Exxon Activist Gets Major Boost as ISS Backs Three Nominees

(Bloomberg) -- An investor pushing for changes at Exxon Mobil Corp. got a boost from a prominent advisory firm, which urged shareholders to support some of the activist’s board nominees.

Institutional Shareholder Services Inc. weighed in Friday on the months-long fight between Engine No. 1 and the oil and gas giant. It recommended investors vote for three of the four nominees from Engine No. 1’s slate: Gregory Goff, Kaisa Hietala, and Alexander Karsner.

ISS said it agreed with the first-time activist’s arguments that more independent industry expertise on the board was needed to improve the company’s performance and help develop its energy transition plans, which the advisory firm said rely heavily on carbon capture and will likely need government support to be viable.

The oil giant “recognizes that the status quo will not persist indefinitely, yet has taken what appear to be only incremental steps to prepare for the inevitable,” ISS said in the report. The company’s shares rose 2.3% to $60.67 apiece as of 1:30 p.m. in New York amid broader market gains.

Exxon disagrees with ISS’s recommendation and has “one of the strongest boards in corporate America,” CEO and Chairman Darren Woods said in a statement. Engine No. 1 was “not interested in engaging,” unlike other investors pushing for change like D.E. Shaw & Co., Woods said. The activist is “putting the company’s future and the dividend in jeopardy.”

ISS’s backing is another major step forward for Engine No. 1’s David-versus-Goliath battle against the oil giant. Earlier in the week, British insurer Legal & General Group Plc became the largest investor yet to publicly support the activist campaign. While the push underscores the increasing pressure the industry is under to accelerate the shift to cleaner energy, the attacks against Exxon intensified last year after the company’s financial performance deteriorated.

“We are pleased that ISS recognizes that the Exxon Mobil board requires new members with track records of transformative success in the energy sector to create sustainable, long-term value for shareholders in a changing industry and world,” Engine No. 1, which has a $54 million stake in Exxon, said in a statement. It said investors should vote for all four of its nominees in order to ensure that Exxon “avoids the fate of other once-iconic American companies.”

Exxon has urged investors to support its slate of nominees, which includes three new directors, among them activist investor Jeff Ubben. It argues Engine No. 1’s proposals threaten its $15 billion annual dividend, ongoing cash flow and its role in the energy transition.

Though Exxon posted the worst quarterly loss in its modern history during the pandemic, it’s benefited from a nascent recovery in the U.S. oil industry. The company said earlier this month it generated enough cash to cover its dividend, debt payments and project spending in the first quarter. The three-month period was the first time Exxon, and rival Chevron Corp., were able to do that in more than a year.

But the recent outperformance isn’t the result of long-term strategy, according to ISS. The shareholder advisory firm said Engine No. 1 had also made a strong case for Exxon to be more realistic and transparent in its energy transition plans.

The company “models the future using demand and technology assumptions that may be credible in isolation, but appear to be overly-optimistic when assembled and considered holistically,” ISS said. Exxon “does not provide enough information about these assumptions for shareholders to fully assess the viability of its strategy for an energy transition.”

(Updates with Exxon CEO’s comment in 5th paragraph.)

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