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The inside story of how tiny hedge fund Engine No. 1 reshaped Exxon’s board

Though it owns just 0.02% of the company, the fund convinced big investors to vote for three new board members with backgrounds in clean energy. But will they be able to actually change how Exxon operates?

The inside story of how tiny hedge fund Engine No. 1 reshaped Exxon’s board
[Illustration: Daniel Salo/Fast Company]
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The board of ExxonMobil, the largest oil company in the United States, includes the CEO of Merck and the former CEO of Caterpillar. They now have some new colleagues: three board members that the fossil fuel company didn’t want—and who plan to push for a coherent plan to address climate change. That’s thanks to Engine No. 1, a hedge fund that didn’t even exist a year ago.

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Chris James, the investor who launched the investment firm in late November 2020, isn’t a climate activist. In fact, in the mid-2000s, James helped open a new coal mine to try to bring jobs back to his Midwestern hometown. But his experience as an investor—including the failure of the coal mine around 18 months later because of the changing economics of the energy system—helped him better understand the business case for companies to improve their social and environmental impact. Engine No. 1 describes itself as “purpose-built to create long-term value by harnessing the power of capitalism,” and says that corporate performance “is greatly enhanced by the investments it makes in workers, communities, and the environment.”

Exxon made a perfect target. At a time when the International Energy Agency says that in order to tackle climate change no new oil and gas fields should be developed, the company is still investing heavily in new production, and has been slower than other energy companies to plan for the energy transition. Royal Dutch Shell, Total, Equinor, and others are pouring more money into renewable energy, electric charging stations, battery storage, and other alternatives to fossil fuels. (Historically, Exxon has worked to promote climate denial, despite the company’s own early research on climate science.) And in recent years, Exxon has also been underperforming financially compared to its peers.

“We’re focused on the idea that companies that think long term will perform better over the long term,” says Charlie Penner, who leads activist campaigns at Engine No. 1. “Conversely, companies that are overly focused on the short term at the expense of long-term value drivers will underperform. I think the issue you’ve seen at Exxon, really for years, is an overly short-term focus and a real disregard for the way the industry has changed, where the world is changing, and what that’s going to mean in the years to come.”

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Engine No. 1 saw an opportunity. As a shareholder, it could nominate new Exxon board members who understood the need for the company to fight climate change. If it could convince enough other shareholders to vote for those candidates at Exxon’s annual general meeting, a process that happens both via proxy cards mailed to shareholders and through online voting, those new directors could begin to help the company change direction. Despite the new hedge fund’s relatively small size—and the fact that its $50 million stake in Exxon represents only 0.02% of the company—it succeeded.

“The first thing you do is make sure that you can actually win”

Penner, previously a partner at the activist hedge fund Jana Partners, had worked on an earlier campaign that successfully got Apple to boost parental controls. For the Exxon campaign, Penner started by looking at the chances of success. Most people who own stock just fill out their ballots using the recommendations of the company, if they vote at all. Engine No. 1’s path went through large investors who own significant chunks of the company and who could be swayed. “The first thing you do is make sure that you can actually win,” he says. “Particularly given that this company has a very large retail investor base, you really kind of have to cut the numbers and make sure that if you do as well as you think you can do with institutional investors, and you do as poorly as you typically expect to do with retail investors, there is still a path to victory.”

The team started building the case for change, going through a detailed examination of what wasn’t working at Exxon and researching potential new board members who would appeal to investors. Penner had worked closely with the California State Teachers’ Retirement System, one of the largest pension funds in the world, on the Apple campaign, and had other relationships with large investors in Exxon.

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“They consulted broadly, deeply, widely with big investors before they got their campaign going,” says Anne Simpson, managing investment director for board governance and sustainability at the California Public Employees’ Retirement System (CalPERS), which manages around $444 billion in assets. “That was the first thing. People think they came out of the blue—they didn’t. So when they were able to identify and announce their candidates, they knew that they’d already taken soundings with a wide range of big funds like ourselves.”

While some climate activists have pushed for CalPERS to divest from fossil fuel companies, the pension fund believes it wouldn’t help to sell shares to another owner, especially if the next owner isn’t as concerned about climate change; the oil company would still keep operating. Instead, the fund hopes to help fossil fuel companies make the necessary transition.

The Engine No. 1 campaign built on previous work that CalPERS and other shareholders have done to gain more power; around a decade ago, for example, CalPERS started pushing to gain the right to vote no on proposed board members (the default provision when companies incorporate in Delaware and some other states calls for plurality voting, which only gives the option to vote yes). “What we were doing was setting the stage for this idea that under capitalism, directors of companies have to be held accountable,” Simpson says. “It’s actually a very serious responsibility.”

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Shareholder discontent at Exxon has been building for years because of poor returns; over the last decade, it has underperformed peers by 57.2%. Large shareholders also increasingly say that they want to see companies respond to climate change, including the massive asset management firm BlackRock, which later ended up supporting three out of Engine No. 1’s four nominees. The campaign also won over Vanguard and State Street; together, the three institutional investors hold nearly 20% of Exxon’s shares. “This was in the wind for Exxon, because the quality of the board has been a topic of discussion with shareholders for quite some time,” Simpson says. “We see a thoroughly underwhelming approach to climate change. But there’s nobody on the board with any energy sector background.”

Simpson says that CalPERS typically doesn’t support hedge fund activism, because hedge funds often have a short-term focus—bring in someone new, make some changes, boost share prices temporarily, and then get out. “The difference with Engine No. 1 is that the whole investment thesis here is to strengthen the board,” she says. “It’s a governance agenda.”

