Corporate Governance

Exxon and the Rockefellers

By J. Robert Brown

The Exxon shareholder meeting is next week, with shareholders in a surly mood.  Despite the immense profit making machine, the company has been in the eye of a shareholder revolt, in large part because of a tone deaf approach to issues important to the owners.  Exxon has been slow to invest in alternative energy sources and to recognize the threat of greenhouse gasses, although that may be evolving.

The battle lines are largely drawn around a shareholder proposal to separate the position of chairman and CEO.  Last year, the proposal received 40% of the vote.  This year it looks to do better, having garnered the symbolic support of the Rockefeller family, something discussed at length in the WSJ.  While the Rockefeller family only owns a small percentage of the company, the support moved the Economist this week to make the following observation:

• The involvement of the Rockefellers highlights the nonsensical nature of the complaint often made by opponents of shareholder rights -- namely that shareholder resolutions tend to be the politically motivated work of activists and trade unions.  They are generous philanthropists, but the Rockefellers are not bleeding hearts.  Their support for the resolution is driven by a desire to maximise the longterm value of their Exxon shares.

How does Exxon find itself in this position?  No doubt some of the explanation is the ego of the CEO, Rex Tillerson.  That's not hard to understand; ego is a quality that often coincides with those who rise to the top.  The harder thing to understand is the willingness of the board to go along with the public relations nightmare.  But an analysis of the board shows that it is a mirror image board, one that is not very diverse and one where most have backgrounds little different from the CEO.  In other words, they are not likely to provide the CEO with an alternative view.  And the directors have considerable incentive to get along and not rock the boat, earning a comfortable $400,000 or so for ten meetings in 2007. 

This is speculation but there will likely be some dispositive evidence.  If the proposal passes, it is precatory.  In the proposal, shareholders merely "urge" the board "to take the necessary steps to amend the by-laws to require that, whenever possible and subject to any presently existing contractual obligations of the Company, an independent director shall serve as Chairman of the Board of Directors, and that the Chairman of the Board of Directors shall not concurrently serve as the Chief Executive Officer."  In other words, the board is free to ignore the provision even if it receives majority support.  Ignoring the proposal will be indicative of a board more concerned about the CEO and its comfortable sinecure than the best interests of shareholders. 

Full post as published by The Race to the Bottom on May 26, 2008 (boomark / email).