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Watching For Change After Activist Hedge Fund Wins 2 Seats On ExxonMobil Board

NOEL KING, HOST:

A small activist hedge fund called Engine No. 1 last week won two seats on the board of Exxon Mobil by convincing other investors that the company's plan to deal with climate change was not much of a plan at all. With me now is Nell Minow. She's the vice chair of ValueEdge Advisors, and she's also an Exxon shareholder. Good morning, Nell.

NELL MINOW: Good morning.

KING: Who is Engine No. 1?

MINOW: Well, it's just a group of investors. It's people who - and it's small by Wall Street standards. So their investment in an Exxon Mobil was only about $54 million. And if you compare that to other people who have had big fights with major corporations, people like Carl Icahn, those people, I want you to think about Michael Douglas as Gordon Gekko in Wall Street. Those are people who had hundreds of billions of dollars. And they invested, and they went in, and they said greed is good. And in a very, very tiny fraction of cases, sometimes they were able to defeat the management-sponsored candidates. But this is the first time that a tiny little fund has been successful. They had 0.002% of the stock. This is the biggest upset since David and Goliath.

KING: OK, so to ask you an obvious question, if they have such a tiny, tiny percentage of the stock, No. 1, why do they care what Exxon Mobil does? And No. 2, how did they get this done?

MINOW: Well, No. 1, they care what Exxon Mobil does because they think that by making these changes, they'll make a lot of money on the stock. And that is why they succeeded. They succeeded because they made an absolutely incontrovertible business case and because Exxon Mobil pretty much did everything wrong and Engine No. 1 did everything right. Exxon Mobil lost a record 25 billion - with a B - dollars last year. Nevertheless, they keep raising the CEO's pay. That's the kind of thing that makes investors very angry. And more important than having a big block of stock, a Carl Icahn, Gordon Gekko block of stock, is having angry shareholders because somebody will get out front. You can get a lot of support.

KING: Why is Exxon losing so much money?

MINOW: Well, because, unlike some of their competition, they are not pivoting to more renewable resources. They are just pretending that the world is always going to be the way it always has been. And things have changed. I mean, just last week, President Biden issued a major executive order that is going to put a lot more pressure on fossil fuel companies. If they don't adjust to that, they're going to go the way of buggy whip manufacturers.

KING: And so when Engine No. 1 votes or pushes to get two of its people on the board, that's not about being altruistic. That's about saying, we are investors; we want this company to be profitable. And in order to be profitable, it has to change with the times.

MINOW: Exactly right. That is what they did right. They came out with a very detailed, very organized and very - I'm going to just say - green eyeshade kind of business analysis. They said, this is why the business lost all this money, and this is what they need to do to get money. And then they put up also very credible candidates, people who had a lot of background in the energy business. And that made it very successful. You know, it's a little bit ironic that one of the groups that decided to vote with Engine No. 1 is the largest investment fund in the world. It's the Norwegian pension fund, which was created by the oil business in Norway. And yet even they thought that Exxon Mobil was going in the wrong direction.

KING: So Engine 1 (ph) got to people onto a board of 12, still a minority. What does this actually change for Exxon, if anything?

MINOW: That's what we're waiting to see. We don't expect to see any major changes immediately. But here's how we'll know what the impact has been very quickly. One, will they put these new directors on the key committees? I want to see them on the audit committee. I want to see them on the nominating committee, which selects new directors. And I want to see them on, most important, the compensation committee. And will they change the compensation so that all of the incentive goals are based on making a change rather than doing what they've done in the past? That's how we'll know how effective that they have been. If the company tries to shut them out of the major committees, if they don't make changes in the compensation, then you can expect another proxy contest next year until they get a majority.

KING: David and Goliath, which you mentioned, is a great story. But ordinarily, smaller voices do not win. Smaller investors do not win. You've been writing and speaking about corporate governance for years. How big a deal is this? Do you see a knock-on effect happening, or is this a one-off?

MINOW: Oh, this is definitely a monumental shift.

KING: Oh.

MINOW: They'll be studying this one in business schools for years. And remember that Exxon Mobil didn't even meet with the people from Engine No. 1. I can guarantee you the next company that Engine No. 1 goes after will return their phone calls.

KING: How does Exxon feel about all of this? What have they said? What has the company said?

MINOW: Well, let me tell you, in a series of incredibly bad decisions, including spending $35 million to fight Engine No. 1 instead of talking to them and compromising with them, they actually did something also completely crazy and unprecedented. They halted the annual meeting in the middle to try to get people to change their votes. It was too little, too late. So I think - I hope that they understand this is a major wake-up call. And if they don't, believe me, they will be getting another wake-up call very soon.

KING: What are the lessons, then, here for corporations and for smaller investors?

MINOW: Well, this is really Capitalism 101. I always say capitalism is not named after the CEO. Capitalism is named after the people who provide capital. And remember, these are people who manage money for the pension funds for firefighters, for teachers, for people who work in offices. And they are trying to do what is best so that you can retire sometime in the future and get paid. So if they don't listen to their shareholders, they're going to see a lot more of this. These shareholders, like the California pension fund, the Norwegian pension fund, they're enormous. So now is the time to make friends with them before things go wrong.

KING: Nell Minow is the vice chair of ValueEdge Advisors. Thanks for being with us, Nell.

MINOW: Bye-bye.

(SOUNDBITE OF EMANCIPATOR'S "ALL IN HERE") Transcript provided by NPR, Copyright NPR.