Last week, the Rockefeller family made an historic challenge to Exxon Mobil Corp., the company founded by John D. Rockefeller in 1870 (as Standard Oil), and in which dozens of family members still hold stock. The challenge came in the form of a shareholder resolution to require an independent chairman of Exxon's board of directors, so that the company can better maximize long-term shareholder value in a rapidly changing energy environment.
Making the board chair independent of the CEO may seem a technical governance matter, but it has great significance. The family argued that having a board that was independent from the day-to-day operations of company management would enable Exxon to better assess the risks and opportunities that are altering the energy and environmental landscape — and that Exxon might alter its business strategy based on a different set of assumptions than those under which the company has been operating.
Research conducted by my colleague Ron Pernick and me at Clean Edge in 2006 looked into Exxon and its set of assumptions about our energy future. Exxon has long adopted a stance that renewable energy will be a negligible part of the energy mix for the foreseeable future, and that operational and market conditions will remain static and relatively unchanging. At the time, we wondered, given the realities of our increasingly volatile global energy marketplace — growing demand, declining production, global security issues, climate change, rising food costs, and other business, social, and environmental challenges — whether Exxon's narrow view would leave the company at risk from competitors and less able to seize new opportunities and adapt to shifting market conditions.
We found some of Exxon's assumption flying in the face of the facts — for example, that only 2% of the world's energy will come from renewable sources by 2030, despite estimates by the Renewable Energy Policy Network that already attribute 4% of the world's energy to new renewable sources. The company consistently underestimates the annual growth of solar, wind, geothermal, biofuels, and other alternative energy resources. Moreover, company statements — as underscored by its actions — is that they are waiting for a major breakthrough in renewable energy technology, at which point it will deploy its significant resources in bringing that technology to market.
There is good reason for the Rockefellers and other shareholder to be concerned about this strategy. By placing nearly all of its emphasis and focus on oil and gas, Exxon risks losing out on the new markets for renewables and places the company strategy within an outdated model of energy markets. As the renewable energy market has developed, it has become clear that our energy future won't be based on a single breakthrough, but on dozens, even hundreds, of smaller ones — new technologies, products and services, and business models. Everyone from GE to Goldman Sachs to Google seems to get this, and are investing accordingly.
So, diversifying investments more aggressively into clean-energy research and development would position Exxon to be better able to adapt to changes, capitalize on anticipated carbon trading schemes and expected developments in the regulatory environment, hedge its bets, and build new business opportunities as alternatives to petroleum-based technologies gain market traction.
Instead, the company seems to be biding its time, waiting for renewable energy markets to develop rather than jumping in to help build them. As a result, rather than taking a proactive role in advancing these technologies, Exxon runs the risk of either not having sufficient access to a viable partner when it finally decides to enter the renewables market in a substantive way, or of arriving too late and losing first-mover advantage, if not significant market share. Most of the other majors — BP, Chevron, Shell — have at least some robust renewable energy programs in place — wind, solar, geothermal, fuel cells, tidal power, and more — albeit relatively small ones in terms of revenue. But at least they're gaining experience and partners in the renewables space.
There are billions of dollars being invested by some pretty smart people in the notion that there's a Moore's Law of energy — that is, that innovation can make clean energy both ubiquitous are cheap. They're betting that energy can follow the path of microprocessors, hard-disk storage, and wireless telecommunications, where costs have plummeted as technology has steadily improved — and carbon can, in effect, be taken out of the energy equation. If even some of these bets pay off, Exxon's assumption — that oil and natural gas will remain the dominant energy sources for decades to come — could put them at a competitive disadvantage. Hence, the interest of long-term, multi-generational shareholders like the Rockefeller family.
It doesn't take much to roil the markets, as Exxon found out last week. At the same time that it revealed gusher-level profits, it's stock took a dive. The reason: Exxon's oil production was down 10 percent, continuing a yearlong decline. It's unclear whether the company will continue to have difficulty finding sufficient new reserves to replenish the billions of barrels it is pumping out of the planet, but if the trend continues, Exxon could find itself in trouble.
