Beating back the tide

One day in late May a small airplane circled Dallas’ city center capturing the attention of onlookers with a large banner that read ‘End the war. Boycott Exxon, Shell, BP.’ Dozens of demonstrators gathered at the Morton Meyerson Symphony Center selling T-shirts attacking ExxonMobil and waving placards endorsing green themes. This was the welcome party for ExxonMobil’s annual shareholders meeting, where a year of extraordinary profits – $40.6 billion, the highest ever for a US corporation – was met with protests rather than celebration. The event was particularly striking given it wasn’t just the blue collars that we’re protesting, it was also the blue bloods.

John D Rockefeller was probably spinning in his grave. What position would the world’s first billionaire have taken in May’s premium-grade proxy fight? On the one side were his relatives, one of the planet’s richest families. On the other was perhaps the most successful US company in the last decade, with a top-notch board of directors and a management team that gets results. 

The issue that divided them was a Rockefeller-supported shareholder proposal to separate the role of CEO and chairman, which the company opposed. We already know that ExxonMobil won, but given the reception from shareholders, did it really?

A legacy in oil

Most proxy fights are buried in the footnotes of financial newspapers, but this one was splashed across the front pages of major media outlets. It was the stuff of Greek tragedy. The Rockefellers had founded Standard Oil in 1870. It became the dominant force in the US petroleum business until its break-up by the US Supreme Court in 1911. Some 34 companies were carved out of Standard, among them Exxon (née Standard of New Jersey) and Mobil (née Standard of New York, aka Socony). Despite that pedigree, this May the Rockefellers aligned themselves against ExxonMobil’s management.

ExxonMobil has a market cap of $465 billion and annual revenues bigger than the GDP of all but a handful of countries. While that bulk speaks to the quality of the management, it just might serve as a lightning rod for enticing opposition. ‘ExxonMobil makes an attractive target simply because of its size,’ says Scott Schaefer, a fellow at the University of Utah’s David Eccles School of Business.

Support for the proposal came from all the usual sources, including RiskMetrics, Proxy Governance and Glass Lewis, while more came from London-based proxy advisory firm PIRC and a range of UK institutional investors such as F&C Asset Management, the Co-operative Insurance Society, Morley Fund Management and the West Midlands Pension Fund.

Also joining in the fray was William Thompson, New York City comptroller and head of the city’s five pension funds. Thompson pointedly accused ExxonMobil of defiance and indifference to the interests of its long-term shareholders.

Winning the battle, losing the war

So why did these forces collide at the ExxonMobil annual meeting in May? Is it possible that ExxonMobil, in winning the vote, set itself up for a bigger loss in public standing and possibly in another proxy fight next year?

A more poignant question is how could this happen. By any measure ExxonMobil is a breathtakingly successful company that has rewarded its shareholders handsomely. From June 1998 to June 2008, ExxonMobil’s stock jumped from $28 to $89. As oil continues its rise above $150 per barrel toward $200-plus, no one predicts a downturn in company value.

The past financial year was particularly good for ExxonMobil. Return on capital was 32 percent, and the company paid out $36 billion on a combination of dividends and stock buybacks. That hard work was rewarded with a proxy filled with 17 proposals attacking management. At center stage were the four supported by the Rockefellers. For the record, the family – including patriarch David Rockefeller, retired chairman of Chase Manhattan Bank – insists a majority stood united in supporting its anti-management proposals.

With so many proposals on the table, it was bound to be a mixed bag. There was the now traditional demand to split off the chairmanship, put before ExxonMobil shareholders in prior years, and along with it, a trio of far-reaching business-strategy planks that, in many respects, would have put shareholders in the driver’s seat in regard to setting corporate strategy.

ExxonMobil, incidentally, is not alone. A raft of similar measures, including splitting the chair and CEO jobs and a study of greenhouse gases, was put in front of Chevron shareholders in May. All failed to gain a majority. This fact might come as news because, lacking Rockefeller involvement, the Chevron proxies received minimal press.

