Exxon Texas Move Shows Shareholders, Not Cynics, Are in Control

Exxon Mobil Corp.’s proposal to reincorporate in Texas from New Jersey is a classic type of corporate governance plan: The board considers a transaction, discloses its rationales and process, and puts the decision to its shareholders.

It’s a classic process that works because shareholders and directors are often aligned. Both desire management to increase the economic value of their common enterprise. Shareholders elect directors who take the initiative to run the corporate enterprise. When a shareholder vote is required, the directors provide the information to allow the shareholders to make an informed vote.

The Cynical Paradigm

Nonetheless, many activists, academics, and governance consultants appear to assume that any win for management must be contrary to shareholder value. A growing cottage industry of governance critics presents itself as a proxy for shareholder interests, yet routinely rejects the outcomes of shareholder votes when they conflict with its preferred policies.

For example, a recent commentary developed what it calls the Leopard Paradigm, which says that “elites” don’t “resist change” but “adapt to formal reforms in ways that preserve substantive power relationships” to critique Exxon’s proposal, subject to shareholder vote, to reincorporate in Texas.

This so-called paradigm is simple cynicism. It assumes conflict where alignment is the norm, and that the only elites in corporate governance are directors and officers—not so-called shareholder advocates who fundraise on their ability to push social and other changes often not supported by shareholders broadly.

The Leopard Paradigm assumes that shareholders who vote with management have been captured rather than persuaded. The theory has been applied to criticize Exxon’s proposal on the grounds that Texas permits decisions that Exxon’s board has decided not to make. Rather than trusting that shareholders can and do “read the fine print,” the commentary implies that shareholders are disenfranchised when they vote to support the boards whom they already elected.

The Disclosure Reality

Concerns that Exxon could adopt thresholds concerning derivative litigation or shareholder proposals—thresholds that when voted on have been broadly supported by shareholders—ignore the fact that any future amendment of the bylaws by the Board is subject to the power of the shareholders of a Texas corporation to “amend, repeal, or adopt the corporation’s bylaws.” That is, management could act first, but long-term adoption of any option threshold in the Texas Business Organizations Code requires shareholder support.

Moreover, these concerns ignore the robust disclosure requirements governing Exxon’s reincorporation. The proxy statement rules under Section 14(a) of the Securities Exchange Act and Rule 14a-9’s anti-fraud provisions require companies to provide shareholders with material information necessary for informed voting decisions. Any misstatement or omission of material fact subjects the company and its officers to significant liability.

Who Really Benefits

Such concerns aren’t expressed for the benefit of the shareholders themselves, but the cynics who claim to speak on shareholders’ behalf without holding meaningful equity stakes. These parties have their own institutional incentives—publication metrics, litigation fees, consulting revenue—to perpetuate adversarial narratives.

If they truly believed in shareholder empowerment, they would respect how shareholders actually vote rather than, as some have, opposing governance reforms that give a voice to retail shareholders.

The cynics don’t ask about the costs that a small set of activists impose on companies—whether through litigation, such as that against Southwest Airlines for changing its “Bags Fly Free” policy, or through shareholder proposals that try to pressure companies into engaging in contested political controversies that can alienate customers and investors.

Nor do they ask whether shareholders should want management to spend time and corporate resources responding to professional activists instead of growing the enterprise—or consider the history—from Evelyn Y. Davis’ magazines to ISS’ consulting services—of shareholder advocates who use the threat of distracting proposals to pressure corporations into buying their other services.

In light of these concerns, Texas authorizes companies to adopt thresholds for shareholder proposals. Despite claims that this excludes retail shareholders, research acknowledges that the shareholder proposal process has been captured by “a professionalized ecosystem of advocacy organizations.”

That is, shareholder propoals aren’t typically driven by retail shareholders exercising their voice in support of economic growth; they’re made by ideological combatants who use Rule 14a-8 as a tool to push their policy agendas. Texas’ thresholds, which Exxon isn’t adopting, don’t silence ordinary investors, who seldom file shareholder proposals.

The law protects shareholders as shareholders, allowing them to work together and establish thresholds intended to show that proposals reaching the ballot have already demonstrated broad support from shareholders and not outside advocacy shops .

Toward Informed Choice

The irony of the Leopard Paradigm critique is that it embodies precisely the paternalism it purports to condemn. Critics assume shareholder support for reincorporation is a sign of manipulation or failure to read the fine print.

But perhaps shareholders read the fine print and concluded that Texas incorporation better serves their long-term interests, given the state’s statutory corporate law, business court, and ability to adopt thresholds for shareholder proposals and derivative litigation. Perhaps they concluded that some activist-driven shareholder proposals generate more headlines than value, and they trust the boards they elected to use the tools available under state law in a responsible and thoughtful manner.

Corporate governance commentary should acknowledge that reasonable shareholders may conclude that certain jurisdictions, litigation environments, or governance structures better serve their long-term interests, even when those conclusions differ from academic or activist orthodoxy.

The goal should be informed shareholder choice: ensuring that all shareholders, including retail shareholders, have access to accurate information and meaningful voting opportunities. The real leopards are the cynics who use the language of shareholder rights to attack the choices that shareholders collectively make.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Christopher Babcock is president of the Alliance for Corporate Excellence and a partner in the Dallas office of Foley & Lardner, where he serves as co-chair of the Texas Corporate Governance Team.

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