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What's XOM Doing to Activists, and Why Does It Matter?
Note: Some followers here are very familiar with this situation, as ESG investors or even as parties to what's happening at XOM. This brief explanation is for everyone else.
Most large publicly-traded corporations in the US receive at least a few shareholder proposals for the AGM each year. XOM shareholders voted on thirteen of these in 2023, and evidently the company wanted to curtail this in future years. Its tactics worked, as it has only four at this year's AGM on May 29 (it had seven in 2022, still a high number relative to most companies). Those tactics merit explanation, and some comments about what they mean for all activists.
Earlier this year XOM filed an actual lawsuit against two shareholders. Those proponents quickly backed off, and yet XOM continued with the litigation. In the proxy statement for the 2024 AGM, it also explained in proud detail its approach to these and other shareholder proposals and proponents.
Two proponents
XOM has of course been the subject of extensive activist attention over the years. Famously, one-time activist Engine No. 1 gained three BoD seats there in 2021 after a proxy contest centered on XOM climate initiatives. As a prominent oil and gas company, XOM sees its share of protest, complaint, and ESG proposals each year. The proximate cause of this year's conflict was a proposal from two of the usual ESG shareholders.
Those two, Arjuna Capital and Follow This, together submitted a climate proposal to XOM in December 2023. They've done that before at XOM, and at many other companies, it's what they do. At that point almost all other companies ask the SEC to allow them to exclude the proposal from the proxy statement for the 2024 AGM.
One lawsuit
XOM didn't like its chances with the SEC staff, so it filed its lawsuit. Arjuna Capital and Follow This are tiny investors that can't possibly defend themselves in Federal district court in Texas. They withdrew their proposal within days, and remain defendants in this matter.
A portion of the complaint argues why XOM can exclude the proposal, based on its interpretation of the relevant SEC rules. XOM essentially asks a Federal district court judge to ready and apply the relevant SEC regulations (Section 14a-8). Most of it just goes after Arjuna Capital and Follow This, alleging the two "Work in Concert to Abuse the Shareholder Proposal Process at the Expense of ExxonMobil Shareholders", among many other assertions.
Three pages
XOM didn't stop with the lawsuit. It devotes three dense, footnoted pages of the proxy statement (p. 79-81) to a harsh critique of climate proponents and the SEC. It calls the proposals an "abuse of the system", with too many other insults to even begin to quote here. Read the whole thing.
Clearly XOM has had it up to here with shareholder proposals. An unprecedented lawsuit against two immaterial shareholders and a harsh polemic in its proxy statement at least allows it to blow off the accumulated steam that dozens of shareholder proposals must generate. Yet, the implications go beyond allowing a privileged BoD to assert its dominance over those shareholders and also SEC staff.
A new direction
XOM extends an ongoing trend in a new direction. Companies increasingly litigate against shareholders over proxy contests, or compel shareholders to sue to enforce their rights, specifically on advance notice bylaw terms. Companies or their representatives periodically sue the SEC over one or another regulation. Now, a company has sued shareholder proponents, seeking to substitute the views of a Federal judge for those of SEC staff.
Instead, XOM should consider letting this go. The proxy statement gripes about the cost and hassle of shareholder proposals. It claims $21 million in direct cost to respond to the 140 shareholder proposals it has received over 10 years. Even if we accept the $150,000 per proposal cost from the SEC, a conservative estimate, XOM spends about $2 million per year, completely immaterial to its billions in revenue and expenses, or even to the tens of millions it spends on BoD compensation and expense. It could take perhaps a handful of managers and staff to respond to a dozen proposals or so in a year.
How about just accepting the proposals it receives, dispensing with the SEC review process and of course lawsuits, and letting shareholders decide how to proceed?
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