Exactly what prompted the Rockefellers to take these positions? Peter O’Neill, John D Rockefeller’s great-great grandson and head of the Rockefeller family committee on ExxonMobil, said in a prepared statement: ‘It was not an easy decision for the majority of the Rockefeller Family to go public with our concerns. In fact, we have worked behind the scenes for a number of years now with ExxonMobil to avoid having to do so. I want to be very clear that as an ExxonMobil shareholder, I have a world of respect for what the company has done well.’ He continued, ‘In fact, if the next 20 years of the energy business were just going to be about oil and gas, we probably wouldn’t be here today. Having an independent chairman leading an independent-thinking board of very experienced directors will substantially improve ExxonMobil’s ability to look the future squarely in the face and will increase its flexibility. The current members of the board appear to have considerable skills that are not being tapped fully.’

More than just oil

A statement from Neva Rockefeller Goodwin, a Tufts University economist and great-granddaughter of John D Rockefeller, shed more light on the subject: ‘In today’s rapidly changing energy environment, we are urging ExxonMobil to get back to its strong historical roots in order to better position itself for the future of its industry. ExxonMobil needs to reconnect with the forward-looking and entrepreneurial vision of my great-grandfather.’ She continued, ‘We recognize and appreciate that ExxonMobil’s management has been extremely skilled at managing the oil and natural gas business. However, the truth is that ExxonMobil is profiting in the short term from investments and decisions made many years ago, and by focusing on a narrow path that ignores the rapidly shifting energy landscape around the world, including developing nations.’

In a war of public relations, it was the Rockefeller dissidents who hired a professional PR firm and then peppered the media with press releases. The Rockefellers also created a glitzy website, http://exxonforowners.com.

For its part, ExxonMobil management struck a no-compromise position, yet according to chairman and CEO Rex Tillerson, the company made no special effort to communicate to shareholders other than by making contact with a few institutional investors. The company did note that when added up, Rockefeller family holdings in ExxonMobil amounted to .006 percent of the company’s 5.4 billion shares. By contrast, Barclays Global Investors UK owns around 4.4 percent of ExxonMobil stock, State Street owns 3.6 and Vanguard 3.15. Big institutions collectively own 52 percent of the company.

It was not just management that vocally opposed the Rockefeller measures. For example, Chuck Canterbury, president of the Fraternal Order of Police and a large holder of ExxonMobil shares, said in a letter: ‘ExxonMobil is an example of how hard work, efficient management and innovative entrepreneurism breed success. The Rockefeller resolutions threaten to degrade the value of ExxonMobil.’

When the vote was counted, proposal five (independent chairman) lost 60.5 to 39.5 percent. Proposal 15 (greenhouse gas goals) lost 69.1 to 30.9. Proposal 17 (greenhouse gases and the poor) lost by a whopping 89.6 to 10.4 and proposal 17 (renewable energy strategy) lost 72.5 to 27.5 percent.

‘If the Rockefellers were major shareholders, there could have been a different outcome,’ says Claudia Allen, chairman of law firm Neal, Gerber & Eisenberg’s corporate governance practice group. She acknowledges that it is not difficult to explain ExxonMobil’s triumph, saying, ‘It is hard to argue with success. ExxonMobil executes very well on its plan.’

SMART Business Advisory and Consulting’s senior managing director, John McLaughlin, agrees, saying, ‘Shareholders are looking for a return and ExxonMobil has delivered.’

The bottom line is that most ExxonMobil shareholders own stock not to change the world, but to enjoy a steady and comparatively high return, year after year. Expecting that constituency to vote with its own pocketbook in favor of quality-of-life issues is just not a winning proposition.

Also intriguing is that at the annual meeting, Tillerson emphatically argued that the company was fulfilling its ‘social responsibilities’ because, at a time when other oil companies scrambled to find new petroleum, ExxonMobil found 101 percent of the oil it pumped from the ground, meaning it fully replenished its reserves. ‘That is the first and foremost vital thing for us to continue to do: to not fail to supply the energy the world has to have,’ Tillerson said. ‘We have the same concern as people around the world: to provide the world with its energy needs while reducing harmful emissions.’

