It’s no secret that in the world of business, everyone has a boss, including those in charge. The highest level executives ultimately report to the CEO, who answers to the board, who in turn serves at the command of the shareholders.
However, Exxon has recently made a surprising move – defying their bosses.
On Sunday evening, the oil giant took legal action against a shareholder resolution proposed by activist investors Arjuna Capital and Follow This. The resolution demanded that Exxon take action to reduce its enormous carbon emissions.
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.)
But wait a minute, aren’t shareholders supposed to be sacred? Isn’t it the whole purpose of a corporation to satisfy its shareholders? This was the argument put forth by Milton Friedman in 1970, advocating for the principle of shareholder supremacy.
However, the new shareholder resolution focuses on something different – reducing Scope 3 emissions, which are the byproduct of using Exxon’s products, mainly fossil fuels.
The main issue facing Exxon is that society’s “basic rules,” particularly those based on “ethical custom,” have evolved and the company now finds itself on the wrong side. According to Pew Research Center, two-thirds of Americans prioritize alternative energy over fossil fuels, and 69% believe the US should reach net-zero emissions by 2050. Globally, a majority of people want their governments to take action on climate change.
Under normal circumstances, Exxon would handle this by appealing to the SEC and asking for the proposal to be excluded from the annual shareholders meeting. However, with the Biden administration in power, the SEC has been increasingly supporting shareholder interests. So who’s really in charge?
In the past, the only shareholders causing headaches for management were activist investors who would gather significant holdings to gain control over board seats and influence company direction. Other shareholders tended to trust management and allow them to run things as they saw fit.
But as the principle of shareholder supremacy gained momentum, more shareholders began exercising their power. Even major asset managers such as BlackRock, Vanguard, and State Street have inclined towards shareholder proposals that urge companies to adhere to “ethical customs” as described by Friedman.
