A hedge fund launched only last year proved to be the little Engine No. 1 that could on Wednesday, winning at least two seats on the ExxonMobil board.

The upstart hedge fund, which controls only 0.02% of the shares, last year began a quest to force change at the Irving, TX-based supermajor. In January, it nominated four people to the 12-member board in what many considered a long-shot effort.

However, based on preliminary vote estimates by the annual general meeting (AGM) proxy solicitor, shareholders elected eight ExxonMobil nominees to the board and two Engine No. 1 nominees.

Results for five nominees were too close to call as of Wednesday afternoon.

Reelected were CEO Darren Woods, Michael Angelakis, Susan Avery, Angela Braly, Ursula Burns, Kenneth Frazier, Joseph Hooley and Jeffrey Ubben. 

At least two of Engine No. 1’s nominees, Gregory Goff and Kaisa Hietala, will join the board. Goff was executive vice chairman of Marathon Petroleum Corp., which he joined after the company bought Andeavor, now Tesoro Corp., where he was CEO until 2018. Goff also was at ConocoPhillips for almost 30 years. Hietala was executive vice president of Neste’s Renewable Products until 2010.

‘Not Yet Determined’

According to the preliminary tally, the “outcome was not yet determined” for ExxonMobil director candidates Steven Kandarian, Douglas Oberhelman, Samuel Palmisano and Wan Zulkiflee. 

It was also too close to determine whether Engine No. 1 candidate Alexander Karsner was elected. Engine No. 1’s other candidate, Anders Runevad, was not elected.

In response to the preliminary results, Woods said he looked forward to working with the new board  “constructively and collectively on behalf of all shareholders. We’ve been actively engaging with shareholders and received positive feedback and support, particularly for our announcements relating to low-carbon solutions and progress in efforts to reduce costs and improve earnings.”

Shareholders have spoken, Woods said, “and we are well-positioned to respond.”

Two nonbinding shareholder proposals also received majority approval. Item No. 9 calls for the board to issue an annual report on lobbying efforts. Item No. 10 requested a report on climate lobbying.

Even before the pandemic, ExxonMobil was stumbling to maintain its status as an oil and natural gas world beater. With Covid-19 crushing energy demand and slamming prices, the company last year lost a record $22 billion. 

In the first quarter, though, the company reversed course, recording profits of $2.7 billion from a year-ago loss of $610 million and a loss in 4Q2020 of $20 billion. 

Pushed in part by Engine No. 1, ExxonMobil in April also updated its business strategy.

The AGM results were shocking to long-time industry watchers. 

NGI’s Patrick Rau, director of Strategy & Research, said the results were “amazing,” as it was only three or four years ago that the producer sector was “growing to the hilt. They all stopped because of Wall Street, and activist investors in particular. They are a very powerful group.”

The other surprise is that Engine No. 1 doesn’t appear to have “much experience in the oil and gas industry,” Rau said. “For them to be successful in getting two seats on the board raises the obvious question, and that is, are conditions now ripe enough that this becomes the first domino to fall in having the North American majors join their European counterparts in being more directly involved in alternative energy investments?”

The industry bellwether may have to dedicate more capital expenditures “into what has been lower returning energy transition businesses,” and that could impact the dividend, Rau said. Management “has been steadfast in protecting that dividend at all costs. 

“An awful lot would have to happen still, but if the company does become more involved in climate-control type of investments and if the stock performs well as a result, then that could open the door for the company to engage in even more energy transition-type investments in the future.”

Follow The Leader?

Rau said “other North American majors will be watching what ExxonMobil does very closely, as will those European majors that may not have been expecting much competition from the North American integrateds in energy transition type of ventures.”

Environmental groups responded to the board results with enthusiasm.

“Make no mistake,” said Sierra Club’s Ben Cushing, financial advocacy campaign manager. “The shareholder vote to shake-up Exxon’s board represents a seismic shift for the company. It’s a culmination of years of activist energy and a result of massive shareholder frustration with the company’s failure to change course on climate. 

“However, change must come from the top as well. And with Darren Woods still in charge of Exxon, we question if the new board members will be able to change course quickly or drastically enough…Accountability starts at the top, and Darren Woods should step aside.”  

The Sunrise Project’s Roberta Giordano, finance program campaigner, said, “What Engine No. 1 could accomplish with such a small ownership stake at Exxon is remarkable. Imagine what BlackRock, Vanguard and other major asset managers could do if they really wanted to effect change at the major polluters of the world.”

The AGM for the supermajor proved tense at times, as shareholders quizzed Woods about the stock price, strategy and plans to transition toward a zero carbon future.

“In a year that no one saw coming, we proved our resilience,” Wood told shareholders during the three-hour meeting. “We delivered on our commitments and today Exxon is a stronger, more competitive company, which we are seeing in our results.” There is a “continued role for oil and gas through 2040,” and companies had to continue to provide “what society needs to support modern living.”

Engine No. 1 chief Charlie Penner, who spoke at the AGM before the results were announced, said all of the firm’s nominees were “willing to put themselves on the line for what they believe in…Change, even under the best of circumstances, will take years, but the work has to begin now…The good news is that, no matter what the outcome of today’s vote, change is coming. Since this campaign started, ExxonMobil has promised in a number of different ways that it will stop fighting and start facing the future.”

Penner said the supermajor could not walk away from its promises, “at least not if shareholders hold the board’s feet to the fire, and if there is one thing we have learned from this campaign, it’s that doing so will be necessary. 

“That type of vigilance will also be required in an investment community that still too often treats acceptance of the idea that humanity will inevitably drive itself off a cliff as hard-headed realism. Again, changing that mindset and showing it can be done in a profitable manner over the long term will take years, but bending the trajectory has to start now. 

“But we have also learned that change can happen anywhere. It will always be a long shot, but it will always be worth it.”