Driver #1 Lessons for Proxy Environmental Campaigns

The recent success of investment startup Engine No. 1 in securing three seats on the board of Exxon Mobil Corp. has been called a “watershed moment” for corporate America.

The campaign not only represented a David versus Goliath victory – with Engine No. 1, a 0.02% shareholder, challenging a company the size of Exxon – but it was also the first major shareholder activism campaign with the climate and environmental issues playing a critical role, raising hopes that big companies could be held more accountable for the actions (or lack of actions) they take on ESG.

While it remains to be seen whether the No. 1 mover against Exxon will spark a wave of similar efforts in the future, its promising result offers several important points that can be successfully applied in environmental campaigns in the future.

Lesson 1: Have a proactive and global strategy

Although ESG issues have been seeping into the activism space for some time, most engagement has taken place through non-binding shareholder proposals focused on corporate disclosure and reporting, rather than large-scale proxy contests over board seats and an environmentally focused capital allocation strategy.

Therefore, when Engine No. 1 launched its campaign in December 2020 promising to nominate four board candidates, observers either ignored Engine No. 1 or gave the company little chance of success.

Nonetheless, Engine No. 1 remained focused on transformative change with a multi-pronged shareholder engagement strategy. This included a large-scale social media campaign; distribution of numerous strategically scheduled press releases and shareholder presentations; and the publication of a white paper on the rapidly changing energy market in collaboration with David G. Victor, a leading public policy and climate expert.

Lesson 2: Reputation, circumstances and narrative material

Although Engine No. 1’s size and stake in ExxonMobil was relatively small compared to most large-cap activists, which the company lacked in these areas, it made up for with deep experience in the industrial and technology sector, in particular thanks to its founders Chris James, a veteran of technology funds, and Charlie Penner, a seasoned activist. This allowed Engine No. 1 to demonstrate the importance of thoughtful storytelling and strong institutional investor support when large numbers of owners were impractical.

Ultimately, Engine No. 1 bet on — and managed to capture — a confluence of shifts in the energy sector and in public and investor sentiment, including long-standing investor dissatisfaction with the respect to corporate governance at ExxonMobil. Timing was also a helpful factor: Engine No. 1 launched its campaign as Wall Street interest in ESG issues grew and the Biden administration took office amid promises to increase infrastructure. renewable energy in the United States.

Lesson 3: Institutions remain the key to success

Engine No. 1 cleverly launched its campaign with the support of the California State Teachers’ Retirement System (CalSTRS). Along the way, he’s garnered praise and support from other major pension funds, including the California Public Employees’ Retirement System (CalPERS) and the New York State Common Retirement Fund, as well as environmental and government organizations. scholars around the world.

Additionally, in nominating and soliciting proxies for highly qualified, independent and successful board nominees, Engine No. 1 has received recommendations from leading proxy advisors such as Institutional Shareholder Services (ISS) and Glass Lewis.

This in turn has helped Engine No. 1 capture a highly institutionalized shareholder base that often sides with management in major proxy battles, including the world’s three largest asset managers – BlackRock, Vanguard and State Street.

By offering major institutions a way to show their dissatisfaction with ExxonMobil’s past failures to engage with shareholders, Engine No. 1 has paved the way for impactful change within the company.

Lesson 4: Expect Last-Minute Curve Balls

Pre-meeting preparations on both sides of a proxy contest are critical to ensuring a successful annual meeting. Despite these expectations at ExxonMobil’s annual meeting, ExxonMobil surprised the No. 1 mover and investors with a last-minute, unscheduled hour-long “stayaway” during which the company solicited additional votes from investors and tried to convince others to change their votes from the dissenter. proxy card to company proxy card.

The fast-paced action of the No. 1 engine and its proxy, legal and public relations advisers – including rapid-fire public messaging and an appearance by Charlie Penner on CNBC during the annual meeting break – has helped avoid a possible vote grab that threatened the No.1 engine’s advantage.

While Engine No. 1 undoubtedly faced a challenge in trying to win seats on Exxon’s board of directors, its measured and comprehensive strategy – encompassing public relations, institutional support and the preparation of all possible outcomes – enabled his proxy campaign to succeed.

As ESG issues take on increasing importance for shareholders at all levels, the success of the #1 driver offers a guide to best practices that can be applied to deliver climate and environmental campaigns in the future.

This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.

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Author Information

Ele Klein is a partner and co-head of the Global Shareholder Activism Group of Schulte Roth & Zabel LLP.

Danny Goldstein is a partner at Schulte Roth & Zabel. SRZ served as counsel to Engine No. 1 in its proxy campaign at Exxon Mobil Corp.

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