In this age of institutional investing where those that wield shareholder voting power are not the investors but the administrators of the funds they invest in, there are times when the most uninformed of these managers take the opportunity to engage in shareholder activism. Prominent players in this type of activism have long been the politically appointed administrators of public pension funds who have consistently espoused the idea of shareholder empowerment—the shifting of decision making from the board of directors, the most informed locus of authority in a public company, to shareholders no matter how uninformed they may be of a company’s operations or ability to enhance shareholder value. These administrators use such activism to advance their careers by scoring political points with their union and political constituencies who have a bias against a board-centric corporate America. Unfortunately, such activism, if successful, can only spell disaster for those companies who are targeted.
A recent example of this type of activism is provided by California Treasurer Fiona Ma, a board member of the mega California public pension funds, CalPERS and CalSTRS, and a candidate for Lt. Governor in 2026. With no known expertise in the oil and gas industry or the governance of those companies that make up the industry, Treasurer Ma has publicly recommended that CalPERS and CalSTRS, holders of over 14 million shares of ExxonMobil shares, vote against the re-election of two key board members at ExxonMobil—CEO Darren Woods and Lead Independent Director Joseph Hooley. A week later Ma got even more than she wished for when the CalPERS board decided to vote against all twelve of ExxonMobil’s board nominated directors.
Ma’s opposition to the reelection of board nominated directors cannot be the result of ExxonMobil’s poor performance. The market value of the company’s stock now exceeds $500 billion with a dividend rate over three percent per year. The holding of ExxonMobil stock has been a good investment for CalPERS, CalSTRS and, most importantly, their participants and beneficiaries.
Instead, Ma is motivated by a desire to pressure ExxonMobil’s board into dropping a lawsuit it filed in federal court seeking to stop a shareholder proposal from repeatedly being voted on at the company’s annual meeting. The substance of the proposal, submitted by two climate activists that hold insignificant amounts of ExxonMobil stock, would require the company to radically reduce its carbon emissions over a very short period of time. If approved by shareholders and implemented by the board of directors, the result would create an existential crisis for the company and a financial disaster for its shareholders. It would lead to a major reduction in current operations, a forced sale of major oil and gas assets to those companies who do not face such activism, a disruption in its integrated supply chains, and a loss in the economic efficiencies created by the company’s large scale of operations both horizontally and vertically. “Moreover, there is no expectation that use of the assets in different hands would lead to a reduction in carbon emissions. This lack of environmental impact adds another level of absurdity to the proposal.”
Shortly after filing, the activists withdrew their proposal. Yet, ExxonMobil continues to seek a declaratory judgment from the court. Its persistence is justified because the standard non-litigation approach to keeping such self-destructive proposals off the ballot, the Securities and Exchange Commission’s no-action letter process, has broken down. “No-action letters” are informal responses to company requests seeking to know if the SEC staff would recommend to the Commission that an enforcement action be taken if the company were to exclude a proposal.
The problem is that the SEC has provided its staff with significant discretion in the no-action letter process. This means the issuing of no-action letters can be based on the staff’s political preferences or other biases, not the law. Therefore, instead of seeking a no-action request that it expected to be denied, ExxonMobil responded by taking the extraordinary and costly measure of filing suit seeking court approval to exclude the proposal from its proxy statement. It is estimated that the company budgeted several million dollars to pursue this litigation.
ExxonMobil’s persistence in seeking a declaratory judgment must be a great cause for concern for those in the shareholder empowerment camp. The fear is that an ExxonMobil victory in court will have a chilling effect on the desire of shareholder activists to submit repeat proposals seeking to usurp board authority knowing that they may be challenged in court even if the proposal is withdrawn. To be involved in a multitude of post withdrawal lawsuits would be cost prohibitive for many activists, resulting in a reduced ability to pressure boards to do as they demand. Therefore, pressuring ExxonMobil to withdraw its lawsuit, not enhancing shareholder value to the benefit of its participants and beneficiaries, must be why Treasure Ma is asking the California public pension funds to vote against the reelection of directors. If the lawsuit is withdrawn, then it is most likely that Ma and the rest of the CalPERS board would withdraw their objections.
We cannot change the desire of politically appointed officials to advance their own career ambitions, this is just human nature and the basis for a whole field of study called public choice theory. But, in the area of shareholder proposals, we can reduce the opportunities for them to utilize the shareholder voting power they administer to promote their own self-interest.
Recommendation
The solution is for the SEC to support Commissioner Mark Uyeda’s recommendation that a company’s board of directors should be able to use its discretion to exclude a shareholder proposal on substantive grounds under the company’s charter amendments and by-laws as authorized under corporate law. This would mean that the type of destructive shareholder proposal that ExxonMobil is fighting so hard against would likely never appear in a company’s proxy statement and be voted on at the annual meeting. This approach, allowing corporate law and not the SEC to regulate the shareholder proposal process, would be the optimal way to stop the opportunistic behavior of politically appointed officials and their harmful interference in the corporate governance of our public companies, including Treasurer Ma’s.
