Exxon turns to the courts to fight back against activist shareholders

4 months ago

We’ve come a long way since the days of Harry Truman. In the modern Beltway, policymakers strive mightily to see to it that the buck stops somewhere else. Presidents blame Congress for failures to enact preferred policies. The House of Representatives blames the Senate, and vice versa, and both parties blame each other for failures to enact legislation aimed at actual problems. Presidents and senators and congressmen blame the bureaucracy for failures to promulgate rules that no legislation authorizes, or failures to enforce existing rules not favored by the current administration.

And so public companies — like a surgical patient without anesthesia — find themselves afflicted by the perversities of ubiquitous buck-passing, which far too often leaves only the courts available as an institution to protect their rights.

The latest example of this trend is the recent lawsuit filed by Exxon Mobil against activist groups Arjuna Capital and Follow This, two “shareholder” groups uninterested in maximizing the value of their (small) ownership stakes, but instead intent upon forcing the Exxon management to waste resources reporting greenhouse gas emissions by Exxon, by its suppliers, and even its customers, with the obvious long-term aim of transforming Exxon from an energy company into one pursuing a private climate policy.

And that pursuit would be financed with other people’s — that is, other shareholders’ — money. The recent greenhouse gas reporting proposal is virtually identical to more than a dozen proposed over the last five years for consideration at the annual shareholder meetings. Like those others, the vast majority of shareholders who are interested in shareholder value are certain to reject them. Like the others before it, dealing with this proposal would consume significant amounts of Exxon’s financial and management resources.

There exists an important rule under the oversight responsibilities of the Securities and Exchange Commission that was designed specifically to deal with such costly nuisances. Rule 14a-8 allows public companies to seek a “no action” determination from the SEC staff, allowing management to exclude specific shareholder proposals from the annual proxy vote, in particular ones irrelevant to the performance of the firm, certain not to enjoy more than marginal shareholder support, and thus a waste of time and resources.

Because of the political objectives of the Biden administration, and also the political ambitions of SEC Chairman Gary Gensler, the SEC staff’s application of Rule 14a-8 has been changed to require firms to consider resolutions of “wider societal interest.” Accordingly, Exxon has no recourse other than an appeal to the courts. Its lawsuit against Arjuna Capital and Follow This led the two activist groups to withdraw their proposal, promising not to submit it again, and now to argue that therefore the Exxon lawsuit should be dismissed.

Not so fast. The activists could still revise the proposal slightly and attempt to force Exxon’s management to deal with it again. Moreover, Arjuna Capital and Follow This are hardly the only activist groups attempting to force public companies to consume resources in pursuit of their political goals. The two organizations are tied closely to a network of ideological groups that work together to submit proposals pressuring public companies to pursue various forms of climate action. That such endeavors would not contribute to productivity or shareholder value is obvious. Their promise not to submit the same resolution does nothing to prevent one of their partners from proposing it during the next proxy season, a threat that the House Judiciary Committee is investigating.

Let us bear in mind that public companies are in business to produce goods and services that markets value, and so to maximize shareholder value, that is, the economic productivity of the firms’ capital investments and resource use. Managements have a fiduciary responsibility to shareholders to pursue those ends. That fiduciary goal is explicitly not pursued by the activist groups. Follow This argues that “we have the power to change oil companies from within — as shareholders” and “You can help [by] buy[ing] a green share and becom[ing] a co-owner of an oil company,” and “Together we file green resolutions.”

This process is an obvious threat to shareholder value narrowly, and to the aggregate productivity of the U.S. economy generally. There is no reason it would be limited to the fossil fuel industry. As You Sow — “Empowering Shareholders to Change Corporations For Good” — has proposed “climate” shareholder resolutions at a long list of companies, from ANI Pharmaceuticals to Zillow Group.


Such are the fruits of Beltway buck-passing generally and the politicization of the SEC in particular. The courts are the last resort, but policymaking is not their job and it is not where their expertise lies. The courts are the least democratic of our political and policy institutions.

Nonetheless, by pursuing this litigation, Exxon is performing a real public service, for which it is being attacked by all the usual suspects. Exxon is right, the activists are wrong, and all of us have crucial economic, political, and social stakes in the outcome.

Benjamin Zycher is a senior fellow at the American Enterprise Institute.…Read more by Benjamin Zycher


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