The Exxon Fight, Round 2

May 22, 2008

Who wins in a shareholder war between green-collar activists and blue-collar union pensioners? Hard to say. But round two in the battle over the fiduciary responsibilities of corporate giant Exxon Mobil ought to be illuminating for investors.

The heirs of John D. Rockefeller’s Standard Oil empire made a media splash recently when they demanded that the oil giant diversify out of oil, of all things. When Exxon holds its annual shareholder meeting next week, the Rockefeller clan will push proxy resolutions requiring the company to invest in noncarbon energy sources, and to create more board of director “independence” from management by splitting the role of chairman and chief executive. To hear the wealthy heirs tell it, Exxon will thus be better positioned to take advantage of the eco-opportunities of the future.

The counterpunch from other, nonwealthy shareholders has now arrived in the form of a letter from union chief Chuck Canterbury. He’s president of the National Fraternal Order of Police, whose 324,000 members have plenty of pension-fund dollars invested in Exxon. In a May 17 letter to Exxon Chairman and CEO Rex Tillerson, Mr. Canterbury made clear he and his members don’t agree that Exxon should be used to promote social goals if it means putting worker retirements at risk.

“ExxonMobil is an example of how hard work, efficient management and innovative entrepreneurism breed success,” Mr. Canterbury wrote, noting this was why many union pension funds have invested in the oil company. “The Rockefeller resolutions threaten to degrade the value of ExxonMobil.”

And more: The family would impose “rigid, ideologically-based conditions on the company’s future,” would nullify “the judgment of a highly successful management team,” and would “undercut every project and business operation.” This would “hamstring ExxonMobil’s profitability and growth, thus directly harming the police officers, firefighters, teachers and public employees whose retirement savings are invested in the company.”

Mr. Canterbury seems to understand how capitalism works better than do the ostensibly capitalist Rockefellers. His letter is a reminder that Exxon’s legal obligation is to maximize returns to shareholders, and that over the years it has done that by taking calculated risks in drilling for fossil fuels. Many investors put their money into Exxon precisely because the company does that so well.

Similar corporate governance reforms haven’t helped the returns of other oil giants. Royal Dutch Shell and BP have both split the roles of chairman and chief executive, without any discernible benefit to shareholders. Since 2006, when Mr. Tillerson assumed the top roles at Exxon, the company’s stock has climbed 57%, compared with 12% for Royal Dutch Shell and 4% for BP. Over the past 10 years, Exxon has consistently outpaced those rivals and the industry average in annual average returns on investment.

Then again, maybe this Exxon “reform” campaign isn’t really about investors. Perhaps it’s a political exercise hiding under the banner of corporate governance. Look no further than Denise Nappier, the ambitious Connecticut State Treasurer who also recently joined the Exxon fun. The Democrat oversees pension dollars on behalf of thousands of teachers and state and municipal employees, and she has also recently denounced the oil company’s “addiction to oil.”

In supporting the Rockefellers, Ms. Nappier explained that her alternative-energy ideas would be better for Exxon than are the investment plans of Exxon’s executives. If Exxon ever took her advice, we’d recommend putting in an immediate sell order on its shares. But it’s more likely that the future candidate for Governor is merely angling for some easy green publicity as she and the state’s pensioners continue to benefit from their investment in Exxon’s substantial oil profits. She’d be violating her own fiduciary duty to those pensioners if she pursued an ideological agenda that hurt returns.

The Rockefellers and most of their allies are wealthy enough to survive any Exxon decline. The same can’t be said for retired police officers. Exxon will do more for its shareholders, and for society, if it avoids political fads and keeps its focus on investments that promise the highest return on shareholder capital.

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