On May 29, Exxon Mobil held its 2024 corporate election. Before the election, the company sued two investors over their proposal to include a commitment in its proxy statement to accelerate the company’s reduction of greenhouse gas emissions. Sarah Haan argues that the election and the lawsuit shed more light on current upheavals in corporate democracy than they do on the success of the ESG movement.
It is tempting to view Exxon Mobil’s recent corporate election as a referendum on the Environmental, Social, and Governance (ESG) movement, particularly since the press framed it that way. In fact, however, that election was about something else altogether: whether democracy has any relevance to the way we govern public companies in the United States.
Stock shares are not mere units of investment; they are entitlements to rights and power under the law, including voting rights in the leading institutions of modern life. These rights matter— corporate decision-making determines nearly everything about the world we live and work in. It’s possible that shareholder voting is as relevant to our experience of self-government as any vote we’ll cast in November. Theodore Roosevelt once observed that “[t]here can be no real political democracy unless there is something approaching an economic democracy.”
Yet for years, corporate law utilized voting practices that relegated the corporation’s largest and most democratic constituency—its shareholders—to the periphery of the organization’s power structure. Periodically, shareholders would rebel. In the 1910s, shareholders demanded an end to the grueling 12-hour work day; in the 1930s, shareholders fought against their own executives’ high compensation. After World War II, shareholders challenged racist and sexist corporate policies. During the Vietnam War, shareholders of companies that manufactured napalm and munitions fought for the right to vote on those decisions. Environmental issues became a major shareholder concern around the same time and remain important to investors today. And so on.
Over the arc of this history, shareholders lost most of the battles they fought inside corporate organizations. However, the issues they raised were democratically salient, popular among the voting public, and ultimately vindicated through legal changes made via conventional democratic channels.
Shareholders repeatedly struck out within corporate governance because it was weighted against them. One reason is that corporate governance’s early democratic features have been lost. One-share-one-vote is a plutocratic rule that became dominant only after the Civil War; it gradually replaced voting systems that had been used to curb the voting power of wealthy blockholders. In the late 1800s, attempts to restore small shareholders’ power through cumulative voting fizzled. Over the years, the rules of corporate governance evolved to make collective action, which is essential to democracy, nearly impossible for shareholders.
Corporate elections use the proxy system, and proxy voting is delegated voting. When a shareholder gives a proxy to another person, the shareholder is delegating his or her vote away. Proxy voting became popular in early America because businesses needed to raise capital from far-flung investors, and those investors were not going to travel hundreds or even thousands of miles to vote in person. Corporate law innovated: it created a right to delegate one’s vote to another person, who would attend the meeting in the shareholder’s place. American corporate law disfavored proxy voting at the start of the nineteenth century, but by the end of the century many states had made it an inviolable right of shareholding.
Proxy voting is profoundly undemocratic—not only does it transfer total discretion over one shareholder’s vote to another person, but it allows a “proxy solicitor” (the party asking for shareholders’ votes, i.e. management) to aggregate votes across holders, concentrating the voting power of thousands or even millions into a single actor. In political governance, we would call this minority rule.
It might be okay for the law to vest near-total control of large, public companies in a small set of individuals, if corporations were regulated effectively by our political institutions, and if the companies had limited control over our lives. But this isn’t the case. In recent decades, as our political system has become mired in dysfunction, the scope of corporate authority has expanded.
Over roughly the same period, the legal structures supporting minority rule in corporations have come under assault. Some investors want more say in corporate decision-making. And their efforts have been supercharged by changes to law and technology that are disrupting corporate managers’ hold on shareholders’ votes. These legal and technological changes, combined with the re-concentration of shareholding, are empowering large institutional investors to flex their voting power, threatening to fundamentally rebalance power inside firms back toward shareholders.
It’s this power shift—largely unreported by the press and not well understood by the public—that motivated Exxon Mobil’s leaders to come out swinging. In fact, Exxon Mobil is the poster child for the transformations creating anxiety for corporate managers. These changing power dynamics—rather than the rise of ESG—explain the dramatic maneuvers around Exxon Mobil’s most recent annual election.
In 2021, an upstart hedge fund, Engine No. 1, ran four candidates for Exxon Mobil’s board, making it a contested election. (Thanks to the proxy system, uncontested elections have been the norm in corporate America for years.) The hedge fund was expressing dissatisfaction with the company’s climate leadership—dissatisfaction that was widespread among the general public and the company’s own investors.
