> We talked about the proxy fight yesterday, before the votes were counted. The vote was close, and there were delays, but it looks like Engine No. 1 got at least two of its four director candidates elected to Exxon’s 12-person board. That doesn’t exactly give Engine No. 1 control of Exxon, it doesn’t exactly put Woods’s job in jeopardy, it doesn’t exactly mean that Engine No. 1 can go implement its plans to invest in renewables and become carbon-neutral. It does give Engine No. 1’s directors seats in the boardroom, though, and power to influence Exxon’s strategy.
> More important, perhaps, it shows that this can work. Shareholders — even shareholders of Exxon — can do this. If Woods and the other Exxon directors decide to ignore Engine No. 1’s plans, keep doing what they were doing, and stick their fingers in their ears and shout “I can’t hear you” whenever the Engine No. 1 nominees speak at board meetings, then next year Engine No. 1 will run a proxy fight for all of the board seats and win. Exxon’s CEO and directors have to take this shareholder vote seriously, because it proves that the shareholders are willing and able to fire them. You might think that that would be obvious — that the shareholders’ “ownership” of the corporation, and their voting rights, of course meant that they could fire officers and directors whom they didn’t like — but I don’t think it was obvious, and I think in practice it often wasn’t true. Now it is.
Who am I to trust more? Matt Levine, someone with years of equities capital market experience while at Goldman Sachs and who now opines on the capital markets at Bloomberg for a living? Or you? No offense intended, but he is a subject matter expert.
> Well! About a hundred of you emailed me to say that it’s obvious what’s in it for Engine No. 1: publicity. This is a hedge fund that launched six months ago; it runs a small fund and doesn’t have much of a track record. Now it is The Little Engine That Took Down Exxon. It has gone from nothing to being a daring successful activist, and an activist with a halo of environmental virtue. It can fundraise off of that forever, attract lots of money, collect lots of fees, etc. The $30 million of proxy expenses are an investment to make millions more in management fees.
> A related benefit is what any activist fund gets from a successful proxy fight: The next company they go after will be intimidated by their Exxon victory, and will try to settle by giving them board seats. You spend $30 million on one proxy fight so you don’t have to spend any money on five more. You show up at a meeting with the next company’s CEO, you put Exxon’s severed head on the table, you say “board seats, now,” and you get them without a fight.
> Fine! That’s all fair enough. One reader pointed out another, more technical but also quite important answer: It is customary for activist hedge funds that win their proxy fights to be reimbursed by the company.[1] So, because it won, Engine No. 1 probably spent $30 million of Exxon’s money on the proxy fight, not its own. That probably helps. It took a big risk here: If it had lost the proxy fight, it would be out $30 million and wouldn’t have all the fundraising benefit of having taken down Exxon. But because it won, the economics actually look pretty good.
> I think the basic reading here is that at a giant public company like Exxon, the managers and board of directors sort of assume that they get to decide who can be on the board, and that shareholders are not really supposed to interfere. Technically this assumption is wrong, and at Exxon last week it did not work out, but you can see why Exxon found it so surprising.
