Rebellion extinction: Does Exxon mark the end of shareholder engagement?

Georgia Stewart is CEO of Tumelo. This post was prepared for the Forum by Ms. Stewart. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions (discussed on the Forum here) by Scott Hirst and Stockholder Politics by Roberto Tallarita.

In an era where the corporate world is increasingly held accountable for its social and environmental footprint, a striking confrontation is unfolding, one that could redefine the very nature of stewardship.

This conflict, epitomised by the recent legal battle between Exxon Mobil and its shareholders, is an acute example of the evolving complexities for corporate-governance professionals.

Gone are the days when the Friedman doctrine reigned supreme, where the sole responsibility of a business was to increase its profits; when alignment among company directors, asset managers and asset owners was straightforward and clear. When there was a singular focus throughout the whole investment chain on share price. As the corporate landscape has grown and globalised, this once-clear path is now fraught with the thorny issues that arise when any stakeholder considers performance across a diversified portfolio, and over the longer-term. 

Exxon’s move to take shareholders to court over demands for more sustainable business practices is a watershed moment. This legal tussle is not just about Exxon’s business model or its environmental impact; this political move also calls the future of “shareholder engagement” into question. This court case, over a proposal which aligns with EU, Californian and International Sustainability Standards Board (ISSB) disclosure requirements, is an attack on shareholder power. Is Exxon not laughing in the face of all the shareholders who have claimed to be engaging with them on climate? How can shareholders effectively hold a giant like Exxon accountable while facing legal retribution? It is possible that this moment represents an end to “constructive engagement” as a tool for changing corporate behaviour. With that, is it time for shareholders to find new ways to exert their influence?

One option would be returning to the old ways. Divestment, once in vogue then shunned as a blunt instrument, may re-emerge as a viable strategy; perhaps not so much for changing corporate behaviour as distancing oneself from it. The Church of England quit engagement with fossil fuels last year, while most others continue to hold on and “engage”. If engagement is stifled, can funds continue to hold Exxon in the Sustainability Disclosure Requirements’ sustainability “improvers” category? I would assume not in good faith.

That being said, I do hope that the wider industry leans into — rather than out of — this turning point and offers shareholders more advanced and effective tools to influence corporate behaviour. One such vehicle is increased access to proxy voting, democratising the vote to more layers of the investment chain. If, given this latest bun fight, we accept that there is inherent misalignment between different fiduciaries at each node in the investment chain, then we ought to investigate where the power lies today, and make some effort to shift it.

In our industry, money is clearly power, and asset owners/end investors have the money. As tied up and cumbersome to move as it may be, asset owners do put the capital in capitalism. If the answer is not turning off the taps, but rather exerting better influence, then it is asset owners who need to be empowered to exert. Given that power, perhaps we wouldn’t see the dramatic decrease in support for ESG proposals that has occurred in the past few years.

Despite what the headlines might tell you, there has not been significantly more ESG proposals on the ballot when counted as a proportion of total votes; and year on year, both Tumelo and ShareAction found no significant change in the “prescriptiveness” of their wording either. Would Exxon have taken Follow This to court if the group had greater backing, if more asset owners had known about the proposal and committed to support it like the almost-identical resolution filed last month at Shell (backed by 27 investors, most of them asset owners, owning 5% of Shell and including the UK’s biggest pension scheme, Nest)? In other words, what would Goliath have done if David could muster the resources to fight?

Considering their limited resources, asset owners must be empowered to collaborate with one another, to join forces, to be successful in the financial engineering they are finding it hard to do today. For this to happen, they need better tools not just for voting but for collaborating, too.

Journalist and advocate for shareholder democracy, Merryn Somerset Webb, says: “If we can remind people that they are all owners and convince them that they have the power to act as such (by using their votes as shareholders), we can reconnect big business and ordinary people while also forcing better behaviour on the corporate world.”

It is widely accepted among zoologists that one mass extinction event is already afoot at the hands of the world’s biggest corporates. Today, we must curb the path of a second annihilation: shareholder democracy. This is possible if we enable asset owners and shareholders worldwide to maintain their role in holding companies responsible.

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