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Last December, when a week-old hedge fund named Engine No. 1 challenged Exxon Mobil to change its ways, laughter echoed through Wall Street circles, the fund’s name, which led to a famous children’s book Remembered its small, then – $ 40 million stake in what was once the world’s largest publicly traded company.
Just six months later, the fund delivered a major setback that caused a stir in the entire oil and gas industry. The Expedition of Engine No. 1 forced Exxon to accept new board members who could rethink their business strategy and face the risk of global climate change, which many investors say is Exxon’s long Time has been reluctant to address.
Companies such as Exxon with a market value of $ 250 billion are rarely encountered, losing very little, shareholder battles. But stakeholders familiar with Exxon’s thinking said Wednesday’s defeat took years to make due to weak returns.
Institutional investors were disappointed by the company’s approach to energy transformation, outpacing global rivals who promised large spending on power generation, solar and wind. In addition, Exxon failed to identify how the investment community became more attuned to climate change issues, which helped Engine No. 1 turn large pension funds into California and New York on its own.
Sources familiar with the company’s strategy say that Exxon was late in defending against Engine No. 1 and even when it did, it focused on the company’s generous dividend threat. But analysts had warned for months that Exxon’s massive indebtedness could jeopardize that dividend, which could lessen its warnings of the fund’s intentions.
“Exxon Mobil worked very hard to lose this battle,” said Robert Eccles, a professor of management practice at Said Business School, Oxford University, over the years of inattention to climate change. In December, Ackles said he thought activists had a chance to win a board battle.
Exxon did not respond to requests for comment. Company executives have said that its scale and investment outlook have faced boom-bust cycles. In a statement on Wednesday, CEO Darren Woods said that Exxon “is very actively engaged with our shareholders, sharing our plans and listening to their vision and the issues that matter to them.”
A spokesperson for Engine No. 1 declined to comment.
Wanted to experience energy
When the newly formed Engine No. 1 announced its campaign in early December, Exxon Mobil was closing a disastrous 2020 due to the coronovirus epidemic that would end with a loss of $ 22 billion.
Engine No. 1 saw an opportunity to push for a change in the company’s board with none other than CEO Woods until this year – with experience in the energy industry, arguments about Exxon’s spending and lack of an energy transition plan with.
According to people familiar with the case, the fund’s top executives Chris James and Charlie Penner made a long effort to recruit potential directors to challenge Exxon, eventually settling four people with energy experience.
The fund was able to turn investors’ dissent into a climate referendum that cost both sides at least $ 65 million. CALSters, the California Teachers’ Retirement Fund, supported the campaign from the beginning.
Exxon sought to blunt the fund’s nominees by expanding its board and adding director Jeff Uben, who runs a sustainable investment fund. It also sought to calm investors’ climate concerns by increasing low-carbon initiatives and reducing the intensity of its oilfield greenhouse gas emissions.
The company also largely oversaw the oil and gas expansion program, though analysts expect spending to pick up next year.
By April, however, Engine No. 1 was putting more allies in line. New York’s $ 255 billion Common Retirement Fund announced it would support a slate of disgruntled directors after California’s $ 300 billion Teachers Retirement Fund.
Pay attention to dividends
Exxon was taking the threat more seriously as of April, but focused on investor returns, warning in a shareholder letter that Engine No. 1 wanted the company to “pursue a vague and undefined plan — which we believe is our would put the future and your dividends at risk.”
The company has long prized its dividend, which rose to a yield of more than 10% during the epidemic-induced oil prices. The company’s debt burden rose to more than $ 69 billion last year, with analysts constantly raising questions about whether the dividend could be sustained as Exxon was being encouraged to cut costs.
A source familiar with the company’s thinking said, “The biggest surprise for Exxon was how the ‘Defend the Return’ strategy didn’t work.”
After two simultaneous events, the tide moved forward against Exxon on 14 May. A damning report was first issued by the influential shareholder advisory firm ISS, which criticized the company’s failure to adjust its spending plans.
The ISS said, “Investors have regularly highlighted concerns about preparedness for the energy transition, yet the board did not take enough decisive action to gain recognition from the market until the start of the dissident’s campaign.”
This was followed by a television appearance by Woods on CNBC, where investors said he did not appear to be prepared for host David Faber’s questions about the ISS report, Exxon’s strategy and the board’s lack of energy experience.
Exxon relied on steady dividends to blunt the company’s size and investors’ criticism for years, even as it led to the purchase of XTO Energy and Texas shale assets in 2017 before a sharp drop in natural gas prices Made a series of risky investments such as purchases. Oil prices were declining.
New York State Controller Thomas DiNapoli said in a statement Wednesday that for years the fund has wanted assurances that Exxon’s board took the climate crisis seriously “and is working to get the company on its way to succeed in a low-carbon economy” Was, and received feedback and gaslighting over the years. “
Blackrock Inc., the world’s largest asset manager, which backed three of the four disgruntled nominees, said in a statement on Wednesday that Exxon invested only $ 10.4 billion on low-carbon energy technologies over the past 20 years, while In 2020 alone, compared to more than $ 20 billion in total expenditure.
On Wednesday, the company closed its annual general meeting for an hour, as it continued counting votes. Woods then answered investors’ pre-selected questions for 40 minutes, far more than the previous year’s annual meeting.
Among the questions was about an International Energy Agency report that warned that investors should not fund new fossil fuel supply projects beyond this year if the world wants to reach net zero emissions by mid-century. However, Woods said that “if you look at the report, it underscores the continuing need for investment in oil and gas.”
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