ExxonMobil: The G in ESG
Donald Trump was on a roll. During a campaign rally in Arizona weeks before the 2020 election, the president proclaimed himself the “greatest fundraiser in history,” and went on to describe a hypothetical phone call with the CEO of ExxonMobil, the Dallas-based energy giant.
“So I call some guy, the head of Exxon. I call the head of Exxon. ‘Hi, how you doing? How’s energy coming? When are you doing the exploration? Oh, you need a couple permits huh? Okay,’” Trump ad libs during a presidential campaign rally, his supporters cheering. “But I call the head of Exxon, I say ‘You know, I’d love you to send me $25 million for the campaign.’ ‘Absolutely sir, why didn’t you ask? Would you like some more?’”
ExxonMobil’s social media team activated its Twitter account almost immediately. “We are aware of the President’s statement regarding a hypothetical call with our CEO…and just so we’re all clear, it never happened,” the company tweeted.
In news terms, the trumped-up CEO story was a one-day wonder, a distraction that came and went from online headlines and cable news cyrons. With that brush fire out, a beleaguered ExxonMobil PR team shifted their attention back to the very real strategic business and financial challenges confronting the company's board of directors and senior management.
Months earlier, in August 2020, ExxonMobil's standing on Wall Street was eroded as its stock was dropped from the Dow Jones Industrial Average. One reason why: ExxonMobil's market capitalization -- the value of the company's stock -- had declined by about a third over the past decade. There was more bad news:
ExxonMobil CEO Darren Woods had slashed $3 billion in costs during the COVID-19 crisis, and in early 2021 was aiming to cut another $3 billion annually, including ongoing layoffs.
The company's debt had been downgraded three times, and ExxonMobil was being accused of using borrowed money to pay shareholder dividends instead of funding profitable projects.
The fifth-largest producer of greenhouse gas emissions globally, the company still had its foot on the accelerator in terms of crude oil and natural gas production.
Efforts to promote carbon capture projects in the transition to a "lower-carbon future" were being widely dismissed as slick marketing campaigns.
In early 2021, these strategic challenges triggered a proxy battle with an activist hedge fund that would expose fault lines in ExxonMobil corporate governance, starting at the top. Governance, the G in ESG, encompasses the strategic decisions made by corporate boards of directors and senior executives about how their company is run, including its environmental and social stands. Publicly, proxy battles are waged in the national media spotlight. For PR, press releases quickly become a weapon of choice.
The little engine that did
Barely a month after the 2020 presidential election, a hedge fund with an awkward name and straightforward purpose fired the first shot, issuing a press release announcing its formation. Named after a landmark San Francisco fire station, Engine No. 1 was founded by money managers with backgrounds that bridged finance and sustainable investing.
Investors in 2020 were pouring more than $50 billion into sustainable investment funds, double the amount from the prior year. In turn, investment fund managers like Engine No. 1 were looking to direct that money toward either companies that were being run well from a sustainability perspective -- which supported a higher stock price -- or were being run poorly. Engine No. 1 had raised a $250 million war chest, and was targeting the latter -- companies that failed to invest in jobs, workers, communities, and the environment.
Engine No. 1 was basically looking for companies that its money managers believed, from a governance perspective, were being run poorly. As a shareholder, Engine No. 1 could them actively press the company's managers to improve their governance processes, which in turn would increase their value of the company, and the value of their investment.
It did not take the activist investors long to settle on the first target -- ExxonMobil. A week after launching, Engine No. 1 issued another press release announcing its plans to nominate four hand-picked directors to the energy giant's board of directors. Governance is about how companies are managed, and Engine No. 1 saw value in driving changes at ExxonMobil.
In a letter to the ExxonMobil board, Engine No. 1 said the company needed independent outside directors with experience in the energy sector beyond working at ExxonMobil, experience the current board lacked. The company also needed to be more conservative in its spending on oil and gas projects, more aggressive in moving toward low-carbon energy solutions, and more disciplined in tying executive compensation to the financial performance of the company and its stock price.
The hedge fund outlined a fairly straightforward case to “reenergize Exxon” by shaking up ExxonMobil leadership. How did ExxonMobil respond? A week later, a spokesperson told Investopedia the company was still reviewing the letter. Two weeks later, Engine No. 1 had its answer, as ExxonMobil ignored the activist investor and issued its own press release announcing emissions-reduction targets "consistent with the goals" of the Paris Agreement.
