The Exxon Mobil Baytown refinery and chemical plant in Baytown, Texas. In 2017, Exxon Mobil settled … [+]
I love David vs. Goliath stories. There’s a new David in town, and he’s taking on one of the biggest Goliaths ever: Exxon Mobil
It’s a clever insurgency. James wants to pressure Exxon from the outside for the purpose of remaking the company from the inside—by securing seats on the Exxon board of directors for a handful of experts in the green sector. He wants to turn Exxon toward stakeholder capitalism, gradually and sensibly. This new model for corporate governance is more profitable than our decades-old orthodoxy about putting higher profits above all other considerations. After all, profit is simply a byproduct of doing something really well and creating new economic value for customers. Profits don’t grow on trees. In this case, innovation and higher devotion to ESG (Environmental, Social, Governance) issues actually could turn out eventually to be rocket fuel for shareholder returns.
It has worked that way in dozens of companies already, places like Home Depot
If you drill down into what James is proposing, it’s impressive in its pragmatic grasp of how Exxon could make these profitable changes. To make himself a bit less of an underdog, he has aligned Engine No. 1 (EN1) with the California State Teachers Retirement System, the second largest pension fund in the country. The two organizations will merge their voices, with a combined ownership of $340 million in Exxon shares. Not exactly a majority stake. But by standing up to the giant, James hopes to draw support from other even more powerful asset managers sympathetic to the cause.
As a capitalist enterprise, Exxon Mobil has been in a downward spiral for a decade. This is apparent in a wonderfully granular report, a sort of quick X-ray of the company’s mismanagement, from CNBC. It lays out how “the company’s return over the last 10 years has been negative 20% versus a 277% return for the S&P 500.” EN1 proposes a few surgical changes, with four new board members, as a prelude to gradual diversification into the alternative energy sector. This will give the corporation a new footing as a model of stakeholder capitalism, for the long term. The ESG crowd will applaud the moves into renewable energy.
EN1 has already sent a letter to Exxon Mobil
But James is suggesting immediate changes in the way Exxon handles money and his ideas will bring smiles to those who care about little more than dividends and earnings per share. To make his long-term ventures palatable to shareholders right now, EN1 wants “the company to impose greater long-term capital allocation discipline, implement a strategic plan for sustainable value creation and realign management incentives.”
Here’s where James shows how he’s done his homework. In fact, he’s done Exxon’s job for it. He points out that Exxon’s return on capital for “upstream projects”, crucial innovation for the future, has shrunk from an average of 35%, years ago, to an anemic 6% over the past four years. He has a specific request to fund only projects that can break even on the assumption of conservative oil and gas prices. In other words he has combed through the company’s filings and has found ways to make smarter use of the company’s money. Not exactly a radical makeover. Just what a scrupulous CEO would ordinarily do. EN1’s proposal would free up cash, strengthen the balance sheet, and actually enable the behemoth to offer shareholders some better dividends right now.
In the same vein of smarter allocation of capital, though maybe a harder sell for the entrenched members of the board, EN1 would like to change executive compensation to align it more closely with shareholder value. That’s a nice way of saying the CEO has been grossly overpaid. Exxon isn’t alone in the way it compensates its leader regardless of results: “as total CEO compensation at the company rose almost 35% from 2017 to 2019 despite Exxon Mobil’s negative cumulative total shareholder return (-12%) during that period.”
All well and good. However, what may feel like the biggest gamble for the old guard at Exxon loyal to the company’s legacy of fossil fuel, would be in the blue-sky portion of the EN1 proposal. It wants the firm to rely on the expertise of its new board members to venture into long-term investment in renewable energy. As CNBC puts it: “EN1 is not asking the company to make immediate changes and acknowledges that change will not come overnight, but they want them to at least explore investments in net-zero emissions energy sources and clean energy infrastructure. While any change in this area could take many years, the company is used to looking out to the future in its E&P business as plants they invest in have lives of up to 20 years.”
That is a humble proposal couched in the least confrontational language possible. In a nutshell, EN1 wants Exxon to make changes that will be good for shareholders, short-term, but great for the company in the long run. As renewable energy becomes more and more profitable and viable, Exxon will begin to draw those dividends and earnings per share from investments that serve all stakeholders—even though shareholders will be getting more for their investment immediately through classic, sensible capital allocation. James is finding a way to bridge the old world with the new and it all makes sense. And underneath it all is a devotion to the welfare of all stakeholders—employees, suppliers, the community at large, the environment and the integrity of the corporation itself—in a way that doesn’t ignore shareholders at all. One couldn’t ask for a better exemplar of stakeholder capitalist activism.
There’s another unstated truism in James’ notion. Tomorrow’s energy savings are not necessarily obvious today. Many innovations in the sources of energy, the capture and conservation of that energy, its efficient distribution of energy are yet to be discovered. The cash cow that fossil fuel has represented—which can’t be equaled by, say, wind power right now—could be matched by a new battery technology, a new way to extract fuel from some plentiful element. Can Exxon become the juggernaut built on an innovation yet to emerge? It can’t hurt to give it a try. The fact is that Exxon’s quest to keep cutting costs and milking its current cash cow will not secure a profitable future, long term. Chris James’s approach has a chance. Can Exxon team up with Bill Gates for fail-safe nuclear energy or Elon Musk to develop a world-changing battery? Why not find out.
