Both True — What to Watch: Exxon

Our summer “What to Watch” series has one goal: to translate the hyped-up headlines into key takeaways for oil and gas leaders. Have no doubt that two of the three disruptors (rise of the millennials and mainstream environmental activism) are key drivers in Exxon’s board shakeup. But at Adamantine, we are interested less in what caused the board shakeup and much more in how it’s playing out in the real world — and what those details signal for your company. Read on to find your game-changing takeaways.

Both of these things are true

  • The breathless climate activist declarations of victory around the Exxon board shakeup tell us something big has happened.
  • The “something big” does not necessarily signal linear growth in climate pressure on oil and gas companies.

The situation

Here’s the quick recap of the Exxon board drama to get everyone caught up:

  • At the end of May, activist hedge fund Engine No. 1. succeeded in seating three of its nominees on Exxon’s board.
  • Engine No. 1 owns just 0.02 percent of Exxon stock but made headlines (and perhaps history) by convincing some of the world’s largest institutional investors to vote for three of their four nominees — with an eye toward pushing Exxon to focus on the energy transition.
  • The drama began in December 2020 when Engine No. 1 announced its campaign. The announcement made a particular splash because both the California teachers pension fund and the Church of England’s endowment endorsed the move. Engine No. 1 was explicitly founded to engage in such an effort.
  • In response, Exxon announced it would add its own directors: Wan Zulkiflee, former CEO of Petronas; Michael Angelakis, Chairman and CEO of Atairos (an investment group) and former Vice Chairman and CFO of Comcast; and, Jeffrey Ubben, the co-founder of Inclusive Capital Partners. This board expansion brought Exxon’s director count to 12. But the expansion did not sway shareholders.
  • Ultimately, some of Exxon’s largest investors voted with Engine No. 1 to back three of the four directors, including Vanguard (Exxon’s largest shareholder), BlackRock (its second), and State Street. This shift is indeed newsworthy.
  • The three successful Engine No. 1 nominees include: Gregory Goff, former chief executive of Andeavor, a refining and marketing company; Kaisa Hietala, former executive vice president at Neste, a Finnish refiner and pioneer in biofuels; and, Alexander Karsner, senior strategist at X (formerly Google X).
  • Notably, Exxon CEO Darren Woods retained his seat.

From that brief history, here’s what game-changing leaders should pay attention to:

  • BlackRock’s climate-driven investment pivot — which I’ve argued foreshadowed big changes for the oil and gas industry — was put to its first high-profile test.
  • In addition to signaling directional concern about Exxon’s commitment to status quo energy demand projections, BlackRock identified two areas for specific action: (1) capital allocation toward the energy transition, and (2) emphasis on Scope 3 emissions — the emissions of the products Exxon produces. In both cases, BlackRock called out Exxon for being “unlike its peers.” Translation: For the first time, BlackRock wants a U.S. oil and gas supermajor to chart a course more like that of its European counterparts.
  • BlackRock went further — indicting Exxon’s traditional posturing. “In our view,” the statement from BlackRock Investment Stewardship (BIS) read, “Exxon and its Board need to further assess the company’s strategy and board expertise against the possibility that demand for fossil fuels may decline rapidly in the coming decades, as was recently discussed in the International Energy Agency’s (IEA) Net Zero 2050 scenario. The company’s current reluctance to do so presents a corporate governance issue that has the potential to undermine the company’s long-term financial sustainability. BIS believes that those companies that proactively consider their operational footprint in the context of a low carbon transition will be better positioned to avoid major disruptions and deliver long-term value to their shareholders.” (Emphasis added.)
  • And yet, BlackRock did essentially endorse Exxon’s strategic posture by keeping CEO Darren Woods in place — with a caveat. “BIS supported the re-election of Mr. Frazier and Mr. Woods because our engagement with each of them over the past several months has given us greater confidence that they are prepared to internalize shareholder feedback, and lead the company, in their respective roles as Lead Independent Director and CEO, on a more ambitious course of action in adapting to the energy transition and responding to shareholders. We also believe some leadership stability is important in the context of the urgency with which the company is expected to deliver on its commitments.”

There are some things about which it is too soon to tell. Here’s what we at Adamantine will be watching to further anticipate what exactly will impact North American oil and gas companies — and separate reality from hype:

  • How much will the new three (of 12) board directors influence strategy? With their new fiduciary responsibilities to Exxon shareholders, will the new board directors fall in line with the Exxon status quo, or push for radical strategic change?
  • How hard will asset managers advocate for a climate-focused strategy? That fiduciary responsibility will be most immediately accountable to the three large institutional investors who voted in favor of the new directors. In 2018, BlackRock, Vanguard, and State Street cast an average of about 25 percent of the votes in elections for directors of S&P 500 companies. So their priorities will weigh heavily on directors’ strategic thinking. If these institutional investors push for directional change, it’s likely to happen.
  • When will diversity, equity, and inclusion (DEI) strategy weigh in? BlackRock has clearly foreshadowed future focus on this topic (which is also the third disruptor); will activist investors take up the cause as well?
  • Where do climate activists strike next? We will be watching the shareholder resolution crowd as well as the activist investors to see who copycats this effort. And where will Engine No. 1 strike next?

Seize the day

Wherever you are in the value chain, no matter the size of your company, and whether you are privately or publicly held, you have lessons to learn from Exxon’s drama. Game-changing leaders are taking away these action items:

  • See social risk as business risk. Investors are influenced by the three disruptors: rise of the millennials, environmental activism gone mainstream, and expectations for racial equity and justice. Game-changing leaders are looking at these developments as fundamental risks, rather than political battles.
  • Climate is the new “capital discipline.” Every oil and gas company, anywhere in the value chain, must be able to articulate its value proposition in a decarbonizing world. Your company may have three years before you must narrate your strategy to an investor — but these strategies are challenging to develop. There’s no tried-and-true blueprint to fast follow. That’s every reason to start that evaluation and strategic planning today.
  • At heart, this is about innovation. Companies must get ahead of the question, How is your company positioning for the energy transition? And getting ahead of the transition requires a kind of strategic thinking and planning outside of our traditional operating paradigm. Put together an innovation team. Map a potential decarbonization toolbox. As you work on strategy, you’ll also need a menu of options to explore territory unfamiliar to our standard operating procedures.
  • Governance matters. Boards and executive teams should be thinking about energy transition, ESG, and innovation strategy in the context of their core competencies and oversight responsibilities.

Even if Exxon’s reconstituted board continues with a business-as-usual strategy, your company should not. The drivers behind Engine No. 1’s success continue to build momentum and will undoubtedly come into play with your investors within the next 24 months. Does your company need to look directly at what this means for your strategy? Reach out because we can help.

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