Activist Wins Two Exxon Board Seats

Two of activist Engine No. 1's four Exxon XOM board nominees won shareholder backing on May 26. Including those two, eight board members were elected, while the outcome for five nominees, including the activist's third candidate, was yet to be determined. Engine No. 1's fourth nominee was not elected. Even if only two of its candidates are elected in the end, it marks a victory for Engine No. 1. We expect the implications for Exxon and investors will likely be less dramatic than the vote, however, as Exxon has already moved toward several of the activists' demands, including greater capital discipline and the introduction of emissions targets. Also, even if the third nominee is eventually elected, the new members will be in the minority. That said, Exxon likely will have to make some additional concessions given Engine No. 1's initial success could be the blood in the water that attracts more activist action. As such, Exxon will likely make greater progress toward Engine No. 1's calls for more long-term planning, including exploring new business areas and setting emission targets, greater focus on returns and likely less spending, and correspondingly aligned management compensation incentives. We do not expect a wholesale change in strategy, however. As such, our fair value estimate and moat rating are unchanged. The election of the new members was likely more a function of investor dissatisfaction around recent financial and share price performance than a call for an overhaul of the core strategy. Past actions, such as ill-timed acquisitions and investments in high-cost assets like oil sands have resulted in Exxon squandering its historical leadership in returns on capital relative to peers.

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