Emboldened ESG Activists Ramp Up For Next Boardroom Showdowns

Mention Engine No. 1’s victory over Exxon Mobil Corp. last month to the socially conscious investing crowd and they’ll rattle off a wish list of targets that have so-far resisted calls to reform their social practices.

The possibilities include Twitter Inc., Facebook Inc., Netflix Inc. and private prisons, to name a few. The question, though, is whether the tactics Engine No. 1 used to gain three seats on the oil giant’s board are a viable method for other small activist investors to replicate against companies where they’d like faster change.

Most activist investors say: not exactly. But, inspired by Engine No 1., they are getting more aggressive. Some say they’ll use the threat of targeting the board to get companies to engage in their proposals. Eli Kasargod-Staub, co-founder of Majority Action, a non-profit that pushes for corporate accountability, plans to ramp up “just vote no” campaigns against undesirable directors. Others are suggesting specific board candidates that favor social change, and some are lobbying Engine No. 1 to find its next Exxon.

James McRitchie, an activist investor who over decades has sponsored hundreds of proxy proposals about social and governance issues, emailed Engine No. 1 to suggest they look at Netflix. Investors have approved several proposals that would make it easier to replace Netflix directors, but the streaming giant has not agreed to the changes.

Engine No. 1 wouldn’t comment on its next possible targets, though it owns stakes in Square Inc., Microsoft Corp., Shopify Inc., Zendesk Inc., and Penumbra Inc. Netflix said in its proxy statement this year that it is taking steps to be responsive to ESG concerns from investors.

“A more collaborative approach would be ideal,’’ Renaye Manley, deputy director at the Service Employees International Union, one of the groups leading the charge to pressure companies to perform racial audits, said on a June 10 Bloomberg Intelligence panel. “But I can certainly see this type of a kind of activist-investor approach over civil rights happening at some point in the future.’’

Nell Minow, who advises institutional investors on corporate governance issues at ValueEdge Advisors, said Engine No. 1 primed boards to be more alert and responsive out of fear of losing control.

“After we spent a lot of money on our first proxy contest, and took out a full-page ad in the Wall Street Journal for a quarter million dollars, we never had to do that again,” she said, referring to an aggressive campaign she waged against the Sears, Roebuck and Co. board in 1991. “Because people knew we would do that if we had to.”

Engine No. 1 succeeded under a set of unique conditions. First, the firm was started by a former hedge fund manager who used his personal wealth to finance a fight with around a $13 million price tag, according to the fund. It also made a strong case for board change, arguing that the oil giant had lower shareholder yields than competitors and mounting debt and spending that jeopardized its dividend. Exxon was also losing money, and Engine No. 1 argued its resistance to transitioning to a low-carbon future would lead to more losses in the future.

“Exxon was unique in its own way,’’ said Eleazer “Ele’’ Klein, a lawyer who represented Engine No. 1 in its campaign. “It wasn’t responsive to its shareholders’ frustrations.’’

Investors don’t often reject director candidates. So far this year, less than 0.5% of the 15,000 board members in the Russell 3000 failed to get at least 50% of the vote in an uncontested election, where seats are assigned based on vote totals. The three Exxon directors were the only ones ousted this year in a contested election, where board candidates have to receive a majority of votes, according to Bloomberg Intelligence data through June 29.

Pressuring companies to switch up their board, rather than a full-on takeover, may be a more realistic approach. Arjuna Capital, which has had success getting major technology and finance firms to release pay gap statistics, now has proposals at Facebook, Alphabet Inc.’s Google and Twitter to add civil rights experts as directors. “It’s a different existential crisis than Exxon is facing,” Natasha Lamb, a managing partner at Arjuna, said. “But it’s a business imperative.”

Alphabet said in its proxy statement that its current board is sufficiently qualified to provide civil rights oversight. Facebook declined to comment but pointed to a website outlining the company’s efforts to address hate speech on its platforms. Twitter declined to comment.

Activists have made progress making alternative directors more palatable to big investors, said Rusty O’Kelley, an executive recruiter at Russell Reynolds. Five years ago, the typical slate would have included members of the fund or their close associates, he said. Now the groups work with executive recruiters to establish networks of board-ready candidates.

“They are much more likely to have a slate of people who have industry relevance, who represent gender and ethnic diversity and look and feel more credible,” O’Kelley said. “It’s designed to gain support from BlackRock, Vanguard and State Street.”

Activist investors have already this year submitted a record number of proposals aimed at improving diversity and equality in corporate America. Even though many of them failed, support averaged 32%, well above the average 24.2% over the previous five years, according to data from Bloomberg Intelligence. Companies often engage with activists if their proposals get at least 30% of the vote, though they’re under no obligation to do so in most cases.

Some of their biggest targets, however, like Facebook and Alphabet are somewhat insulated from these kinds of campaigns because of their dual-class share structures. Facebook Chief Executive Officer Mark Zuckerberg, for example, has majority control of the social network even though he owns less than 15% of outstanding shares.

Still, some boards are being proactive. A survey this spring by recruiter Spencer Stuart of 77 committee chairs on S&P 500 boards found that expanding or enhancing ESG initiatives is their number one priority over the next three years.

—With assistance from Naomi Nix.