The hedge fund nominated four executives, including Kaisa Hietala from Neste, the world’s largest producer of renewable diesel, and Alexander Karsner from X, Alphabet’s innovation arm. Gregory Goff, another nominee voted onto the board, has decades of oil industry experience that Engine No. 1 believes is necessary for Exxon to run more profitably; his climate expertise is less clear. (Anders Runevad, former CEO of wind energy company Vestas, was nominated but not elected.) “This is going to be a yearslong process of figuring out how to reposition this company for the future,” Penner says. “And our core aim here was that it would be really tough to do that without people with successful transformative energy industry experience on the board.”

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Caught sleeping

Exxon didn’t seem to feel threatened by the campaign as it launched. “I think we got probably the same call that most frustrated shareholders get, which is from the investor relations department,” Penner says. The fund put out its first letter to the board in December, around two months before it would need to give notice that it was going to nominate new directors at the shareholders meeting. “We actually didn’t have a conversation with anyone on the board until late January,” he says. “They may have thought that given that we were a new firm, with a fairly small stake in the company, that we weren’t going to see it through. There was never really an attempt to substantively engage about the people that we were putting forward for the board. There was a very dismissive attitude.”

DE Shaw, a larger hedge fund, had launched a similar campaign at the same time; Exxon responded with some new emissions reductions targets and appointed some new directors. That was enough for DE Shaw. But the new directors didn’t have energy industry expertise, and Exxon’s climate targets are lacking. (When calculating its emissions, for example, it leaves out the biggest source—the use of its fuel in customers’ vehicles.) Engine No. 1 kept going.

A few weeks before Exxon’s annual general meeting, Climate Action 100, a coalition of investors concerned about climate risk, held a presentation introducing the four nominees for the board. “We were able to ask them all the tough questions,” says CalPERS’ Simpson. “What do you do as a change agent when you’re in the minority? How do you work collaboratively when you’ve come through the shareholder channel, and management’s got other people, and some long-standing board members may lose their seats? It’s not just have you each individually got the chops and can you make the cut in terms of your skills and experience, but do you have the emotional intelligence and the understanding of how to work on a board in order to be productive with a group of people who’ve got different opinions to you, where a big change is needed.”

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Exxon was invited to the meeting, but chose not to attend. (On a previous call with Engine No. 1 in January, Exxon CEO Darren Woods reportedly told the hedge fund that it thought the nominees were unqualified, though Penner says each nominee has individually created billions of dollars of value in the energy industry.) On the day of the general meeting, as votes were beginning to go against Exxon’s picks, Simpson says she heard the company tried lobbying at least some investors to change their votes. (She says that the Securities and Exchange Commission should make changes that would prevent companies from opening ballots and then asking shareholders to change their votes.)

What can three board members do?

Because Goff, Hietala, and Karsner will join nine other current members on the board, it’s not clear yet how much influence they’ll have. Some climate activists, including campaigners from the Sunrise Project, have argued that shareholders should have gone further and worked to remove Exxon’s CEO, since current management may not be best able to lead the transition to cleaner energy.

“There’s no doubt that the elections were a blow to Exxon, but I’m skeptical about the ability of a few new board members to reform the company,” says climate activist Jamie Henn, director of the nonprofit Fossil Free Media. “Extracting oil and gas and externalizing the costs of pollution is hardwired into Exxon’s operating system. It would be like asking Blockbuster to shutter all of its stores and become an online streaming service: It has neither the business model nor the expertise to make the transition. The way that we’ll know the new board is serious is not with some new ‘net-zero by 2050’ commitment—that would just be cover for business as usual—but if they come out with a serious plan to wind down oil and gas production. Until Exxon starts keeping fossil fuels in the ground, they’re still going to be part of the problem.”

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Still, some shareholders are optimistic. “We hope this means we’ve now got critical mass for a change of direction,” says Simpson, who compares the company to an oil tanker: Changing direction is something that she thinks will happen slowly over time. “What we’ve done through this is significantly improve our odds of getting a transition plan that means the company’s fortunes can be resolved and they can map out a path forward.” In response to a request for an interview for this article, Exxon sent a statement saying, in part, “We welcome the new directors to the board and look forward to working with them constructively and collectively to benefit all shareholders.”

As You Sow, a nonprofit that pushes for corporate accountability through shareholder action, is cautiously optimistic. “You can add new people to the board, but if the company stays on business as usual, then we haven’t solved anything,” says CEO Andrew Behar. “That is only as good as the decisions that they make, and the incentives they give management to make. So we’re hoping to see a real shift in the company. The company needs a major transformation in how it’s allocating its capital expenditures.”

There’s no reason that Exxon can’t transition to more renewable energy or other business ventures that reduce climate risk. “The idea that this company can only do one thing over the long term isn’t backed up by their history,” Penner says. Exxon scientists helped develop the lithium ion battery, for example, and technology used in solar cells. The company’s experience working in the ocean can easily translate to offshore wind energy. Other oil companies are already moving more quickly. And the result of the vote at Exxon will also influence other companies.

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“This result is reverberating through boardrooms,” Simpson says. “I had a call from the chair of another big oil company just saying, ‘So, how did you do that?’ But also, ‘Thank you.’ Because there are some oil companies wanting to push further, faster. I think Exxon and also Chevron, to an extent, have been laggards. If you look at the statements and commitments coming out of some of the competitors, they need Big Oil in the U.S. in their corner. They need to be able to work on this as a sector. So we know this is being closely watched.”

About the author

Adele Peters is a staff writer at Fast Company who focuses on solutions to some of the world's largest problems, from climate change to homelessness. Previously, she worked with GOOD, BioLite, and the Sustainable Products and Solutions program at UC Berkeley, and contributed to the second edition of the bestselling book "Worldchanging: A User's Guide for the 21st Century."

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