Exxon vs Calpers: Inside the clash over shareholder rights and fiduciary duty

Good morning and welcome back to Energy Source, coming to you from New York.

Today we are focusing on an epic legal clash involving ExxonMobil and two climate-focused shareholder groups that holds important implications for shareholder rights and corporate accountability.

The back-story: In January Exxon sued Follow This, a Dutch climate activist group, and investor Arjuna Capital to block a climate resolution the groups had submitted ahead of the company’s annual meeting, which is due to be held tomorrow. The resolution would have let shareholders vote on whether to accelerate Exxon’s reductions in greenhouse gas emissions.

Both climate groups withdrew their proposals following Exxon’s suit but the oil supermajor is pressing ahead, hoping to win a ruling that would set a precedent for such cases.

Last week the judge dismissed the lawsuit against Follow This, because of jurisdictional issues as it is based in the Netherlands — but the case against Arjuna will proceed.

Exxon says it needs to take a stand against efforts to manipulate shareholder activism. Shareholder groups, however, have alleged the company is “bullying” investors and say that if Exxon’s action succeeds, shareholder rights would be suppressed.

Exxon’s lawsuit has prompted a revolt from some shareholders. Calpers, the largest public pension fund in the US, has said it will vote against the re-election of Exxon’s board members, including chief executive Darren Woods. Norway’s oil fund said last week it would vote against independent director Jay Hooley, who leads Exxon’s governance strategy.

Ahead of tomorrow’s vote, Energy Source asked chief executives at Exxon and Calpers to outline why the legal action is such an important issue. Here they are in their own words. Let us know what you think at energy.source@ft.com.

Thanks for reading — Jamie

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Marcie Frost: ExxonMobil’s lawsuit puts shareholder democracy at stake, writes Calpers CEO

The writer is the chief executive of the California Public Employees’ Retirement System.

ExxonMobil’s decision to sue a group of shareholders strikes at the very heart of our mission as a public pension fund.

Calpers has a sacred, fiduciary duty to provide retirement benefits for more than 2mn public sector workers and their families. Our members expect us to make prudent investments and to do everything we can to improve the long-term success of those investments.

That includes holding corporate leaders accountable. When we exercise our rights as shareholders in some 6,000 US companies, we engage in what’s often called “shareholder democracy”, a way to speak truth to power. The process is overseen by the US Securities and Exchange Commission.

Calpers plays by the rules of shareholder democracy, no matter who’s in charge in Washington, DC. Why can’t ExxonMobil?

For months, the company’s directors and senior leadership have acted as though they are under siege by two small shareholder groups that have dared in recent years to introduce proposals related to climate change. Rather than petition the SEC for relief from votes on those measures, ExxonMobil has asked a US district judge to rewrite the rules.

Don’t be distracted by outlandish claims that this is a fight over politics or a valiant effort to stave off radical climate activism. This fight is entirely about whether shareholders will keep their existing rights to speak out on topics they believe are material to a company’s long-term profitability.

One newspaper’s opinion page recently compared Calpers and other critics of the ExxonMobil lawsuit to unruly “agitators” as a reason to justify silencing shareholders who bring up issues a company’s executives don’t want to address.

The company has sought to further mask its anti-speech effort by insisting it merely seeks court-ordered “clarity” about the SEC’s rules for shareholder proposals. We believe the real intent is to tilt the balance of power towards corporate C-suites and boardrooms.

Workers’ rights, reasonable and transparent executive compensation, and independent directors — all of these issues and more could be unilaterally sidestepped in years to come if shareholders ignore this legal fight and ExxonMobil prevails. Fortunately, a growing number of investors are now paying attention.

Since we first spoke out against the lawsuit two months ago, we’ve been asking a question that ExxonMobil can’t — or won’t — answer: When faced with shareholder proposals it didn’t like earlier this year, why didn’t the company follow established procedures and ask the SEC for so-called “no action” relief from bringing these proposals forward? After all, a recent independent review found more than two-thirds of such requests have been granted by regulators this year.

ExxonMobil’s decision to bypass the SEC and go straight to a Texas federal court, to say nothing of pushing ahead on the lawsuit even after the shareholder groups dropped their proposals in February, strikes us as a tell-tale sign that something bigger is at play.

