Memo to Corporate Directors: Three Lessons from the Exxon-Mobil Activist Victory

Exxon-Mobil spent $35 million, added new directors, and made promises to do better, all in an effort to defeat the dissident slate nominated by activist fund Engine №1. It failed, and, at this writing, Exxon-Mobil has lost at least two seats on the board of directors and votes for two others were still being calculated. The challengers, who spent $30 million, making this the most expensive proxy fight ever, are really the little Engine that could; with only a tiny .002 percent of the stock, they were able to succeed by making an incontrovertible business case for change, helped, no doubt, by Exxon-Mobil’s poor performance, with losses last year of $22 billion, its worst performance in forty years, and by nominating four highly qualified candidates. With the support of the major proxy advisory firms and institutional investors like BlackRock, CalPERS, and CalSTRS, Engine №1 candidates defeated those nominated by the board.

This David and Goliath victory reflects investor concerns about the viability of fossil fuel companies. But it also reflects broader investor frustration with inadequate oversight by boards of directors. The most important lesson for corporate boards and executives is that this is not a singular event; it is the beginning of a fundamental change in the way that investors push back on portfolio companies. From now on, activist investors do not have to be Carl Icahn-types with major stakes in order to succeed.

Three key lessons for all corporate executives and directors:

1. This is capitalism 101. Back when I was taking Corporations in law school, I remember the professor explaining that corporations, like the US government, were set up with a series of checks and balances, and one of them was the ability of investors to replace directors if they were unhappy with the direction of the company. That turned out to be more true in theory than in practice. The pretense of using the term “election” when insiders select the candidates, no one runs against them, and the company counts the votes is an increasing source of frustration for investors. So is the unconscionable disconnect between pay and performance, misaligning the connection between the incentives for CEOs and the creation of shareholder value.