Why this Exxon vote is a turning point
My husband and I started watching Billions, a show about a hedge fund manager’s illegal tactics to secure consistently high returns. In the first season, the hedge fund manager, “Axe” of Axe Capital, convinces the Board of Directors of YumTime to fire one of its members and place him in the seat instead. Axe Capital owns almost 5% of YumTime and he claims that he is there to get the company back on track - back to its original recipe that uses real ingredients and tastes better.
Around the same time we watched that episode, news broke that Exxon shareholders elected 3 new members to the Board of Directors, going against the recommendation of Exxon’s management. These three (3) new members were elected with the help of behemoths like Blackrock and Vanguard, and are pushing that Exxon move faster and more convincingly toward renewable energy sources.
What is the Board of Directors?
The Board of Directors is an elected group of individuals that represent shareholders’ interests. Shareholders are the people that own shares in a company. The Board of Directors are there to provide oversight, but also demand accountability from company leaders. If you own Exxon shares, you likely do not have much of a personal dialogue with the CEO unless you own a large amount. Shareholders owning any amount, however, can vote proxy for things such as board elections.
How Board Members are Elected
All public companies hold an annual general meeting where shareholders vote on issues ranging from board elections, executive compensation packages, and sustainable practices. Even if you do not attend the annual general meeting, as most do not, you can vote by proxy. For example, I received an email from Shareholder Services Group, my custodian, informing me that I could vote proxy for a stock in my portfolio. I logged in, made my selections and submitted my vote.
If you have never received a proxy ballot before, you are likely outsourcing that task to an asset manager. You will only be notified to vote if you hold an individual stock, such as Disney or Tesla. If you hold a mutual or index fund, the fund manager is voting for you.
What happened at Exxon represents a major shift.
I have argued previously that asset managers, such as Blackrock and Vanguard, have immense power that they haven’t fully utilized. This recent vote at Exxon indicates that they are ready to change that.
Asset managers have historically voted in-line with the company’s recommendations. They aren’t required to do this and in fact, some have indicated that when it comes to ESG factors, they are willing to break away from management when necessary to manage investment risk for their clients.
That is exactly what happened at Exxon. Engine No. 1 is an investment firm that holds .02% in the energy company, yet they nominated four (4) new board members to Exxon, three (3) of which won a seat (there are 12 total members). If you are curious if your asset manager voted for the change, that data is not disclosed in real-time. Asset managers only need to disclose how they voted on shareholder resolutions once a year, but some have chosen to volunteer the information sooner when it is a high-profile vote such as this one.
The role of proxy advisors
Asset managers tend to hire a proxy advisor given the high volume of votes they need to cast on behalf of shareholders. Institutional Shareholder Services (ISS) is a proxy advisory firm that asset managers pay to vote for them or advise them on how to vote. ISS recommended voting for the three (3) new Exxon board members that eventually won. CalSTRS, CalPERS, New York State Common Retirement Fund, and Blackrock have all stated that they voted in-line with ISS’ recommendations. Vanguard supported 2 of the 3 (Goff and Hietala). Together, Blackrock and Vanguard own 14% of Exxon’s shares.
What comes next.
Activist investors are nothing new - they acquire a large amount of shares in a company and try and instill change (often by obtaining board seats). I suspect Axe’s forced entry into the YumTime boardroom may be of the more nefarious nature - perhaps cost cutting and pumping the stock price so he can dump his shares at a profit - but I haven’t gotten that far into the series yet.
There is no doubt, however, that we have entered into a new era where there will be more asset managers voting against company management when there is a lack of movement on ESG factors, such as there was with Exxon. Investors may also begin to choose asset managers based on their past voting record. Regulators, including the Securities and Exchange Commission (SEC), will be watching that asset managers vote consistently and in-line with their stated objectives, and that should be welcome. Asset managers wouldn’t have broken free if they didn’t feel (and I agree) that voting with ESG considerations in mind is part of their fiduciary duty.
Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients nationwide and is based in San Diego. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.
Planning Within Reach, LLC (PWR) is a virtual fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.