Without full and fair rights governing corporate engagement, Calpers and other similar investors will struggle to meet their fiduciary duty.

ExxonMobil’s lawsuit is a shocking overreaction to a pair of non-binding shareholder proposals — advisory measures seeking to have a dialogue, not to impose directives. Meanwhile, a company that reported net profits last year of more than $36bn complains about the cost of preparing shareholder proposals for a formal vote, broadly estimated by the SEC to sometimes total $150,000.

That’s a small price to pay to uphold the fundamental tenets of shareholder democracy, while the cost to shareholders’ rights if ExxonMobil’s lawsuit prevails is priceless.

Darren Woods: Calpers should ‘leave politics to politicians’, writes Exxon chief

The writer is the chair and chief executive of ExxonMobil.

It’s easy to be distracted by all the noise surrounding ExxonMobil’s legal action against activists, masquerading as shareholders. Here are the facts:

This is not about David vs Goliath — just because you’re big doesn’t mean you’re in the wrong.

This is also not about climate change — ExxonMobil has, as recently as this year, opposed shareholders who would have us do less, not more, about the climate.

Finally, it’s not a challenge to shareholder democracy — in fact, we’re supporting it. One of the hallmarks of democracy is that everyone is treated fairly and abides by the same rules.

This is about activists submitting a proposal for the third consecutive year asking us to limit sales and allow others to meet the world’s energy demand. This proposal had been voted down by the vast majority of our shareholders two years in a row.

When we exercised our right to be heard by a federal judge on the critical question of whether the defendants were violating US securities regulations, the proponents immediately withdrew their proposal.

Why did they withdraw in the face of that simple request for clarity? What happened to the commitment to their cause? I suspect they wanted to avoid a legal defeat that would undermine their fundraising “business model”.

Their arguments make for easy headlines but fall apart under scrutiny.

For instance, they claim they withdrew because the cost of defending themselves was too high. That’s nonsense. These are the same organisations that fundraise with attacks on our company.

And, in fact, the judge in the case said he expects to resolve this issue through legal papers, not in court, which minimises the financial burden on all parties.

Likewise, they say we’re trying to silence small shareholders. To the contrary, resubmitting a twice-failed proposal, in violation of SEC rules, ignores the voices of 90 per cent of voted shares that disagreed with them the last time they tried. Establishing improved SEC rule clarity is better for all shareholders.

They also say that because they dropped the proposal and promised not to resubmit it, the case should be dismissed. But, as the court put it, “Not so fast”. Their promise is “toothless” because they could simply “ . . . add an Oxford comma here, shorten a sentence there, and submit the results anew”.

Finally, some critics say this lawsuit is unnecessary because the SEC has increased the frequency with which they grant what is known as “no-action” relief, meaning a company doesn’t need to take action on a specific shareholder proposal. That’s true, but two things seemed to have happened since our lawsuit went public: more companies are seeking relief, and more are being granted it. In recent years before our suit, activist proposals were increasing, and SEC relief was decreasing.

Organisations like Calpers know these facts are true. More importantly, they know their job is to be the best possible stewards of the pension funds entrusted to them by California state employees.

Calpers also knows these activists have no interest in earning a return on ExxonMobil shares. They want to financially hurt the company and compromise the investments of millions who rely on the dividend as part of their retirement portfolio. Calpers’ fiduciary duty is not furthered by their attack on our company (or any company). They should leave politics to the politicians.

All that we seek in our lawsuit is greater clarity on the SEC rules and their application. I can understand why activists might resist this, but it’s hard to imagine why an investor like Calpers is opposed to federal regulations being better understood and more consistently applied. It’s even harder to imagine why Calpers would organise an effort to stifle and punish a company as it seeks what anyone in business desires: fairness and predictability in the application of the law.

In the end, that is what our lawsuit is about.

Energy Source is written and edited by Jamie Smyth, Myles McCormick, Amanda Chu and Tom Wilson, with support from the FT’s global team of reporters. Reach us at energy.source@ft.com and follow us on X at @FTEnergy. Catch up on past editions of the newsletter here.