Exxon May Be Corporate America’s Canary in the Coal Mine

The California State Teachers’ Retirement System (CalSTRS) called the election of at least two new members to Exxon’s board against the wishes of management “historic.” Moody’s Investors Service said the shareholder vote, which cannot be appealed, likely presages similar results in future board elections at other U.S. oil companies.

And Andrew Behar, chief executive officer of As You Sow—a corporate accountability nonprofit that’s acted on the behalf of shareholders since 1992 and filed 21 climate-related resolutions with Exxon over the past decade—called the vote a turning point.

“When companies don’t listen, shareholders will take action,” Behar said. “For over a decade,  Exxon has ignored our requests for capital discipline and climate transparency; this is long overdue. All board directors should be on notice that if they don’t fulfill their duty of independent oversight, their tenure will be challenged.”

Until last week, it was always assumed that an investor would need to hold a 3%-to-5% stake in a company to run an activist campaign, he said. “That myth has been overturned.”

Engine No. 1 owns only about 0.02% of Exxon’s shares, but it was able to win support from the three largest U.S. investment firms—BlackRock Inc., Vanguard Group and State Street Corp.—and the nation’s three biggest pension funds, including CalSTRS.

“Now it is clear that you don’t have to be Carl Icahn or even Gordon Gekko to force change,” Behar said. “However, having a large stake can help when it comes to wielding power. If (BlackRock CEO) Larry Fink called on every company to adopt a Paris-compliant climate-transition plan and report it against these targets every year, or said ‘we are going to vote against your board,’ every company would do it overnight.”

Before last week’s boardroom smackdown, Exxon was already under increasing financial pressure to transform its business model. The Coalition United for a Responsible Exxon (CURE), which includes As You Sow, puts it pretty bluntly:

“Exxon’s current direction is premised on outdated assumptions about high oil prices, demand, and margins that are incompatible with the reality of climate change and the inevitable transition to renewable energy sources. As a result, Exxon continues to make massive capital investments in projects that will, in our view, destroy shareholder value and that operate inefficiently, exacting a toll on profitability. To support these investments and an unsustainable dividend, the company today is burdened with the highest debt levels in its history. We are concerned that shareholders’ dividends have never been more at risk.”

In a report last week, analysts at Moody’s wrote that major oil producers now face higher credit risks because of last week’s court ruling against Royal Dutch Shell Plc, in which judges ruled the oil giant was violating human rights by not sufficiently fighting global warming. The shareholder vote at Exxon and a decision at Chevron Corp. made things even worse for Big Oil, as activists move more aggressively to force companies to be more serious about addressing their greenhouse gas emissions.

The increasing potential for more stringent investor climate- and emissions-related investment thresholds, Moody’s warned, are likely to lead to higher capital costs and diminished access to capital for oil companies.

The industry will encounter heightened investor pressure to decarbonize more quickly than companies are currently planning, Moody’s said. Big Oil will have to shift its business away from oil generation and toward renewable-energy sources, meaning outsized spending may be required for acquisitions, research and development, and other capital expenditures.

At the same time, large investors have said they’re committed to reducing their fossil fuel-related equity positions and plan to hold energy companies accountable if they don’t transition away from oil, coal and other pollutants.

The Exxon vote last week proved that little investors are doing just that. Let’s see if the big players follow suit.

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