A friend emailed this morning to ask:
Do you know what the mechanism was by which the dissidents were able to get two people on the Exxon board?
Of course I do.
As background, the WSJ reports that:
Exxon’s loss came at the hands of Engine No. 1, an upstart hedge fund owning only about 0.02% of the oil giant’s stock. It had waged an aggressive campaign challenging the company’s energy transition strategy and response to climate change, depicting it as a corporate dinosaur.
The vote at the company’s annual meeting capped a pitched, monthslong battle between the company and the activist to persuade Exxon shareholders, that turned into one of the most expensive proxy fights ever. ...
Engine No. 1 ran what is known as a short slate contest in which it nominated 4 candidates for election to Exxon's 12-member board of directors.
Exxon Bylaw Article 1 sec. 5 is a majority vote provision:
At a meeting of shareholders at which directors are to be elected and a quorum is present, a nominee for director shall be elected to the Board of Directors if the number of votes cast “for” such nominee’s election exceed the number of votes cast “against” such nominee’s election, excluding abstentions; provided, that directors shall be elected by a plurality of the votes cast if the number of nominees exceeds the number of directors to be elected at such meeting.
Exxon’s proxy statement explains that it worked as follows in this election:
Under ExxonMobil’s by-laws, in a non-contested election a director nominee must receive a majority of votes cast in order to be elected to the Board of Directors. However, the 2021 election is contested by Engine, which nominated four directors. As a result, there are 16 director nominees which exceed the number of directors to be elected, which is 12. In such a case, our by-laws provide for a plurality voting standard, which determines that the 12 persons who receive the greatest number of votes are elected to the Board for the following year.
Exxon has announced that:
Re-elected ExxonMobil directors were Woods, Michael Angelakis, Susan Avery, Angela Braly, Ursula Burns, Kenneth Frazier, Joseph Hooley and Jeffrey Ubben. Elected from Engine No. 1’s nominees were Gregory Goff and Kaisa Hietala.
The outcome was not yet determined for ExxonMobil director candidates Steven Kandarian, Douglas Oberhelman, Samuel Palmisano and Wan Zulkiflee, and for Engine No. 1 candidate Alexander Karsner. A fourth Engine No. 1 candidate, Anders Runevad, was not elected.
The interesting thing is that Exxon’s proxy card only listed its 12 candidates, while Engine No. 1’s proxy statement only listed its 4 candidates. If a shareholder returned an Exxon blue proxy card voting for 10 directors and also an Engine No. 1 white proxy card voting for two directors, only one would count. Engine No. 1’s proxy statement explains that:
THE ONLY WAY TO SUPPORT ALL FOUR OF ENGINE NO. 1’S NOMINEES IS TO SUBMIT YOUR VOTING INSTRUCTIONS “FOR ALL” THE NOMINEES USING THE WHITE PROXY CARD. PLEASE DO NOT SIGN OR RETURN A BLUE PROXY CARD FROM THE COMPANY, EVEN IF YOU INSTRUCT TO “WITHHOLD” ON THEIR DIRECTOR NOMINEES. DOING SO WILL REVOKE ANY PREVIOUS VOTING INSTRUCTIONS YOU PROVIDED USING THE WHITE PROXY CARD.
In order for the vote to come out as it did, I assume that a substantial number of shareholders returned the blue card voting for less than all 12 of Exxon’s candidates and a substantial number of other shareholders returned the white card voting for less than all of Engine No. 1’s candidates. As the WSJ reported, for example, "BlackRock Inc. backed three of Engine No. 1’s candidates" presumably by submitting the white proxy card with "for votes" for three of Engine No. 1's candidates. Interestingly, ISS had recommended a vote for three of Engine No. 1's candidates, but not all 4.
Many commentators argue that the process should be simplified by mandating a universal proxy card. The Council of Institutional Investors explains:
When a director election has more nominees than available board seats, shareowners typically receive two versions of the proxy card: one from the company and one from the shareholder who nominated the alternative candidate(s). Each card provides a unique list of nominees, neither list is complete, and shareowners are prohibited from using both cards to vote. Thus, depending on the combination of candidates a shareowner supports, he or she may be disenfranchised.
"Universal" proxy cards solve this problem by listing all duly nominated board candidates, allowing shareowners to vote for the precise combination of nominees they wish to represent them. That precision is vitally important in proxy contests, when board seats (and in some cases, board control) are at stake.
As of April 2021, the SEC appears to be on the verge of adopting a universal proxy rule. The SEC proposed a rule in 2016, about which CII has made available a brief FAQ. Since then the SEC Investor Advisory Committee and a special working group have added further support to the proposal's finalization.
The Business Roundtable has offered 4 arguments against a universal proxy card:
- The Proposed Rules May Disenfranchise Shareholders While Favoring Activist Shareholders Who May Be Driven By Self-Interest.
- The Proposed Rules Will Likely Increase the Number and Frequency of Proxy Contests and Impede the Ability of Corporate Directors to Make Long-Term, Value-Driven Decisions.
- The Proposed Rules Represent a Significant and Fundamental Shift Away From the Traditional Method of Electing Public Company Directors and Towards a Short-Term Focused Model.
- The Proposed Rules Exacerbate the Risk of "False Equivalency" Between Incumbent Directors and Candidates Nominated By Dissident Shareholders.
