ExxonMobil: Gearing up for a heated annual meeting?May 24, 2011: 3:27 PM ET
From executive compensation to political and lobbying expenses, the oil giant should expect some impassioned debate at its annual meeting.
By Eleanor Bloxham, contributor
FORTUNE -- The temperature will be rising in Dallas as ExxonMobil shareholders gather on Wednesday for their annual meeting -- and the oil giant's management team will be on the hot seat this year on a whole range of topics.
Proxy advisory firm Institutional Shareholder Services is recommending no votes on ExxonMobil's (XOM) executive pay, as are institutional shareholders AFSCME and RAM Trust -- and Exxon has eight shareholder proposals on its proxy this year.
Exxon declined to comment on its compensation programs, and Bill George, who chairs the board's compensation committee, wrote in an email to Fortune, "I believe it is appropriate to have Exxon management answer any questions shareholders have at the meeting itself."
Robert A. G. Monks, founder of Lens Governance Advisors, ISS, and RAM Trust, says the environment for asking questions and raising issues at the meetings, however, is inhospitable. "The board is not a stand up board and permits the rude treatment of shareholders" at these meetings, he says.
Rather than offering a meaningful opportunity for dialogue, management "acts as if, as a shareholder, you are an imposition, a waste of their time. They act like bullies."
As a result, Monks no longer attends the company's annual meetings, because otherwise, he says, he would be an "enabler, pretending they are having a real meeting."
Exxon has recommended that shareholders vote against all of the shareholder proposals this year.
While Exxon's spokesperson says that the company reaches out to shareholders on their proposals, there are several indications to the contrary. The Laborers International Union had only had preliminary discussions with Exxon over the union's political spending disclosure proposal when the company proceeded to try to knock the item off the proxy, according to Jennifer O'Dell, LIU's assistant director of corporate affairs.
And Lisa Lindsley, director of capital strategies at AFSCME, says Exxon did not reach out to AFSCME to discuss its views or meet with the organization either before or after it issued a negative voting recommendation on Exxon's executive pay plan.
ExxonMobil's compensation issues are complicated. But at the heart of the company's pay policies, Lindsley says, is a process that allows full discretion by the board's compensation committee without relevant ties to performance.
Monks says ExxonMobil's executives are paid too much. "How much in dollars should management take out of the company? Should [ExxonMobil CEO Rex] Tillerson join the $1 billion club?" he asks. Retention is not an issue for the company, he says.
While the company has a good safety reputation, Monks says, the company's return on capital numbers are manufactured. "They buy back capital to boost the return numbers," he says.
Exxon board member Bill George led a National Association of Corporate Directors Blue Ribbon Commission on "Executive Compensation and the Role of the Compensation Committee," which included recommendations such as not offering contracts to executives (giving the board more flexibility in how it deals with the CEO's pay and tenure), which is reflected in the pay practices at ExxonMobil.
The comparable CEO pay packages that ExxonMobil uses to determine its executive pay practices are questionable. HP (HPQ) is a comparator company with historically high CEO pay. Another comparator is IBM (IBM). If IBM CEO Sam Palmisano (who sits on Exxon's compensation committee) gets a pay raise, that boosts the benchmark used to set Tillerson's pay. Only two of the 12 companies ExxonMobil includes in its comparables are in the oil and gas industry and, inexplicably, major oil companies BP (BP) and Shell (RDSA) are not used as benchmarks.
The complaints that Exxon offers to naysayers of its pay practices are numerous. Many of the company's arguments, however, don't stand up to scrutiny. As one example, Exxon said that the total shareholder return comparisons of three years that are cited by the company's critics are too short term. But Exxon pays half its annual bonus in cash immediately and in its proxy, it cited one- and five-year return on average capital, current-year and five-year average earnings, and current-year as well as the ten-year average annual shareholder returns as part of the justification for its pay.
If Exxon's compensation committee wishes to really enforce longer term views, they must not only do it in the time horizons over which pay is doled out but also in the time horizons of the metrics used to determine pay itself. If the time horizons used in the proxy do not accurately reflect what Exxon is using, this should be corrected so shareholders have a better understanding of the measures that are being used.
Frequency of executive pay votes
Exxon is recommending a vote on executive pay every three years, although pay is awarded annually and shareholders as a general matter tend to prefer annual votes. This may lead to unintended consequences if shareholders agree with Exxon's recommendation.
As pay votes become routine, shareholders are much more likely to be lulled into complacency in all but the most egregious circumstances by annual votes (as they are now with annual votes for auditors) than if a company has a vote every three years, which would likely attract more attention.
Pushing for an independent board chair
Every year, Monks introduces a proposal for an independent chair. And every year, Exxon tries to get the proposal knocked off the proxy, Monks says.
Monks says that having an independent chair is important for all companies but especially important for one with the size, scope and power of Exxon. "You can't have a person [the chair] evaluating himself [as CEO]. You can't mark your own exam papers. It's wrong," he says.
Lobbying and political spending
Also on the proxy this year is a shareholder proposal requiring ExxonMobil to offer additional transparency in its lobbying and political spending.
"ExxonMobil has made some progress in its disclosure…. But the trade association disclosure remains a persistent gap," says Valentina Judge, associate director at the Center for Political Accountability (CPA), which was not involved with the resolution this year.
Exxon argues against the transparency proposal in its proxy discussion to shareholders but omits any discussion of the requirement for disclosure of its trade association spending. The company would not provide further comment. Given the vast sums at the company's disposal, this issue is critical.
And so it goes. Exxon has argued against all the other shareholder proposals as well, including a "policy to explicitly prohibit discrimination based on sexual orientation and gender identity"; a policy articulating Exxon's "respect for and commitment to the human right to water"; "a report discussing possible long term risks to the company's finances and operations posed by the environmental, social and economic challenges associated with the oil sands"; a report of "known and potential environmental impacts" and "policy options" to address the impacts of the company's "fracturing operations"; a report of recommendations on how Exxon can become an "environmentally sustainable energy company"; and adoption of "quantitative goals … for reducing total greenhouse gas emissions."
Monks points out that Exxon has still not settled lawsuits from the Alaskan spill -- and he sees danger on the horizon related to the company's development of the Marcellus shale.
In a recent blog post, Monks wrote that Exxon is "the most powerful commercial entity in the world," with a "scope [that] is manifestly larger than that of any single country in which it operates, including the United States." "There are neither transnational laws nor enforceable regulations affecting companies of the scale of Exxon."
That's why, Monks argues, shareholders have a role to play that regulators cannot because they, like the company itself, "transcend global and political boundaries."
But are shareholders ready to recognize that role? Will the annual meeting provide time for intelligent questions and thoughtful responses? We can only hope that Exxon's board members will ensure that will be the case.
Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://thevaluealliance.com), a board advisory firm.