A change on the horizon?

Tillerson’s statement was true to ExxonMobil form. ExxonMobil is a remarkably stubborn company; in situations where others blink, it raises its fists. When Chevron, BP, France’s Total and Norway’s StatOil agreed to new terms after Venezuela unilaterally sought to modify long-standing lease agreements, ExxonMobil passed. Venezuela in turn has shut off ExxonMobil’s access to its oil, but ExxonMobil has responded by seeking to seize many billions of dollars of Venezuelan assets in US and British courts. This action sends a clear message: don’t mess with ExxonMobil. This message could well apply not only to obstreperous foreign governments but also to renegade shareholders. That said, many governance experts expect ExxonMobil to at least make some concessions before the next annual meeting.

‘It is fair to say that splitting the chair and CEO is becoming the norm,’ says Mukesh Bajaj, senior managing director and leader of expert services company LECG’s global securities practice. ‘By fighting this proposal, even though it prevailed, ExxonMobil compromised its public image.’

It is one thing for a company to hang tough, but another to come across as a bully indifferent to stakeholders. Bajaj says ExxonMobil might have crossed that line. He adds, ‘This was not a public relations victory for ExxonMobil.’

‘It seems as time goes on shareholders are becoming more and more discontent with executive-level checks and balances, which one might say is not unlike a fox guarding the hen house,’ says business consultant Forrest Breyfogle. ‘ExxonMobil lost in the long term. The perception is that they are simply stubborn, that these are executives who are simply trying to protect their own interests.’

‘ExxonMobil needs to say to its shareholders, We hear you. They need to open up the curtains just a crack,’ advises Los Angeles public relations executive Harvey Englander.

The probable concession: ‘We may see ExxonMobil explore a more robust lead director,’ says Allen. Right now, ExxonMobil rotates the lead director hat between two, but many governance experts are expecting the job to go to just one director, in a nod to shareholder pressure to split off the chairman job from the CEO’s. It would not be like ExxonMobil to immediately appoint a lead director – ‘They don’t want to appear to have caved in to pressure,’ says Bajaj – but it would not surprise many governance experts if in early 2009 that same move is taken.

What about the push into alternative energies? On that score outside experts acknowledge the cleverness of the Rockefellers in linking their environmental measures to the independent chairman measure which, importantly, was introduced not by the family but rather by Robert Monks, an attorney and co-founder of the Corporate Library. The Monks measure is a mainstream request, whereas the Rockefeller strategy proposals till new ground in setting up shareholders as influencers on core business directions and requiring management to go in different directions.

As for the Rockefellers, despite losing, they might actually have won. ‘Look at all the press,’ says Nick Unkovic, managing partner of Squire, Sanders & Dempsey’s Palo Alto office. ‘They succeeded in raising awareness about environmental issues they care about.’

‘The Rockefeller descendants made their point and made it loudly,’ agrees Michael Robinson, senior vice president at Levick Strategic Communications. ‘They succeeded in putting their issues on the table.’

Bursting the bubble

‘Big oil is myopic; it’s parochial, insular,’ says David Astorino, senior consultant and practice leader of management due diligence at RHR International. ‘This is the moment for them to embrace change.’

Many outsiders chide big oil, especially ExxonMobil, for insularity and a tradition of ignoring critics. Will that change? Or better yet, can it?

This fight is not over. ‘This is only the first volley. Shareholders will regroup and this may be a harbinger of things to come, for ExxonMobil and for other companies,’ says Johnnie Jackson Jr, retired general counsel at Olin and now an independent governance consultant. ‘Shareholders will take it for a long, long time but at some point they will not and will respond in a much more populist way than if the company had just listened and made some accommodation to their requests in the first place.’

Stay tuned: Next May will bring another annual meeting, and perhaps more from the Rockefellers.