Engine No. 1: The little hedge fund that shook Gargantuan Oil
Engine No. 1, a hedge fund correct six months inclined, manages around $250 million in sources. It owns a meager 0.02% of ExxonMobil, the oil and gasoline enormous that’s value $250 billion.
Yet the hedge fund, instigating an activist advertising campaign to flip ExxonMobil a long way flung from fossil fuels, managed to get two of its nominees elected to the ExxonMobil’s board on Wednesday—great against the firm’s wants. A third might perchance maybe maybe well also observe, as soon as excellent votes are counted.
Searching support, it’ll almost seem as if Engine No. 1 used to be space up expressly to pause these adjustments in ExxonMobil’s board. Ever because it used to be founded in December, Engine No. 1 has been calling on ExxonMobil’s shareholders to “Reenergize Exxon”—the name of its advertising campaign, total with slick net situation. The fund’s arguments had been strategic in assign of ideological: that the firm’s returns were consistently disappointing shareholders over the final 10 years, and that it wanted recent direction in a decarbonizing world.
The past decade seen ExxonMobil’s total shareholder returns—dividends included—languish at -15%, compared to the 271% return the S&P 500 equipped. Sticking to oil and gasoline, and now no longer exploring spruce vitality selections, used to be an “existential possibility” for ExxonMobil, Engine No. 1 argued. (Engine No. 1 didn’t reply to a inquire for comment.) On Dec. 7, the hedge fund sent ExxonMobil a letter record its four nominees for the board. “It is time,” the fund wrote in the letter, “for shareholders to weigh in.”
Who is in the support of Engine No. 1?
Engine No. 1 used to be space up by veterans in the funding industry. Chris James, the fund’s founder, labored for a fluctuate of funding companies starting in 1991, and co-founded Andor Capital Management in 2001, the assign he tended to the fund’s tech portfolio. Andor survived handiest till the financial shatter of 2008, when the company shut down and returned its $2 billion in sources under administration to traders. By then, even supposing, James had lengthy split with Andor, developing the San Francisco-basically based mostly mostly Partner Fund Management in 2004 with about $430 million in sources, to make investments in worldwide equities.
Even supposing James began his profession as an analyst, he transformed gradually genuine into a mountainous-image investor. One evaluate boom, written in 2011, remarked: “Mr. James is now no longer intimately concerned relating to the essential points of the backside up evaluate task… [He] will generally plan solutions that are pushed from the backside up, in particular after they attain now no longer line up along with his high down views.”
In 2014, Partner invested $96 million in Theranos, the blood-testing startup. No longer lengthy afterwards, Theranos’ science came into inquire, and in 2016, Partner sued Theranos, claiming that the fund had been fooled into parting with its cash “by scheme of a chain of lies, self-discipline subject misstatements, and omissions.” The next one year, Theranos and Partner reached a $43 million settlement out of court docket.
At its high, in 2018-19, Partner managed virtually $6 billion in sources. By March 2020, earlier than the pandemic began, Partner’s sources had dropped to around $3 billion.
The activism in the support of Engine No. 1
James funnels his philanthropy by scheme of the James Family Foundation, which endows scholarships and helps conservation and environmental evaluate programs at a different of affirm universities. James has additionally chaired the board of Tipping Point, a firm that raised funds from San Francisco’s correctly off elite to tackle disorders of power poverty in the Bay Dwelling. He used to be a donor to Neighbors for a Better San Francisco, a PAC that funded metropolis official candidates who ran against progressives. Final one year, the PAC unsuccessfully antagonistic a referendum to double valid property transfer taxes on sales of $10 million or larger.
In an interview with Bloomberg, James acknowledged that Engine No. 1 used to be born out of his attempt and delivery a unique coal mine in the mid-2000s, end to his fatherland of Harrisburg, in Illinois. He seen the tag of coal drop and the marketplace for coal withering, he acknowledged. It perceived to display radical shifts in the employ of vitality. “That used to be an genuine eye-opening boom,” James acknowledged.
When he began Engine No. 1, James employed Charlie Penner to stream the fund’s “energetic engagement observe”—to, in other words, lead the price in activist investing campaigns equivalent to the one at ExxonMobil. Penner had labored previously at Jana Partners, a 20-one year-inclined company that is heavily interventionist in the companies it invests in.
In at the least one occasion, Jana pressed for adjustments that had been extra socially to blame than strategic. In 2018, Jana teamed up with the California Command Lecturers’ Retirement Contrivance and, utilizing their blended $2 billion-value of possession in Apple shares, pushed Apple to abet fogeys restrict their young other folks’s employ of telephones. The identical one year, when Jana space up a unique fund managed in piece by Penner, it included on its advisory board Sister Patricia Daly, the “nun with a fund“—a vocal member of a coalition of faith-basically based mostly mostly traders. Daly has, in narrate, focused ExxonMobil, one of her coalition’s portfolio companies, over its “criminal responsibility, or at the least awful integrity, connected to its data relating to the native climate impacts of its core alternate practices,” as she wrote in a letter in 2016.
Penner led the minor shareholder riot against ExxonMobil in identical model. He sought the increase of big asset administration companies equivalent to Vanguard and BlackRock, which together accumulate roughly 15% of ExxonMobil. However he additionally change into support to his inclined ally, the California Command Lecturers’ Retirement Contrivance, as correctly as to the Church of England and the Unique York Command Celebrated Retirement Fund. The latter two organizations had already urged shareholders through the final annual assembly to persuade ExxonMobil to tackle the native climate emergency. “Should that you simply would be able to maybe additionally get Exxon to alternate,” Penner advised Bloomberg, “each person else in the industry has to hear.”