Shareholder Concerns About ExxonMobil: Pay, Performance, and Climate Change

VEA Vice Chair Nell Minow writes in Huff Post:

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I am proud to serve on the board of the shareholder advocacy non-profit 5050 Climate Project, which had a major success last week with the first-ever majority shareholder vote on a climate change-related proxy proposal, at Occidental Petroleum. They also released a major new report this week finding that five major utility companies have failed to develop and disclose their sustainability strategies. A new analysis of ExxonMobil (NYSE: XOM) by 5050 raises some important concerns for shareholders relating to pay, performance, and climate change.
1. ExxonMobil’s documented policy of preventing investors from engaging directly with members of its board to discuss company strategy, financial performance, risks and opportunities, and other topics germane to the board. This antiquated policy is out of step with widely recognized best practices for corporate governance and undercuts the board’s ability to gain valuable outside advice and perspectives. [Note: for several days last week the company’s website interface for contacting board members was not functioning and a call to inquire about it was met with a recording explaining due to technical difficulties they were unable to answer the phone, or, apparently, take messages. They did not respond to an email inquiry about these issues, though the website function has been fixed.]
2. Lack of clear and transparent succession planning for retiring board members, particularly given the mismatches we see between the skills and orientation of outgoing directors and the strategic challenges facing the company. For example, ExxonMobil’s outgoing Audit Committee chair lacked relevant financial expertise during a time of regulatory scrutiny and business model transformation, and though his and other board members’ retirement dates were known in advance, no replacements have been nominated for the 2017 annual shareholder meeting nor has the company discussed plans for the directors’ replacements.
3. Board compensation practices that may create perverse incentives as directors approach retirement. ExxonMobil provides that most director equity-based pay does not vest until the mandatory retirement age of 72, an unusual proviso, under which directors can potentially forfeit what can amount to millions of dollars in pay if they leave the board before retirement. As they approach retirement, directors’ time until payout shortens while the value of their equity compensation increases – a dynamic that can compromise director independence and objectivity, as directors nearing retirement may not voice dissenting opinions for fear of putting their impending payout at risk of forfeiture.
ExxonMobil’s own statements acknowledge the realities of climate change and, without being specific, their role and their obligation to respond. “Addressing climate change, providing economic opportunity and lifting billions out of poverty are complex and interrelated issues requiring complex solutions. There is a consensus that comprehensive strategies are needed to respond to these risks. “ It is an encouraging sign that they have added Dr. Susan Avery, Former President and Director of the Woods Hole Oceanographic Institution, to their board of directors. A good next step would be making her available to meet with investors to hear their concerns about strategy and transparency.
5050’s mission is to “help large investors create market-based demand for meaningful climate disclosures and greater climate competency on corporate boards.” These large investors, mostly pension funds, mutual funds, and endowments, are permanent investors with very significant holdings in just about all public companies. They cannot sell the stock if they disagree with management, especially if the price of the stock is discounted by failure to align pay with performance or to create strategies for sustainable growth. All they can do is engage with management and the board to raise their concerns and ask for better answers. Given potential regulatory rollbacks and the government’s reduced role in providing data and research on climate change, institutional investors who understand the quantifiable risks of failure to address climate change are finding that it is cost-effective to assess and respond to these risks rather than wait for corporations or government to act on their own.

50/50 Climate Project Shows Conflicts Skew Proxy Voting Decisions

Ross Kerber reports at Reuters:

Several big fund firms supported challenges on executive pay or climate disclosures less frequently where they had business ties to energy companies and utilities, according to a new study released on Tuesday.

The scrutiny of firms including Vanguard Group and Invesco Ltd is the latest research to raise questions about how well they manage potential conflicts of interest when casting proxy votes at the same time they are trying to win work like running corporate retirement plans….For its study 50/50 reviewed how fund firms voted on 27 proxy questions last year at oil and gas companies and utilities, tracking how often they voted against management recommendations.

At Vanguard, for instance, 50/50 found the $4 trillion Pennsylvania index fund manager broke from management 22 percent of the time. But at four companies where Vanguard serviced retirement plans, its funds did not support any challenges….Another fund firm, Invesco, broke with management 12 percent of the time, and at none of seven companies where it had business ties.

Kerber’s article includes more information and responses from the managers included, denying that the votes are influenced by conflicts. The full report is on the 50/50 website.

[T]he 50/50 Climate Project found that the managers who tended to vote in favor of management received more in fees and stewarded more assets than all other managers combined, and that their voting practices were even more management friendly at companies with which they had business relationships.