It’s a dirty little secret in business that everybody has a boss, even the bosses. Top executives report to the CEO, the CEO answers to the board, and the board serves at the whim of the shareholders.
Exxon’s management has now decided that it doesn’t like what its bosses have to say.
On Sunday evening, the oil supermajor filed a lawsuit in federal court asking for permission to ignore a shareholder resolution at its next annual meeting. The resolution was proposed by Arjuna Capital and Follow This, two activist investors that are seeking to compel Exxon to rein in its vast carbon emissions.
Hang on a minute, aren’t shareholders supposed to be sacrosanct? Isn’t the whole point of a corporation to please its shareholders? That’s what Milton Friedman said when he argued in favor of shareholder primacy back in 1970:
In a free‐enterprise, private‐property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom. (Emphases added.)
The new shareholder resolution calls on the oil company to reduce its Scope 3 emissions or those that result from the use of its products. In Exxon’s case, that’s mostly the burning of fossil fuels.
The problem Exxon faces is that the “basic rules of society,” specifically “those embedded in ethical custom,” are changing, and the company now finds itself on the wrong side of them. Two-thirds of Americans say we should prioritize alternative energy over fossil fuels, and 69% say the U.S. should move toward net-zero emissions by 2050, according to the Pew Research Center. Internationally, most people want their governments to do something about climate change.
Exxon would normally take its grievances to the SEC, filing a request with the regulator to omit the proposal from this year’s proxy statement. But under the Biden administration, the SEC has been siding more frequently with shareholders. After all, who’s the boss?
Years ago, the only shareholders who were a thorn in managements’ sides were activist investors who would amass substantial positions in a bid to gain board seats and steer company strategy. Other shareholders tended to be deferential to management, letting them run their business as they saw fit.
But as shareholder primacy took root in the public consciousness, more shareholders began to exercise their rights. Even larger asset managers, including BlackRock, Vanguard and State Street, have warmed to shareholder proposals that seek to push companies to adhere to what Friedman called “ethical custom.”