On our podcast, Mike Levin and I previously discussed Exxon’s new retail shareholder voting program.  In sum, Exxon got SEC permission to allow its retail shareholders to adopt standing voting instructions to automatically cast their proxy votes in accordance with Exxon’s management.

I’ve heard a lot of shareholder-rights advocates speak favorably of the program, but I disagree.  I’m all for making it easier for retail shareholders to vote – including allowing them to adopt standing voting instructions (Jill Fisch had a whole thing on this) – but Exxon’s program only allows retail to vote for Exxon’s board.  Exxon is almost certainly expecting that, just as retail tend not to vote much at all, those who opt in to the program will likely never bother to revisit their instructions, leaving Exxon with a banked set of votes to oppose any activist interventions (including, of course, what I call “little a” activism, i.e., shareholder proposals).  The way the program is currently constructed, it’s a board entrenchment device.

Which is why I was happy to see that the New York City Comptroller’s Office, on behalf of the New York City Police Pension Fund, has submitted a shareholder proposal for Exxon to open up the program to include options to vote against management. 

There are plenty of ways this could go – standing instructions in favor of climate proposals, or to vote as recommended by independent entities, like themed proxy advisor recommendations, things like that.  Exxon, shockingly, recommends shareholders vote against the proposal, because:

The proposal asks ExxonMobil to implement additional voting options beyond those approved in our SEC no-action letter and which we believe violate proxy rules. For example, the proposal specifically suggests an “against management” option that would be inconsistent with state law and the Board’s fiduciary duties, making the proposal unworkable and illegal. By issuing a no-action letter, the SEC acknowledged ExxonMobil’s Voluntary Retail Voting Program respects the rights of shareholders to make their own decisions. It was also clear that our program, unlike passthrough voting by investors, represents a direct solicitation by ExxonMobil. The proposal ignores all this and wants ExxonMobil to make solicitations directly against the Board’s recommendations…..

The proposal ignores the fact that retail shareholders enthusiastically embraced this program, as evidenced by their participation. (NB: an overwhelming 3% of all shares – which I gather to be about 11% of the retail base – have opted in. I have no insight into the level of enthusiasm these shareholders expressed when doing so) The guidance provided in the SEC no-action letter is applicable to all parties, and the New York City Comptroller’s Office, or any other party, is free to implement its own retail voting program….

(Ad hominem attacks on the New York City Comptroller’s Office omitted).

So, I’m gonna take the last part first. What exactly does it mean, the Comptroller’s Office can implement a retail voting program?  For … shareholders of the Comptroller’s Office?  Shareholders of companies in whose stock the Comptroller’s Office holds shares?  What exactly does Exxon have in mind here?

As for illegality, I think the point Exxon is making is that, since the Board necessarily recommends that shareholders vote for things the Board thinks are good, if the Board recommends shareholders vote against those things, the Board is violating its fiduciary duties.  Fine.  But Exxon also says that its program merely effectuates retail preferences – which suggests it has nothing to do with what the Board recommends at all; it’s only about enabling retail to express what they would prefer.  So fiduciary obligations should have nothing to do with anything.

The way that Exxon gets to the idea that it’s making “recommendations” – which contradicts its own claim that the program merely effectuates retail preferences – is by defining its program as including a “proxy solicitation.”  But proxy solicitations don’t have to include recommendations – they include any request that a shareholder allow Exxon’s representative to vote shares (in any manner) on his or her behalf:

(1) The terms “solicit” and “solicitation” include:

(i) Any request for a proxy whether or not accompanied by or included in a form of proxy:

(ii) Any request to execute or not to execute, or to revoke, a proxy; or

(iii) The furnishing of a form of proxy or other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy,

In other words, just by giving shareholders a proxy card, and asking them to vote – in any way – Exxon is engaged in proxy solicitation.  And simply giving shareholders options as to how to vote is not a recommendation, and – to a more limited extent – is currently required right now, when Exxon sends shareholders a proxy card that includes “no” options.  So it’s hard to see where the fiduciary violation comes in merely by giving retail shareholders a greater ability to express their own preferences; indeed, if Exxon were judged by Delaware standards (it’s a New Jersey company, for now), it might be a violation of fiduciary duty to impede shareholders’ ability to vote against management.

That said, currently, the Comptroller’s Office is asking Exxon’s shareholders to vote to expand voting options for retail, and the Exxon shareholder base is about 66% institutional, including around 10% at Vanguard, 7% at BlackRock, etc.  And I don’t know that institutional holders, in general, have an overriding interest in seeing retail voices enhanced.  Not to mention, of course, the current political environment, where the SEC has suggested that institutional index funds might actually mislead their own investors about their investment strategy if they dare to vote against management.

Point being it’s hard to be sure that any institutional actors – mutual funds, proxy advisors, anyone – are effectuating their actual preferences (whatever that means) when the threat of federal retaliation hangs over them.

Anyhoo, I guess this is what Chair Atkins has in mind when he says the SEC is “focused on ensuring that States, and not the SEC, regulate matters of corporate governance.”

And another thing. New Shareholder Primacy podcast is up!  Me and Mike Levin talk about the “zero slate” proxy solicitation at BJ’s Wholesale Club (I learned that phrase from The Corporate Counsel), and the activist intervention at Snap.  Here at Apple; here at Spotify; and here at YouTube.