What will be the aftermath of ExxonMobil's director nominees facing possible removal by shareholder vote after some institutional investors expressed dissatisfaction with the company's decision to sue two small shareholders who submitted a climate change resolution with which it disagreed?
Will suing shareholders resolve the dispute?
How company boards handle shareholder resolutions has been a topic of discussion at boardroom meetings since ExxonMobil sued Arjuna Capital and Follow This in January for pushing a shareholder resolution calling for accelerating emissions targets aimed at curbing climate change.
ExxonMobil's decision to take its disagreements over shareholder-filed resolutions to court could undermine the spirit of cooperation that exists between boards of directors and shareholders. If more boards resort to litigation when shareholders file highly contested resolutions, rather than addressing them through regulatory procedures or active engagement, it could put important business decisions in the hands of judges. While the judge ruled that ExxonMobil can continue to litigate against investors in this case, going to court would not have resolved the issue of climate change.
There are still shareholders who want oil companies to do more to address greenhouse gas emissions and fossil fuel dependency. Ahead of the annual meeting, the California Public Employees Retirement System (CalPERS), the nation's largest public pension fund, announced it would vote against all of ExxonMobil's director nominees, and the New York State Common Retirement System said it would vote against 10 of 12. Other investors also urged shareholders to vote against ExxonMobil's director nominees. The vote was successful, but it risks intensifying resentment against the just-elected ExxonMobil directors. A statement from CalPERS CEO Marcy Frost and President Theresa Taylor, reported by Politico, indicates investors' concerns: “If successful, the lawsuit could result in the role and rights of all investors in driving corporate profits being diminished.”
In shareholder disputes, courts may not always rule in their favor, and litigation involves legal costs and reputational risks. Company directors need to carefully consider the merits and demerits of suing shareholders to whom they serve under a pledge.
Will the lawsuit raise more questions than it's worth?
When a board sues shareholders, it is likely to attract unwanted attention. The board must explain why it took the action and possibly answer other questions. In this case, ExxonMobil was asked to explain why it continued with the litigation even though the activists had dropped their proposal. More questions pose additional risks to the board and the company.
ExxonMobil defended itself by arguing that the lawsuit was a response to abuses of the shareholder proposal process, and that activist investors were “advancing their own objectives through a flood of proposals.” But others didn't see it that way.
Reuters reported that proxy advisory firm Glass Lewis said ExxonMobil's “unusual and aggressive tactics in this matter risk discouraging both investors' willingness to submit and their ability to vote on important issues.”
Is it worth litigating a proxy advisory firm for spewing negative comments about the company? Is it worth insisting that major investors vote against directors in an election? Is it worth risking the company's reputation with customers, clients and the community? Each board must decide these answers. ExxonMobil's board likely won the support of most shareholders by answering these questions with superior stock price performance.