It's not too late. By changing strategies, Exxon stands to capture a better foothold in the evolving energy market and a significant percentage of revenues that would otherwise be lost.
Experts believe that the most viable technologies for the near term — such as cellulosic ethanol, next-generation solar technology, and plug-in hybrid technology, along with copious amounts of energy efficiency — represent the future of energy. With the likelihood of such events as a carbon tax or carbon caps within the next decade, the conditions for market acceptance of lower-carbon solutions become more attractive. The concept of negawatt programs is gaining traction, with power companies investing in conservation (average cost of $350/kilowatt) over coal ($1,000/kilowatt). The emergence of small, lightweight, long-running lithium-ion batteries has helped create a market for notebook computers, cell phones, and other portable devices. Efforts to scale that technology for use in automobiles could do for that industry what improved batteries did for computer and phone companies, building a market for hybrid, plug-in, or electric vehicles with great efficiency, acceleration, and range — at the same price or cheaper than today's gas-powered vehicles.
It's not just technologies that are changing. So are markets. For example, until relatively recently, the distribution of gasoline has been controlled by entities with an interest in keeping alternatives out of the infrastructure — the oil companies. But Wal-Mart and other independent retailers with large fuel distribution networks are largely impartial to the type of fuel they carry, and their market reach to consumers can accelerate the growth of alternative products and infrastructure. Large fuel purchasers like the Defense Department are actively creating conduits for the market acceptance of oil and gas alternatives by encouraging economies of scale and increased R&D. There are other disruptive technologies on the horizon that could gain market acceptance, further dampening demand for oil and gas. By waiting for a single "breakthrough" technology, Exxon is overlooking that this sector is engaged in an iterative process that is building a new approach to energy applications; waiting for the perfect solution is a potentially dangerous approach, from a business strategy perspective.
The modern history of innovation suggests that being big is no assurance of survival. Consider that six of the thirty multinationals included in the Dow Jones Industrial Average 20 years ago are gone today (Allied-Signal, American Can, Bethlehem Steel, Texaco, Union Carbide, and Woolworth), and a seventh, AT&T, exists in name only, the original entity having been scattered into multiple companies. Several others — Eastman Kodak, IBM, Sears, and Westinghouse — look radically different today than then. In many industries, the dominant players not that long ago are gone. Burroughs, Data General, Digital Equipment, NCR, Sperry, Univac, Wang — all leading computer manufacturers of the 1970s and 1980s — are cases in point.
The Rockefellers' efforts are aimed at ensuring that Exxon doesn't follow this path, and that it will overcome its stubborn, decidedly non-green, outlook toward one that recognizes the realities of a world in which carbon and climate become significant business considerations.
Will the strategy work? The odds are long, but we'll know more after the company's annual meeting on May 28. If history is any indicator, Exxon is likely to downplay dissent in favor of its own hellbent course.
At a BSR conference a number of years ago, I was struck by the "head in the sand" approach taken by a senior Exxon/Mobil engineering manager. The company strikes me as a classic example of a dominant organization that has developed a severe case of tunnel vision. Odds are that even if they make a move into renewables, they will do so with huge question--who's the customer? A classic situation well described and analyzed by Clayton Christiansen in The Innovator's Dilemma.
Posted by: Mike Brown | May 05, 2008 at 10:59 AM
It is always interesting to watch the behaviors of wealthy trust babies. Before we all get teary-eyed and “green” with envy for these trust babies, let's first recognize that the real reason for their behavior is more about ensuring their trust does not run dry than saving the planet by forcing Exxon Mobil to invest in alternative fuels R&D and establish an "independent" chairperson of the board to ensure this happens. Even with an “independent” chairperson, I don’t see how this individual could force an alternative fuels agenda on the company, but stranger things have happened.
With the increasing growth in the number of trust babies in this particular family, it would indeed make sense to take steps to ensure the longevity of one’s source of wealth and income. Wouldn't we all like to be in their situation?
