Proxy Advisor ISS Backs Activist Engine No. 1 in ExxonMobil Battle

Institutional Shareholder Services, the influential proxy adviser, is backing three dissident candidates to the board of ExxonMobil in the first proxy contest to push a major oil company to make a significant transition to clean energy.

The support of ISS is a coup for the new impact investment firm, Engine No. 1, which put up the slate that ISS endorsed. After Engine No. 1 first announced its proxy campaign in December, Exxon took steps to refresh its board, adding new board members, including hedge fund manager Jeff Ubben, who last year launched his own impact hedge fund.

But ISS, in a measured but ultimately scathing critique of the fossil fuel giant, concluded that the addition of the new directors wasn’t enough to meet the challenge. Despite Exxon’s recent recognition of climate change risk, “there are lingering questions about the extent of its commitment in the area,” the proxy advisor wrote in its report endorsing the three candidates, which Institutional Investor has obtained.

The problem, concluded ISS, is that Exxon continues to make “strategy decisions on what appear to be overly optimistic demand and technology assumptions, and does not provide shareholders with enough information to fully understand how prepared it actually is for an energy transition.”

A decade ago ExxonMobil was the world’s largest public company. Although it has recently slipped from that perch, its size and pedigree, along with its “culture and business model” have been “targets of scrutiny,” ISS noted, adding that Exxon also “is frequently identified as an entity responsible for one of the largest individual shares of historical and ongoing emissions.”

Exxon was perceived as “intransigent on these issues in the past,” ISS said. But the oil giant’s recent poor operating performance appears to have opened the door to change.

“On the basis of operational performance alone, the dissident has made a compelling case that additional board change is needed,” ISS wrote.

Exxon’s “Fundamental Failing”

ISS noted that Engine No. 1’s case has been built on the poor stock performance of Exxon, which has trailed the average performance of its peers Chevron Corp., Royal Dutch Shell, Total SE, and BP, as well as that of the S&P 500 index, over the one, three, five, and ten years prior to the onset of the Covid-19 pandemic (measured through February 19, 2020).

The cause of the underperformance, according to ISS, is that Exxon “invested heavily in production in a low-price environment.” 

The company increased its capital expenditure guidance in March 2019 to $35 billion, targeting a 25 percent increase in production, before indicating in March 2020 that it intended to spend up to $210 billion through 2025. But the success of these endeavors is contingent on high demand — and prices — for fossil fuels.

Such capital allocation policies are a “fundamental failing,” according to ISS, which concluded that several of the current board members that Engine No. 1 has targeted “may have been overly deferential to management.” 

“This calls into question the board’s willingness to address other uncomfortable and important issues, particularly if they have attendant concerns that are less immediate or more challenging to quantify — such as [Exxon’s] preparedness for an energy transition.”

Mounting Support for Clean Energy Slate

ISS has endorsed Engine No. 1 candidates Gregory Goff, the former executive vice chairman of Marathon Petroleum; Kaisa Hietala, a partner of sustainable business advisory firm Gaia Consulting, and Alexander Karsner, the senior strategist at X, the innovation lab of Alphabet. From 2005 to 2008, Karsner was the U.S. Assistant Secretary of Energy.

A fourth candidate put forward by Engine No. 1, former Vestas Wind Systems CEO Anders Runevad, was not included in the ISS endorsement.

San Francisco-based Engine No. 1 said in a statement:  “We are pleased that ISS recognizes that the ExxonMobil Board requires new members with track records of transformative success in the energy sector to create sustainable, long-term value for shareholders in a changing industry and world.” 

Before ISS came out with its endorsement, Engine No. 1’s slate had already gained the support of several institutional investors, namely California’s public employee and teacher pension funds, the Church Commissioners for England, the New York Common Retirement Fund, and Legal & General.

“Climate change poses a mounting business risk for companies,” ISS wrote in its recommendation. “Business risk is but one adverse effect of climate change, and emanates from what is expected to be a broader negative impact on society. Governments, companies, organizations, and individuals have been working for decades to mitigate these consequences.”

Engine No. 1 was founded in late 2020 by Chris James, a tech investor and veteran of Partner Fund Management, with others from firms like Bain Capital, BlackRock, and JANA Partners.