While global leaders were targeting net-zero carbon emissions by 2050, ExxonMobil pledged to reduce upstream greenhouse gas emissions -- pollution generating by drilling and processing oil and gas -- by 15-20 percent. The company also would work to reduce methane intensity -- a term of art that some consider PR spin -- by up to 50 percent. The company also pledged to stop flaring excess methane and other gases by 2030.
“These meaningful near-term emission reductions result from our ongoing business planning process as we work towards industry-leading greenhouse gas performance across all our business lines. We respect and support society’s ambition to achieve net zero emissions by 2050, and continue to advocate for policies that promote cost-effective, market-based solutions to address the risks of climate change.”
-- Darren Woods, Exxon Mobil Chairman and CEO
For hedge fund Engine No. 1, the pillars of ExxonMobil's corporate governance centered on four things: The make-up of the oil giant's board of directors; senior management's long-term strategy; the allocation of capital; and, incentives for executives and investors. Let's break that down.
So how exactly was ExxonMobil being governed? Governance to some extent reflects the strategic pillars of a company's board and senior management . This can encompass how the board itself is structured, how the company operates its business, and how shareholders -- including executives -- are compensated.
In its proxy battle, Engine No. 1 took aim directly at ExxonMobil Governance in its investor presentation to "reenergize" the company. For one thing, the company's board included no outside directors with energy experience. Engine No. 1 believed outside perspectives were needed to consider ways to transition the energy giant into a more sustainable product mix.
ExxonMobil was the largest company in the world, -- and the largest on the Dow Jones Industrial Average index -- with a $370 billion market capitalization in 2010. By 2020, the company's market capitalization had been nearly cut in half, and its shares were removed from the Dow. ExxonMobil's credit ratings had been downgraded three times, with debt ballooning to $63 billion from $7 billion. From a compensation perspective, ExxonMobil was using that debt in part to pay shareholder dividends as cash flow fell $20 billion short of the payout from 2017-2020.
Strategically, ExxonMobil was aggressively spending to grow oil production at a time when climate activists were screaming for companies to decelerate. ExxonMobil expense levels required an $87 a barrel price just to break even, but the COVID-19 pandemic slashed oil prices as the demand for gasoline, diesel and jet fuel plummeted. Looking to conserve cash, ExxonMobil made the governance decision to suspend the 401(k) retirement investment match for employees, and step up internal performance reviews as a way to cut staff.
All of this before factoring in climate change and global pressures to end greenhouse gas emissions. ExxonMobil ranked as 5th largest producer of greenhouse gas emissions globally. The company's go-to sustainability response, the use of carbon-capture technology, accounts for 0.1% of global emissions. Carbon capture also involves costly and unproven technologies, and remains dependent on government subsidies, Engine No. 1 argued. And while ExxonMobil pledged to meet international standards for greenhouse gas emissions, calculations in their press releases excluded 90% of fossil fuel production and development emissions from the equation.
Because proxy battles play out publicly in the headlines, Engine No. 1 took aim directly at ExxonMobil's advertising and publicity operations. While the strategic decisions that were being made by ExxonMobil board-level and senior management were the target of the Engine No. 1 campaign, marketing communications and PR quickly found themselves in the cross-hairs as the activist investors pressed their case.
Carbon-capture and biofuels initiatives "have mostly generated advertising,” Engine No. 1 said. While most companies were abandoning development of algae-based biofuels, Engine No. 1 characterized ExxonMobil's ongoing efforts as "vague PR-bait and social media posturing.” Current and former company employees told Bloomberg that a $15 million investment in Global Thermostat, a start-up carbon capture company, appeared mainly to be aimed at generating publicity.
At height of proxy battle, ExxonMobil publicized its ambitious Houston ship channel carbon-capture project. Playing into the April 22nd Earth Day news cycle, Exxon Mobil announced unveiled a concept for capturing about 100 million metric tons of CO2 emissions annually by 2040, or nearly ten times the current levels of U.S. carbon capture.
“Even if this were an actual project versus a press release," Engine No. 1 said in a subsequent pitch to institutional investors, carbon capture only supplements emission reductions, which ExxonMobil was not achieving at the rate that would be needed to meet the Paris accord.
