ExxonMobil Board Policies Must Change to Reflect Corporate Governance Best Practices
ExxonMobil (XOM): Board Policies, Composition, and Pay Undermine Ability to Mitigate Key Risks
ExxonMobil’s financial performance has suffered considerably during a prolonged period of lower oil prices. Profits and shareholder payouts have both fallen, and following months of SEC and Attorney General investigations, the company in 2016 reduced proved reserves by billions of barrels of oil equivalent and took a $2 billion impairment charge. The company faces a complex future, with shale oil production, alternative energy technology, and climate change policies all contributing to the “lower-for-longer” oil price environment, posing substantial challenges to ExxonMobil’s current business strategy. Skillful, open-minded, engaged and forward-looking board leadership will be required for the company to successfully navigate a complex and constantly shifting business environment.
In our view, ExxonMobil’s board of directors must undergo substantial reform if it is to competently meet the challenges of this environment. While the company has a new CEO and a new board member with climate expertise, <b>we believe that the ExxonMobil board’s investor engagement policies, composition, succession planning, and pay practices do not reflect corporate governance best practices.</b> These areas of concern exacerbate ExxonMobil’s exposure to material long-term risks and undermine its ability to adapt to the complexities of its future.
Our specific concerns include:
ExxonMobil’s documented policy of preventing investors from engaging directly with members of its board to discuss company strategy, financial performance, risks and opportunities, and other topics germane to the board. This antiquated policy is out of step with widely recognized best practices for corporate governance and undercuts the board’s ability to gain valuable outside advice and perspectives.
Lack of clear and transparent succession planning for retiring board members, particularly given the mismatches we see between the skills and orientation of outgoing directors and the strategic challenges facing the company. For example, ExxonMobil’s outgoing Audit Committee chair lacked relevant financial expertise during a time of regulatory scrutiny and business model transformation, and though his and other board members’ retirement dates were known in advance, no replacements have been nominated for the 2017 annual shareholder meeting nor has the company discussed plans for the directors’ replacements.
Board compensation practices that may create perverse incentives as directors approach retirement. ExxonMobil provides that most director equity-based pay does not vest until the mandatory retirement age of 72, an unusual proviso, under which directors can potentially forfeit what can amount to millions of dollars in pay if they leave the board before retirement. As they approach retirement, directors’ time until payout shortens while the value of their equity compensation increases – a dynamic that can compromise director independence and objectivity, as directors nearing retirement may not voice dissenting opinions for fear of putting their impending payout at risk of forfeiture.
Board oversight of these matters fall within the purview of ExxonMobil’s Board Affairs Committee, which oversees board nominations, compensation, and practices. Kenneth Frazier has chaired this committee since 2012. BlackRock, ExxonMobil’s second largest shareholder, voted “withhold” on Frazier in 2016, reportedly in protest of the company’s investor engagement practices. ExxonMobil shareholders also passed a resolution in 2016 calling on the company to adopt proxy access so that long-term shareholders would have a means to ensure that their voices and perspectives were properly represented on the board.
ExxonMobil will hold its annual shareholder meeting on May 31st, 2017. Shareholders should consider whether Kenneth Frazier and other members of the Board Affairs Committee have properly discharged their responsibilities across the dimensions of investor engagement, succession planning and director compensation in a manner that promotes good corporate governance practices and serves shareholders’ best interests.