The question is whether the Rockefeller's shareholder resolution will actually lead to growing their wealth versus their historic position of preserving their wealth. It would seem these trust babies believe they know better what is best for Exxon Mobil than the leadership of the company knows. This belief flies in the face of Exxon Mobil's performance since the beginning of the Fortune 500 list in 1954, not to mention all the years since its inception as the Standard Oil Company of Ohio in 1870.
So why doesn't Exxon Mobil simply spend a few billion on alternative fuels and pacify these trust babies? Maybe, just maybe, Exxon Mobil has studied and continues to study alternative fuels and has concluded, at least for now, this is not the space where Exxon Mobil or its shareholders want to see the company’s profits spent. A snapshot of this analysis is revealed in Exxon Mobil’s February 2006 publication entitled Tomorrow’s Energy – A Perspective on Energy Trends, Greenhouse Gas Emissions and Future Energy Options at http://www.exxonmobil.com/Corporate/Files/Corporate/tomorrows_energy.pdf. Self serving you might say, then Google the costs associated with wind, solar, hydro, biofuels, ethanol, nuclear, etc. and learn that none of these alternative sources of fuel can compete with oil and gas and in all likelihood will not compete with oil and gas for the next hundred years, as much as Al Gore and the enviros would like for us to believe.
Let's face it; Exxon Mobil is a profit making enterprise tasked with creating as much revenue as it can to deliver dividends to its investors, including these aforementioned trust babies. Believe me, if Exxon Mobil saw that investing in alternative fuels would deliver the returns expected in this industry, they would be in this space in a heartbeat. By the way, if the price of oil continues on its meteoric path, the viability and economic return on these alternative fuels might likely become more appealing causing significant investment in this space. But until that happens, it is fantasy to believe a capitalistic enterprise is going to invest in the alternative fuels space to any significant degree. From a fiduciary point of view, it would be irresponsible for Exxon Mobil or any other publicly traded enterprise for that matter to significantly spend money in this space, at the moment. This isn’t to say no funds should be placed toward R&D in this space, but to force a company like Exxon Mobil into this space without thinking through the consequences is financially reckless.
For me, this shareholder resolution is more about Power, Control and Money than it is about alternative fuels. Alternative fuels just happens to be a politically popular, feel good vehicle for these trust babies to impose their will on a company that hasn’t paid much, if any, attention to them over the years. If their shareholder resolution passes on May 28th, it will be interesting to watch how the market responds. I wonder if these trust babies have thought through what they will do if their Exxon Mobil stock drops. With over 99,000,000 shares of Microsoft stock (Q 4 2007) in their trust portfolio, I don’t think any of us needs to worry too much about their life style changing.
Posted by: Jim Leemann | May 05, 2008 at 02:13 PM
I don't know who you are Jim Leemann, and I truly don't mean to offend, but your sense, or should I say lack of sense, regarding any social, environmental or global responsibility on the part of the world's largest transnational corporations is truly stunning.
And I'd LOVE to take you up on your bet about alternative fuels being competitive with oil in the next hundred years. Too bad we won't be around to settle; pretty safe way to state a claim.
Posted by: Fel | May 05, 2008 at 10:18 PM
In Jim Leemann's defense, I cannot blame him for taking a cynical view of the shareholders who are demanding this change. It is not unreasonable to question their motives as they are understandably concerned about the long-term profitability of Exxon. However, it IS unreasonable to think that alternative sources of fuels are not going to be compete with oil in the next hundred years.
If these powerful shareholders are concerned about their future wealth, why would they not want the company to explore developing technologies. It would not be a successful long-term strategy to wait for major technological breakthroughs and forfeit profits from developing markets.
Posted by: Will O'Neill | May 06, 2008 at 11:07 AM
Joel, I think you have several good points in this post. I am puzzled by the Exxon strategy compared to their competitors - BP and Shell in particular. Dedicating only a tiny share of their profits could mean a huge influx in the renewables area, and huge potential long term gains for their shareholders.
Even Google and other investors, coming from outside the energy field, sense this. As I discussed in a blog post (link), renewable energy investments now amount to USD100billion per year.
