ExxonMobil Goes to Court
The viability of shareholder democracy in a moment of backlash.
Back in the 1950s, Adolf Berle, a lawyer and one-time member of FDR’s inner “Brains Trust,” looked out on the annual shareholders meetings of America’s major corporations and found the scene to be, well, rather lackluster. Such exercises were, he wrote, “a kind of ancient, meaningless ritual like some of the ceremonies that go on with the mace in the House of Lords.” They were far from the meetings of serious deliberation, as many advocates of shareholder democracy had hoped or intended they would be: something like an old New England town meeting in which those who owned stock appointed representatives to the board and provided genuine input to executives about the plans and purposes of a company.
That was the 1950s, an era of relative calm in the long and sometimes unstable marriage between shareholders and executives—and between Wall Street and corporate America. Decades later, the shareholder activism of the 1980s shook up that placid portrait, as waves of activist investors and private equity firms drove hostile takeovers and mergers and acquisition. Today, we live on what might be called the far side of that movement for shareholder value—and now we see a different kind of conflict at annual shareholders meetings. Now many of the activist shareholders are actually activists. And they’re pushing not so much for higher rates of return but for more substantial action on social and environmental issues, forcing the hand of many corporations to lower fossil fuel emissions or protect human rights in global supply chains. But what right do activists have to force companies to take into consideration issues that may have little to do with generating profits? And what happens when shareholders don’t seem all that interested in shareholder value? These are the questions driving today’s conflicts over so-called Woke Capitalism.
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Case in point: ExxonMobil. The energy company has long been perceived as one of the least enthusiastic supporters of green energy initiatives in the energy sector. And it has been targeted by activist investors such as Engine No. 1, an investment fund that has pushed the company to make bolder steps toward the transition away from fossil fuels. Back in 2021, Engine No. 1 shocked corporate America by instigating a shareholder rebellion that elected three of its candidates to the board of directors. Importantly, the group made its case for shaking up the leadership of Exxon primarily in economic terms—i.e. the company needed to move more quickly on green energy initiatives because it made good business sense. They didn’t simply make an argument for good ethics; they made an argument for better profit-seeking.
This winter, as shareholders and management groups prepare for annual meetings later this spring, two activist groups— Arjuna Capital and Follow This—proposed resolutions asking Exxon to “go beyond current plans, further accelerating the pace of emission reductions in the medium-term for its greenhouse gas (GHG) emissions… and to summarize new plans, targets, and timetables.” In response, Exxon took the unusual step of filing a lawsuit in the US District Court in Texas on January 21 seeking to block the resolution from consideration at its annual meeting in May.
Their reasoning? For one thing, there is an SEC rule that prevents shareholder resolutions from being submitted repeatedly after they have been defeated. The groups had previously filed similar resolutions in 2022 and 2023 and they were defeated by significant margins. For another thing, Exxon’s lawyers claimed that the resolutions sought to “micromanage” the affairs of the company. The courts have long recognized the “business judgment” rule that gives executives wide latitude to make decisions about day-to-day business. In other words, adjusting the timetable for emissions reductions is none of shareholders’ business. Which is, admittedly, a thin sort of justification for preventing the consideration of questions about something as important as climate change.
But there was news on Friday that Arjuna Capital and Follow This have withdrawn their resolutions, likely in anticipation that they would lose the case in court. From their perspective, it’s probably the least-bad option. A legal defeat could set a challenging precedent for subsequent shareholder resolutions. But even still, this turn of events will probably have a chilling effect on climate-focused activist investors. It suggests a change in thinking at big corporations about the way they should handle such shareholder protests. And, as executives talk less about sustainability in quarterly earnings calls and the ESG brand of investing has gone toxic, it raises important questions about the input that shareholders and large institutional investors have at large corporations.
The idea that shareholders might have a voice in the affairs of a publicly traded company—and that they might express that voice on social issues—is not new. We forget that many of the earliest activist investors were actually activists. As I write in Taming the Octopus (out 2/20!):
The Securities and Exchange Commission developed rules in the 1940s that allowed shareholders to propose their own candidates for director under the supervision of regulators. Rule 14a-8, sometimes called the foundation of corporate democracy, also gave shareholders access to the proxy statement, a document that every publicly traded corporation was required to send out to all those who owned stock informing them of resolutions, candidates, and other matters coming up at the annual meeting. As one SEC chairman involved in drafting these regulations put it, “entrenched and irresponsible control is as odious in corporate life as it is in political life.” The purpose of SEC regulations was to give shareholders a more effective and ordinary means to participate in business policies and to hold directors and top-level managers more accountable. But SEC policy makers did not have social activists in mind when they made the rules; they thought of corporate accountability as a financial matter that could be safeguarded by protecting the fiduciary obligations of executives.
I write about James Beck and Bayard Rustin, both of whom helped organize the Freedom Rides and the Congress of Racial Equality, and how they bought shares of the Greyhound Bus company, attending the annual shareholders meetings in the late 1940s and early 1950s. Using their voices as shareholders, they demanded that the company integrate its bus lines in the South. Some stockholders accused them of being communists. And Greyhound’s management was less than enthusiastic.
Greyhound stonewalled Peck and Rustin for years, but the status of their shareholder proposal was uncertain until the SEC finally stepped in:
In January 1952, the commission issued new rules that severely restricted the criteria for legitimate proxy solicitations from stockholders. Now the commission determined that any proposals were illegitimate that promoted “general economic, political, racial, religious, social, or similar causes.” Those rules stifling shareholders and empowering management would stay on the books until the 1970s, effectively removing the question of civil rights as a legitimate topic of shareholder consideration. The SEC’s “alleged purpose is to protect the rights of stockholders,” Peck wrote. “In effect, it works hand-in-glove with the big corporations.”
In our moment, the SEC is unlikely to limit shareholders’ voices in this sort of way. But even if regulators are open to certain kinds of shareholder input on social and political issues, it seems clear that some executives would like to see a far narrower understanding of what counts as a legitimate form of shareholder democracy.
The conflict between Exxon and activist investors over a proposed resolution will likely be the first of many skirmishes over climate, diversity, equity, and inclusion initiatives, and other issues leading up to the season of annual meetings. The underlying questions driving such disputes are not much different from the questions that Peck and Rustin faced decades ago in their battle with Greyhound over civil rights: Do shareholders have a voice in determining the purpose of business corporations? Or do they have to stay in the narrow lane of profit and shareholder value?
At the end of the day, large business corporations are always already intertwined in a mess of social and political issues. And the viability of the American experiment in shareholder democracy, which has always been more of an ideal (or a myth, as Berle thought in the 1950s) than a real tradition, will depend at the very least on the broader public’s ability to have a voice in the way corporations deal with those issues.
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