The Last Frontier: Climate-Focused Investor Takes on ExxonMobil…And Wins

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Last week, Engine No. 1's successful proxy battle against ExxonMobil demonstrated the role of shareholder activism and its power to shape corporate governance in the context of Environmental, Social, and Corporate Governance (ESG) issues. Climate change is not a scientific abstraction and for ExxonMobil, the center of gravity just shifted.

Engine No. 1, established late last year, bills itself as "an investment firm purpose-built to create long term value by harnessing the power of capitalism." It mounted its campaign, Reenergize Exxon, in response to ExxonMobil's anemic underperformance, driven in large part by a corporate strategy that continued to rely on fossil fuel demand. In its letter to the Board, Engine No. 1 noted that over the last 10 years, ExxonMobil's total shareholder return, including dividends, was -20% compared to 277% for the S&P 500.

Citing a poor long-term capital allocation strategy, combined with aggressive spending notwithstanding declining returns, Engine No. 1's campaign consisted of four key pillars:

1. Refresh the Board with independent directors, of which four were proposed, with expertise in the energy industry.

2. Develop a more disciplined approach to long-term capital allocation by applying stringent protocols for new capital expenditures.

3. Implement a strategic plan for sustainable value, investing in clean energy.

4. Recalibrate management incentives to align compensation with the creation of shareholder value. Engine No. 1 noted that from 2017- 2019, despite a negative shareholder return of 12%, CEO compensation rose almost 35% during the same period.

As a minority shareholder with only 0.02% of ExxonMobil's shares, Engine No. 1 built a compelling business case that gained the support of large institutional investors including the California State Teacher's Retirement Fund (CalSTRS), the second largest U.S. pension fund, the New York Common Retirement Fund, the Church of England, and the California Public Employees Retirement System (CalPERS).

Ultimately, Engine No. 1 won a total of two new Board seats, upending ExxonMobil's corporate lethargy. Engine No. 1, the little, by shareholder metrics, engine that could and did change the framework for and lens through which ESG shareholder activism and its role in corporate governance is viewed. Engine No. 1 is not your typical hedge fund and will certainly be one to watch.