And you can't overestimate the importance of the negawatt concept. And investors is going to realize that. Since last year, capital influx have exploded into the energy efficiency investment segment. Investments in Power And Efficiency Management Services increased by 454% compared to last year! And it's gonna keep growing. Last year, I predicted this development (link 1, link 2).
Posted by: Patrik Marckert | May 07, 2008 at 10:25 AM
Joel...you need permalinks and maybe a "read more" code. Technicalities aside, as usual, this is a timely commentary. So frustrating to see that gas companies are not moving on the clean tech issue when they should.
Posted by: Clara | May 13, 2008 at 12:22 AM
Nice article - as always. I just wanted to share this link with all of you - It is a profile of the oil industry's top 10 players using the HIP Methodology. (www.hipinvestor.com)
Thanks!
Wil
Posted by: Wil Keenan | May 23, 2008 at 05:03 PM
http://www.fastcompany.com/investing/2008/#self
Posted by: Wil Keenan | May 23, 2008 at 05:04 PM
Well the Exxon Mobil proxies are in and the Rockefeller Trust Babies have nothing to fear for at least another year. Regarding the Trust Babies effort to separate the Broad Chairman and CEO to held by two people instead of one (Proxy Item # 5), the proxy vote results were 39.5 For and 60.5 Against.
Regarding the proxy votes related to the environment and alternative energy here are the results:
13. Community Environment Impact – 10.8 (For) 89.2 (Against)
14. ANWR Drilling Report – 8.4 (For) 91.6 (Against)
15. Greenhouse Gas Emissions Goals – 30.9 (For) 69.1 (Against)
16. CO2 Information at the Pump – 7.0 (For) 93.0 (Against)
17. Climate Change and Technology Report – 10.4 (For) 89.6 (Against)
18. Energy Technology Report – 9.4 (For) 90.6 (Against)
19. Renewable Energy Policy – 27.5 (For) 72.5 (Against)
Source: Definitive Proxy Statement to the U.S. SEC Schedule 14A Exxon Mobil Corporation. http://www.sec.gov/Archives/edgar/data/34088/000119312508078618/ddef14a.htm#toc87659_26 and Summary of 2008 Proxy Proposal Votes at http://phx.corporate-ir.net/phoenix.zhtml?p=irol-eventDetails&c=115024&eventID=1825185
These results not only show the sentiment of Exxon Mobil’s leadership, but the voting positions of shareholders that own more than 4.4 billion shares of Exxon Mobil outstanding stock.
As I penned earlier, reading the Definitive Proxy Statement confirms that Exxon Mobil is quite aware of alternative energy prospects and is devoting human and financial resources to evaluating these technologies along with cleaner technologies for oil and gas consumption. So to imply the demise of the world’s largest petroleum company due to their lack of, in your opinions, an alternative energy vision is just factually incorrect. It appears your objective is to use Exxon Mobil as the “tipping point” for convincing everyone to jump on-board the alternative energy band wagon. Based on the above proxy vote results, this will likely turn out to be a monumental task to accomplish.
The proxy vote results are quite telling when it comes to the opinions of the individuals and institutions that own Exxon Mobil shares. Bottom-line the shareholders are very satisfied with Exxon Mobil’s current direction when it comes to the environment and alternative energy. Fortunately, at least for now, the governance of publicly traded companies remains intact.
Posted by: Jim Leemann | June 03, 2008 at 09:43 AM
Thank you for your very interesting blog
Very useful blog
http://www.youtube-youtube-youtube.com
Posted by: max johnson | November 01, 2008 at 04:07 PM
Very interesting article...
Posted by: Dave | November 25, 2008 at 02:17 PM
This is a problem of the global elite making up rules that suit them.
Way can't the government just step in with legislation that can tackle these problems before they even become issues.
Well, I say that but I know its not possible. Maybe if we elected a completely new government that was not in the pockets of these huge multinational companies we would stand a chance.
Posted by: Kirsty | March 02, 2009 at 09:05 AM