ESG activism is growing – what should boards do?

By Michelle Bennett, Hannah Biggins, Tom Hall, Lana Yang
Boards & NEDS Climate Change Corporate Governance Environment, Social, Governance

ESG key in non-board endorsed candidates' election to ExxonMobil board 6 min read

Environmentally focused activism continues to be on the rise. In a recent US example, ExxonMobil's shareholders elected three non-board endorsed candidates standing for action on climate change to the board, following a proxy battle waged by a small, activist hedge fund.

This is another instance of ESG-related interests of stakeholders impacting the governance arrangements of large listed companies. We look at why this is important for boards, and what steps they can take to mitigate becoming the target of this type of activist campaign.

Key takeaways

  • Boards should be cognisant of stakeholder priorities and expectations regarding climate-related risks and opportunities, and regularly assess the appropriateness of their company's business strategy and climate change plans.
  • Shareholders may react to factors such as perceived poor financial performance or a lack of oversight and response to climate change issues by putting forward or supporting director candidates who seek a different approach on these issues.
  • Boards should regularly consider the experience, training and 'skills matrix' of their directors (which ASX listed companies should disclose annually in their Corporate Governance Statement), and ensure that the board collectively has the appropriate level and type of experience to deal with issues relevant to the business, such as climate change-related matters.

A shift in investor sentiment

In the lead-up to ExxonMobil's annual meeting of shareholders, Engine No.1  – a newly created investment fund with a 0.02% ExxonMobil shareholding – alleged that ExxonMobil had poor shareholder returns, misplaced allocation of capital and was not positioning business for the future in relation to energy transition.

In publicly advocating for changes to ExxonMobil's climate change initiatives and strategy, Engine No.1 put forward four nominees for the ExxonMobil board of 12. The board did not endorse any of the four candidates, and issued a letter to shareholders to explain their reasons for this (which included that the board had already developed a strategy regarding ExxonMobil's ongoing participation in energy transition to a lower-carbon future; had recently appointed three new independent directors to enhance board expertise; and that Engine No.1's proposed initiatives would jeopardise ExxonMobil's ability to generate the necessary earnings and cashflow needed to pay the dividend, invest in future growth and work on technologies to help tackle climate change).

However, three out of the four candidates proposed by Engine No. 1 were approved by ExxonMobil's shareholders and elected to the board, receiving between 40% to 49% of votes in favour. 1

Why was Engine No.1's campaign successful?

  • Quality candidates: the candidates put forward by Engine No.1 were experienced individuals (eg former chief executive officers, a former executive vice president and a former senior strategist), with Engine No.1 asserting that each candidate possessed energy industry and climate change-related experience and credentials.
  • Institutional investor support: Engine No.1 received support from a number of major institutional investors and major asset managers, such as BlackRock, State Street and Vanguard, which, at the time of the AGM, collectively owned nearly 19% of ExxonMobil's shares. In addition to these major asset managers, Engine No.1 also received support from the California State Teachers’ Retirement System, the second-largest US pension fund and, at the time of the AGM, holder of over $300 million in value of ExxonMobil shares.
  • Public campaign: significant public attention and coverage accompanied the campaign, and it was reported to have cost Engine No.1 and Exxon Mobil over $30 million each. It also focused on key issues for the company and shareholders, such as its recent falling share price, low returns on capital and rising debt.

Could the same thing happen here?

The US legal regime is different from Australia's, though there are several ways a candidate could be nominated to stand for election as a director of an Australian listed company, including that the ASX Listing Rules require that a listed company must accept nominations for candidates for election to the board of the company in the lead-up to the AGM. The maximum number of directors that may be elected to a board will generally be set out in the constitution of the listed company. This number may be changed, but only with shareholder approval.

Unlike in the ExxonMobil example, where the local law provided that the candidates with the most votes in favour were elected to the board, in Australia, directors are generally elected at AGMs by way of an ordinary shareholder resolution, which requires more than 50% of votes cast to be in favour.

What happens if there are more candidates for election than vacancies on the board of an Australia listed company? There is no general mandate for this scenario in Australia, but one approach is that the company could fill the vacancies with:

  • the candidates who receive more 'for' votes than 'against' (ie candidates with more than 50% of votes cast to be in favour); and then, if there are still too many eligible candidates for the number of vacancies;
  • as between those candidates that received 50% or more votes in favour, those candidates that received the highest number of 'for' votes in total.

In Australia, some companies may also have additional regulatory requirements that need to be satisfied before a director can be elected. For example, companies in the financial services sector will have to consider the overlay of the Banking Executive Accountability Regime – particularly in ensuring that any candidate standing for election to its board is a 'fit and proper' person.

What's next for Australia?

There are examples in the past of large ASX listed companies having received unsolicited director nominations connected to particular activist campaigns. These candidates have tended to stand for very specific causes and have not had the visible backing of institutional shareholders. Typically, the resolutions to elect such nominee directors have been resoundingly rejected by shareholders, falling far short of the required 50% voting approval.

However, as Allens reported last year, momentum for ESG-related activism keeps building in Australia, with ESG-related advisory resolutions continuing to be requisitioned on the agendas of AGMs for many listed companies and receiving rising levels of support from shareholders. In addition, various Australian funds and investors have made public statements and commitments on climate-related matters, and we are seeing other emerging ESG-related governance developments in Australia, such as the 'Say on Climate' initiative.

With this growing global trend, Australian listed companies could see similar campaigns for the election of (non-board endorsed) nominee directors to their boards. If elected, as a member of the board, the director would be involved in all key decision making, which could have a significant impact on the company's strategy and governance arrangements – in the truly literal sense, the director would have a seat at the table.

What should boards do?

Steps boards can take to mitigate becoming the target of this type of activist campaign include:

  • regularly communicating with, and seeking frequent feedback from, shareholders and proxy advisors to ensure the company and shareholders are aligned in relation to values and expectations;
  • adopting clear targets and policies on climate change-related matters, taking the necessary steps to achieve these targets and fulfil policies, and enhancing transparency to ensure shareholders understand the company's progress and future direction on these matters; and 
  • regularly considering the experience, training and 'skills matrix' of their directors and ensuring that the board collectively has the requisite skills and knowledge2 to understand and effectively address existing and emerging matters relevant to the company (eg climate change-related risks and opportunities), and communicating this experience to shareholders.


  1. ExxonMobil is a New Jersey-incorporated entity and, under New Jersey law, directors are elected by way of a plurality of votes cast at an election, such that the candidate(s) with the most votes in favour will be elected to the relevant vacant seat(s) on the board.

  2. As contemplated by Principle 2 of the ASX Corporate Governance Principles and Recommendations, 4th edition.