In late May, ExxonMobil shareholders met at the company's annual shareholder meeting to hear management presentations about the company's performance, updates on its key strategic initiatives, and to vote on the new slate of directors. Engine No. 1 had nominated four, and midway through the meeting, ExxonMobil executives realized that several were indeed on track to win board seats. The company called time out, recessed for an hour, and began calling on major institutional investors trying to sway their votes.
In late June, weeks after the proxy contest ended with the voting at ExxonMobil's annual shareholder meeting, the verdict was in. Three of the four Engine No. 1 board nominees were elected, injecting outside energy experience and a renewable energy focus into the ExxonMobil board.
By the numbers
Part of the energy behind the ESG push has been a marketing-centric belief that elevating corporate social responsibility also will create tailwinds for brand perceptions, purchase intent, profitability, and a company's overall value on Wall Street. And because, as we saw in the ExxonMobil proxy battle, much of the perceptions are influenced by news and social media, PR's tactical and strategic value to companies becomes elevated as well.
While it may seem somewhat counterintuitive, the headlines about ExxonMobil's myriad governance challenges have generated little to no discernible Buzz among one of those key stakeholder groups -- consumers. Take a look at this chart. Remember, Buzz measures the percentage of U.S. consumers who heard something positive or negative about a company or a brand, in this case, ExxonMobil. It does not seem unreasonable to assume that persistent headlines about the energy giant's climate, financial and governance challenges would be stirring up negative consumer sentiment. Not so much.
On any given day over the past four years, about 7% of people would say they heard something positive about the company recently. At the same time, 4% would say they heard something negative. Net net, the news about ExxonMobil does not appear to be creating headwinds for the company's brand or reputation.
In June, ExxonMobil faced yet another governance bombshell. One of the company's army of lobbyists was caught on tape admitting the company was actively working to undermine climate-change science, funding shadow groups that contested research into global warming. The lobbyist, secretly recorded by a Greenpeace-funded activist journalism outlet, Unearthed, also confirmed that ExxonMobil was creating false fronts by supporting sustainability initiatives like carbon pricing, which would penalize companies financially for continued greenhouse gas emissions but the company believed would never be enacted.
“Did we aggressively fight against some of the science? Yes. Did we hide our science? Absolutely not ... Did we join some of these shadow groups to work against some of the early efforts? Yes, that’s true.”
-- Keith McCoy, ExxonMobil Senior Director of Federal Relations
The lobbyist, Keith McCoy, in a statement posted on professional networking site LinkedIn, said his comments did not reflect ExxonMobil's positions on sustainability, and in some instances were taken out of context. The company also issued a press release addressing McCoy's statement and related comments from ExxonMobil government affairs executive Dan Easley, who characterized Trump administration policies regarding oil and gas exploration, global trade and corporate taxes as “wins” that were “probably worth billions to Exxon.”
"We condemn the statements and are deeply apologetic for them, including comments regarding interactions with elected officials. They are entirely inconsistent with the way we expect our people to conduct themselves. We were shocked by these interviews and stand by our commitments to working on finding solutions to climate change.”
-- ExxonMobil press release
Here's a final question on the effectiveness of challenging corporate governance. At the end of the day, did the infusion of three activist investors on its board change the way ExxonMobil is being run? You be the judge. The Engine No. 1 hedge fund had pressed ExxonMobil to invest in clean energy and reposition the company to compete in a low-carbon economy. Weeks after seating the new board, the company began considering a pledge to attain net-zero carbon emissions on its operations by 2050.
News about the strategic shift -- the lead story in the Wall Street Journal in early August -- was leaked to the paper by “people familiar with the matter.” While ExxonMobil had not yet finalized new sustainability goals, the company was mapping out a timeline to announce strategic plans on the environment generally, and high-carbon businesses specifically, by year end, the sources said.
ExxonMobil media relations spokesperson Casey Norton responded to media inquiries with yet another corporate statement.
“As the board goes through its deliberations regarding future plans related to the company’s energy transition activities, we routinely evaluate our work and commitments and will update our shareholders and the public as those plans evolve.”
-- ExxonMobil media spokesperson Casey Norton
Here's some thoughts on ExxonMobil's path forward from CEO Darren Woods. Take a look at his New York Times DealBook interview from November 2021.
How does Darren Woods position ExxonMobil
in terms of the company's role in addressing climate change?
How well did he address the misinformation contained
the Unsettled Science campaign?
Post your thoughts below,
and we'll talk about this in class.