This is an abbreviated version of the July/August 2021 Directorship magazine cover story, exclusively for NACD members. If you are an officer or director of a public, private, or nonprofit organization, you can become an NACD member to view the complete article and related resources.
Following an earthquake, aftershocks can continue for weeks, months, or even years.
Similarly, boards and companies across sectors are still processing what happened at Exxon Mobil Corp.’s annual shareholder meeting on May 26. Engine No. 1, an investment firm that reportedly owns 0.02 percent of ExxonMobil, reshaped the company’s board by ousting three directors. The firm put forward a slate of four candidates and three were elected: Gregory J. Goff, former CEO of petroleum refining and marketing company Andeavor; Kaisa Hietala, former executive vice president at Neste, also a petroleum refining and marketing company; and Alexander Karsner, senior strategist at X (formerly Google X).
Engine No. 1 describes itself as “purpose-built to create long-term value by driving positive impact through active ownership.” Its challenge to Exxon’s board to think about its position in the transition to a carbon-free energy future was backed by powerful investors in the oil and gas giant: BlackRock, the world’s largest asset manager, and the country’s two largest public pension funds—the California Public Employees’ Retirement System and the California State Teachers’ Retirement System (CalSTRS). The Exxon vote is a cautionary tale for boards across industries that shareholders are clamoring for companies to address climate change.
“Our economy is littered with companies that couldn’t adapt to change, whether that be technology shifts or, in this case, climate change,” said Aeisha C. Mastagni, portfolio manager at CalSTRS. “You only have to look at some of those companies that couldn’t adapt and couldn’t be resilient in the face of change to demonstrate how there’s an urgency here.”
The Harvard Law School Forum on Corporate Governance found that while activist investor campaigns in general have had mixed success since 2017, the number of campaigns increased sharply for the most part in 2020. These campaigns are on pace to continue after a drop-off during a year dominated by COVID-19.
Activists are also zeroing in on boards, according to separate research from Insightia, which tracks data on shareholder activism. In the first quarter of this year alone, 41 percent of activist campaigns have focused on boards, which is only slightly lower than the figure for all of 2019.
A Dutch climate activist group offered three separate resolutions in May calling on Chevron Corp., ConocoPhillips, and Phillips 66 to reduce their emissions. All received strong support from shareholders: 61 percent, 58 percent, and 80 percent, respectively. Activist investors like Engine No. 1 teaming up with more established shareholders is another sign of change.
Mastagni believes the Exxon vote reflects a new dynamic between investors and boards, and a new way that companies will be scrutinized on their climate change efforts. “I do think that the vote represents how investors are going to continually hold corporate boards accountable for underperformance or a lack of strategy to compete as we transition to a low-carbon economy,” she said.
BlackRock raised a similar point in its vote bulletin on last year’s Exxon annual meeting: “the risks of climate change and the transition to a lower carbon economy present material regulatory, reputation, and legal risks to companies that may significantly impair [Exxon’s] financial position and ability to remain competitive going forward.” In its bulletin this year, BlackRock noted progress made by the company on climate commitments and disclosures, but said more needed to be done on both long-term strategy and short-term actions.
“We’ve all been focused on the significant risks associated with sustainability issues, but there are also significant opportunities—financial and investment opportunities—for companies that are first movers in terms of investing in innovation,” said Michelle Edkins, managing director of BlackRock’s investment stewardship team.
CGI Appeals to SEC for Mandatory Climate Disclosure
Based on the premise that “successful corporate action on climate change depends on a productive collaboration between business and policy makers,” the global Climate Governance Initiative (CGI), launched in collaboration with the World Economic Forum, issued a comment letter to the US Securities and Exchange Commission (SEC) in response to its March 15 request for feedback on the agency’s climate disclosure project. Input from the member chapters of the CGI, which includes NACD as its US representative, was reflected in the recommendations submitted by the CGI in a letter signed by its chair, Karina A. Litvack.
The CGI’s specific recommendations to the SEC, as detailed in its letter, include the following.
Reinforce the view that climate change will have significant implications for all companies and their boards, requiring them to revisit their corporate strategies to respond to it, and to integrate all relevant impacts within the financial statements and disclosures.
Set minimum disclosure requirements that apply to all companies, allow for comparability, and cover the entire value chain, as well as define some specific disclosure requirements that will be necessary for certain industries.
Frame its guidance as a mandatory standard that requires compliance but allows for the presentation of alternative performance measures (accompanied by reconciliations to those prescribed by the standard) and supported by fulsome explanations.
To read the full story and learn more about how to oversee climate change from the boardroom, keep an eye out for the upcoming July/August 2021 issue of Directorship magazine and check out NACD’s recently released Director FAQ on Climate Governance.
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