There are quite a few rooms throughout history in which I would love to have been a fly on the wall. One is in the room where Marcus Junius Brutus and his co-conspirators plotted the assassination of Julius Caesar. Did they have any idea how infamous they would become, even 2000 years later? Another is in the Pennsylvania State House on July 2, 1776 when the Second Continental Congress voted on declaring American independence (they then had Thomas Jefferson draft the Declaration of Independence, which was approved two days later). That was the conversation that gave birth to this country. And though tragic, it would have been remarkable to watch Anne Frank write her diary in real time.
There’s another room in which I want to be a fly on the wall, but it’s a room in the future rather than from the past. My, how I would love to sit in on Exxon’s next board of directors meeting.
If you missed the news last week, a small hedge fund successfully led an effort to elect new members to Exxon’s board. Before I explain why this is a big deal, I first want to give you a primer on how corporate boards work, in case this is all a mystery to you.
Corporations are designed to be rather democratic, at least in form. They are owned by their shareholders, and those shareholders get proportional votes based on how many shares they own. Shareholder votes are then used to elect individuals to serve on the board of directors of a corporation, with the corporation’s bylaws determining details like how many directors there are and how voting is managed. The elected directors then serve in a fiduciary role for shareholders, meaning the directors are supposed to govern the corporation in a way that serves the interests of the shareholders, not themselves. The board has the power to manage the corporation and how it operates, largely through its power to hire and fire the executives who actually run the corporation’s operations. So in the simplest terms, whoever controls the board controls the corporation.
Usually, the board of directors of a publicly traded corporation gets to nominate who is voted on for board appointments, and they generally give only one option. It would be like walking into a voting booth for a political office and seeing “John Doe” and “Enter a Write-in Candidate.” John Doe would win the most votes every time. That said, the Securities and Exchange Commission allows some investors who own enough of a corporation to nominate a rival slate of board nominees. So now you can see “Jane Doe” next to “John Doe” and the option to write someone in. By just being on the ballot, Jane Doe has a real chance to win, especially if influential corporate investors campaign on her behalf.
That’s exactly what happened here. Engine No. 1 is an investment company who led the charge for a few rival board members to be elected instead of those nominated by the current Exxon board. They specifically called out Exxon’s stance on climate change as a reason for the need for new directors (see slides 10 and 11 of their investor presentation here). They recruited other investors, most importantly BlackRock, to support the election of these directors. And for two of their slate, they won!
Admittedly, two climate-conscious directors won’t be enough to force Exxon to start decarbonizing aggressively. But they will have the rights of every other board member, and so they’ll be able to have their say during board meetings (which is why I really want to be a fly on the wall).
The meaning is more significant though. Last week’s news shows that fossil fuel companies are vulnerable to director challenges. Activist investors now have an example to point to, which will shift power dynamics when such future challenges are made. The message is clear – if companies drag their feet on transitioning away from fossil fuels, they risk losing corporate control. That’s a dang good message.