In the months before the Exxon Mobil election of 2021, management took steps to placate investors by adding a director with ESG chops. But it also played with board composition. Exxon Mobil’s board has the power to increase its own size and to install new temporary directors. If new directors are to stay, however, they must stand for a shareholder vote at the next election. What Exxon Mobil actually did in 2021 was temporarily increase the size of its board to 13 before the election, but seat only the 12 highest vote-getters after the election.
The company’s moves appear to have antagonized investors. And Exxon Mobil underestimated the capacity of its investors to act collectively. When the votes were tallied, three of the four Engine No. 1 candidates had been elected to Exxon Mobil’s board. The company’s shareholders had actually removed three incumbent directors—recently installed Wan Zulkiflee and longtime directors Douglas R. Oberhelman and Samuel J. Palmisano. The highest vote-getter of the three insurgents was a woman—not coincidentally, board gender diversity is an issue that institutional shareholders care about a lot. That director, Kaisa Hietala, received roughly 1.5 billion votes. This echoed like a thunderclap in corporate board rooms.
The following year, the Securities and Exchange Commission (SEC) changed some of its rules to make it easier for insurgent shareholders to run and win a board election. The new “universal proxy” was a big deal because it turned the proxy vote into something closer to an absentee ballot than a delegation. By allowing shareholders to easily mix-and-match among candidates run by different “parties” on the proxy card, the new rules stop a company’s management from easily co-opting shareholders’ votes. As a result of these changes, corporate voting now more closely resembles political voting than at any time in American history.
Engine No. 1’s electoral win at Exxon Mobil in 2021, followed by the creation of the universal proxy, have unsettled corporate managers. And managers face another front in the proxy wars: the “shareholder proposal.” Proposals allow shareholders to tee up matters for an advisory vote by all shareholders, and constitute a major vehicle for building and expressing collective shareholder will. Managers (rightly) see them as a threat to their power.
Exxon Mobil received a handful of shareholder proposals in the leadup to its 2024 election, like it does most years. This cycle, one of those proposals included a commitment by Exxon Mobil to to expedite the reduction of its greenhouse gas footprint. It’s common for a company’s management to oppose shareholder proposals, and the typical route is to ask the SEC for permission to ignore them. Instead, Exxon Mobil went right to the nuclear option: It sued the two shareholders in federal court in Texas over their ESG proposal. The company is chartered in New Jersey; the two investors are headquartered in Massachusetts, North Carolina, and the Netherlands. It was clear to all that Exxon Mobil had forum-shopped its way to Texas, not only to get the most favorable outcome but also to maximize costs for the shareholders.
In response, the investors beat a quick retreat—they withdrew their proposal and tried to deescalate. But Exxon Mobil refused to withdraw its lawsuit. This is the corporate governance equivalent of executing the rebels and hanging them from the ramparts for all to see.
Eventually the Dutch investor was excused from the case and, on June 17, the Texas court dismissed what remained of the lawsuit.
But before that happened, word came that some investors would counterstrike by voting against Exxon Mobil’s directors. The nation’s largest public pension fund, the California Public Employees’ Retirement System (CalPERS), announced it would cast its votes against the whole incumbent board; other investors joined the campaign. The election was uncontested, so the dissenters’ best outcome was to remove a director or two from the board. When the polls closed, however, no director had lost their job. The dissenters hadn’t successfully mobilized the vote.
In corporate governance, as in political governance, what matters is power. Shareholders exercise power only by acting collectively. The great flaw at the heart of American corporate governance has always been its failure to provide shareholders with viable mechanisms of collective action. This is now changing—in fits and starts, shareholders are learning how to coordinate and vote together. The electoral skirmishes at Exxon Mobil, which have spilled over into the courts, show that companies are changing the playbook to suppress dissent. Shareholders have one thing in their back pocket, however: the short electoral cycle in corporate elections. In a few months, when the annual election cycle starts up again at Exxon Mobil, shareholders won’t have forgotten the company’s harsh treatment of activists. They’ll get another shot at collective action, and they’ll have learned from their latest defeat.
Author Disclosure: the author reports no conflicts of interest. You can read our disclosure policy here.
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