Proxy Access Shifts the Voting Process Yet Again: The Recent Exxon Board Election (2/3)

From slate to individual and then plurality to majority – the next move is proxy access. Who gets to put names forward and how does that happen? In a proxy fight, as in the Exxon case, one set of candidates versus another set of candidates.  

Proxy access means an outsider can propose director candidates to the company under certain conditions. The conditions are quite onerous:  if you own 3% of the company and you have owned it for three years, you can put together a group of up to 20 similar shareholders in order to propose directors. 

These were the typical terms known as a 3-3-20 pattern. 

Now, all of these provisions, being the United States, are under constant legal pressure. In the US in 2018, of the 27 proposed directors and none were accepted by the resulting proxy ballot. In 2019 also none.

The proxy access idea is supported by most of the major investors, all of the pension funds and huge numbers of the asset managers. The big three State Street, Vanguard and Black Rock, all support proxy access and ISS, the world’s largest proxy advisory service and Glass Lewis, the number two, also support these proxy access rights. 

In Canada, we had more or less the same terms, ownership thresholds, time periods, and shareholder groups. And in 2017, the shareholders of the TD bank asked to approve the right to put nominees forward as proxy access if they follow those rules. And the TD bank said, yes, we’ll do that. Now the Royal Bank said, no, we won’t. 

The next season, perhaps under the guidance of OSFI, all five major banks opened this up as policy.

In the United States, there have only been two attempts use proxy access. In the 2017 season GAMCO investors sought to intrude three of their nominees on to the National Fuel Company Board. None got elected.

In 2019 Austin Trust Companies sought to influence the director’s selection on the Joint Chiropractic Board and they didn’t succeed either. 

The fact that on May 26, 2021 this monstrous company, Exxon, had three of its directors not elected, is absolutely earth shattering. It’s never happened before. Never even come close to happening before. 

So. How could this happen? What were the issues? 

Firstly, Exxon Mobil’s share price and profitability significantly underperformed against their major competitors, Chevron and Shell, Total and BP. They were 57% below. In 2020, they had a loss of US dollars, $23 billion, the worst record in 50 years for the company. 

In 2013 it was the number one market cap in the world. In 2021 it was dropped from the Dow Jones industrial average. 

Secondly, Exxon’s environmental policies did not inspire investor confidence.

Most of these other giant oil companies have redefined themselves as energy companies in the belief that the stone age didn’t end because we ran out of stones. The oil age is not going to end because we run out of oil, but rather that we find other more environmentally friendly and cheaper products to fuel us.

Exxon apparently didn’t believe any of that. 

How did this Goliath get defeated by this David? This is Chris James. He’s the founder of Engine Number 1, self-made entrepreneur out of Silicon Valley, worth a lot of money.

Engine Number 1 only owned 0.02% of the Exxon Mobil stock.

Chris visited all the major funds who owned Exxon stock and told them his story and his view of the reforms he would install at Exxon. Reforms to improve both profitability and environmental policies.

Chris James built a “wolf pack” – he would say: “This is a significantly under-leveraged company. They are not making the most of their assets. I don’t ask for your formal support, but when it comes to voting your proxy, please bear in mind our position and our ability to transform the economics of this corporation.”

In this case, Chris started off with CalSTRS. CalSTRS went to CalPERS and the New York Common State Retirement and the Anglican church.

CalSTRS took this up as a personal enterprise for the fund. 

Engine Number 1, then added retail retirees. Chris James estimated that retirees owned up to 40% of the share. So, money was spent trying to reach the retired employees of Exxon Mobil to ask them to vote their shares in favour of the Engine Number 1 nominees.

Exxon acted by adding two directors to their board nominees who did look as though they were more ES and G capable, competent, and friendly. But it wasn’t enough and, in the end Exxon inherited three new directors proposed by Chris James and his company.

Read the third article here.

David R. Beatty, C.M., O.B.E., is Academic Director of the David and Sharon Johnston Centre for Corporate Governance Innovation at the Rotman School of Management. Currently, he serves as a Director of publicly-traded McEwan Copper and the private Bon Intelligence. Over his career he has served on over 40 boards and has been Chair of eight publicly-traded companies. He was the founding Managing Director of the Canadian Coalition for Good Governance (2003-2008) and is a founder of the Directors’ Education Program.