A Target For No Reason?

According to Proxy Monitor, Exxon Mobil (NYSE:XOM) was the most frequently targeted company by activist shareholders in 2012. In fact, when both social policy and corporate governance resolutions are taken together, by November 2012 the company received 83 resolutions by various types of filers and for a plethora of issues. In terms of popularity as a target, Exxon Mobil outperformed its industry competitors ConocoPhillips (NYSE:COP) and Chevron (NYSE:CVX) who too received a number of resolutions yet by far not as many as Exxon Mobil (ConocoPhillips: 47; Chevron: 46).

Why is it so?

Assuming that it’s company characteristics that drive targeting decisions one would suspect that it’s the companies that perform poorly on some dimension of corporate financial and/or social performance that receive the highest number of resolutions. Comparing Exxon Mobil with its two competitors, however, invalidates this conjecture. In terms of financial (stock) performance all three are conservative stocks that outperformed the S&P 500 index over the period of last ten years. In 2012, Exxon Mobil even outperformed its competitors (see chart). In terms of social performance, a look at the KLD measure reveals a similar picture: while all three companies performed poorly on some of the KLD-dimensions Exxon Mobil didn’t do as badly as to explain why it received the double number of resolutions its competitors got. At the first sight, it seems there’s no apparent reason why Exxon Mobil received this high a number of resolutions relative to its competitors.

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Exxon, ConocoPhilips, Chevron and S&P 500 Index Peformance by Nov/2011-Nov/2012 (source: ExxonMobil IR stock chart calculator)

Nonetheless, managing activist shareholders, dealing with resolutions and the SEC, negotiating and finding common ground, compromising, fending off attacks that threaten the company’s reputation may eat up resources and be very cumbersome. With the upsurge of the shareholder rights movement and the increase in shareholder activism, therefore, companies have become eager to assure themselves of a continued support of their investors. In fact, as some have argued, companies seem to be striving towards attracting  The Perfect Shareholder Base, a mix of shareholders that fit the company’s strategic direction and that are most likely to be supportive of management and its ideas. Under these circumstances, gaining a thorough understanding of one’s shareholder base becomes pivotal.

Classifying Shareholders

To this end, companies, corporate governance consultants and advisory services use various classifications systems to pigeonhole shareholders. Underlying this endeavor, clearly, is the desire to predict shareholders’ behavior. Practitioners, as an example, use investment style as a criterious to classify shareholders  into growth, value, GARP or index investors. Researchers, on the other hand, typically use classifications systems that predict shareholder behavior and involvement based on proximity and distance between shareholders and the company (classification criteria include pressure sensitivity, portfolio turnover rate, risk disposition).

However, while useful for predicting when poor performance will lead to targeting and when not,  these typologies are not helpful for explaining why good performing companies and companies that do not underperform their competitors become targets of activist investors. Investor pressure sensitivity, portfolio turnover, and risk disposition notwithstanding, something other than performance considerations seem to underlay much of shareholder activism. One reason why this is the case is related to activists’ objectives and the way they define success in targeting. Some activists use targeting in order to achieve very specific changes in very specific firms. Others, however, pursue broader objectives. They use targeting as a means to achieve field-level changes, i.e. to change society. When this is the case, targets become amplifiers of activists’ messages. It follows, that company size and visibility rather than performance considerations alone become predictors of shareholder targeting. Among the three petroleum refining companies mentioned above, Exxon Mobil is the largest (in terms of revenue, number of employees, and market capitalization) and most visible company. One suspects this is the reason why it continues to be the more popular target of activist investors. This insight bears important implications for the choice of tactics (e.g. buffering vs. bridging) used for dealing with activists. It also determines the extent to which investments into reaching agreement and finding common ground are worthwhile. The crux, then, becomes finding a typology for discriminating between firm-level and field-level changers, i.e. those to whom targeting is an end in itself and those to whom targeting is merely a means to ends.