Engine No. 1 and Elliott Advisors each invested millions of dollars to do careful and in-depth analyses prior to launching their campaigns to improve the performance of ExxonMobil and GSK, respectively. While Engine No. 1’s campaign has been successfully concluded, Elliott’s is still in its fairly early stages. Nevertheless, some insights can be gained by studying the letters which publicly launched each campaign. They reveal five elements of activist stewardship. They also raise five important questions every board member needs to be asking her or his self.

The proxy contest campaign against the Houston-based oil and gas giant ExxonMobil by the new activist investor Engine No. 1 continues to receive attention and accolades and deservedly so. With a tiny investment of $40 million but with strong support from CalSTRS, followed by CalPERS and Legal & General Investment Management and other major asset owners and asset managers, Engine No. 1 successfully placed three of its four candidates on the board of directors.

From its earliest days, in January Colin Mayer and I were optimistic about its prospects. I wrote about the campaign as it evolved, starting with ExxonMobils’ Magical Mystery Tour for its investors. Not long after I saw A Bad Moon Rising for the company, yet ExxonMobil bravely responded with six cute fables inspired by Aesop it prepared in advance of the annual shareholder meeting on May 26, 2021. The annual meeting itself was a well-choregraphed play in three acts, produced, directed, and starred in by Chairman and CEO Darren Woods. Following the meeting, ExxonMobil’s shareholders cheered Here Comes the Sun!

A more recent campaign, publicly launched on July 1, 2021, is the one by the large and well-established activist Investor Elliott Advisors. It is focused on the London-based global healthcare company GSK, in which it has made a multi-billion-pound investment. As expected, the British press is following the story closely, albeit in dramatically varied tone. “It roars out a fire and brimstone sermon” declared Jim Armitage of the Evening Standard who the next day called it “an excoriating open letter to investors.” Alistair Osborne of The Times was less impressed calling it a “damp squib” and saying with an air of disappointment that “for a hedge fund with a bullying reputation, Elliott’s missive was almost subtle.” These two reactions reveal contrary interpretations of the rhetorical style of Elliott’s letter.

I have written more generally about the different reactions to these two campaigns. Investors and others concerned about climate change have been almost universally positive about the hard-hitting ExxonMobil campaign driven by people with backgrounds as traditional activist investors, investors who are often seen as in pursuit of profit no matter the broader long-term costs to shareholders and other stakeholders. The Elliott/GSK story is still evolving but what is clear is that Elliott is taking a much softer approach, too soft for some, and the outcome is unclear.

Yet both campaigns are examples of activist stewardship, which Kirsty Jenkinson, Aeisha Mastagni, and I have written about before in this forum. These campaigns also suggest that we need to rethink some stereotypes of what are often referred to by many with moral derision as “activist hedge funds”—even when hedging has no role in their investment strategy. The Engine No. 1 campaign is regarded by many as a major contribution to “sustainability.” The Elliott Advisors campaign is being considered by many as a rather muted form of activist investing that lacks the traditional punch, although it falls within the boundaries of making money with no regard for or even at the expense of sustainability.

One only has to dig a little bit deeper into each campaign to see some striking similarities despite the differences in styles. This is revealed by reading the letters sent by Engine No. 1 on December 7, 2020 and by Elliott Advisors on July 1, 2020 to the board of directors of ExxonMobil and GSK, respectively. There are five elements these letters have in common. They point to an emerging model of activist stewardship that is focused on long-term returns and an appreciation of the close relationship between financial performance and sustainability.

Respect for the Past but Concern for the Future

Engine No. 1’s letter opens “No company in the history of oil and gas has been more influential than ExxonMobil Corporation (“ExxonMobil” or the “Company”), which is home to many of the industry’s most talented managers, operators, scientists, engineers, safety professionals, and other employees.”

Elliott states that “GSK is an important company within the U.K. and across the globe…making a positive impact on the lives of billions of patients and their families around the world. Its history dates back more than 300 years, over which GSK has pioneered revolutionary innovations in fields such as vaccines and HIV treatment. At its best, GSK provides lifelines to the world’s most vulnerable populations.”

Engine No. 1 then goes on to note (bold in the original) that “It is clear, however, that the industry and the world it operates in are changing and that ExxonMobil must change as well.” Engine No. 1’s concern is that ExxonMobil has failed to recognize the reality of the energy transition already taking place. While the company may be well-managed, it is managing in the past, not for the future. There are many companies in many industries that are not adapting quickly enough to the changing world around them

Elliott observes that “Despite the strengths of its people, its vaccines, and its drugs, GSK has a poor record of execution and value creation” and “Despite possessing strong businesses in attractive markets, GSK has failed to capture business opportunities due to years of under-management.” This is the opposite situation of ExxonMobil. What GSK does fits very well with what the world needs. It’s just not doing it very well. Again, there are many companies in attractive markets that are failing to take advantage of them due to poor execution.

The tone of both letters is polite and professional, yet candid. Neither uses provocative or inflammatory language. For example, Elliott could have said “poorly managed” instead of “under-managed” and Engine No. 1 doesn’t accuse ExxonMobil of being in climate change denial, even though they essentially still are despite their weak rhetoric to the contrary. Both letters are constructive and express the willingness to engage in a dialogue with management in the best long-term interest for the company and its shareholders. Something neither company appears to have done. The heated rhetoric which emerged during the Engine No. 1 campaign is due to the company doing everything in its power to resist, obfuscate, and deny the reality of its situation in hopes of thwarting the campaign. It failed to do so.

Time will tell the result of Elliott’s overture to GSK but has started on a more positive note. Unlike ExxonMobil, the company has already taken steps to address the performance issues by announcing that it will separate the very different pharmaceutical (New GSK) and Consumer Health (CH) businesses. Elliott is supportive of this decision but has suggestions for how this can be done most effectively to create the most value, potentially >45 percent more than the current market cap.

Poor Strategy Leading to Poor Capital Allocation Decisions

ExxonMobil’s strategy has been to continually drill for unneeded oil in the ground with capital expenditure (capex) plans of $180-250 billion from 2020-2025. Engine No. 1 points out that the company lacks “a Long-Term Plan to Enhance and Protect Value” and worries that while “ExxonMobil has a long history of industry-leading innovation” it could end up ceding this ground, “particularly as its iconic status is threatened.”

GSK’s strategy has flip-flopped, like selling its oncology business to Novartis in 2015 then re-entering it three years later through a $5 billion acquisition of Tesaro which resulted in a $10 billion drop in its market cap. GSK has underinvested in R&D, critical in the pharmaceutical business, and overinvested in “its fragmented and inefficient manufacturing base, high SG&A, and other non-R&D cost buckets.”

Both companies have continued to pay dividends they cannot afford due to their dismal financial performance. Elliott noted that “GSK has persistently paid a higher dividend than it could afford.” ExxonMobil’s record high debt levels (from at one point having no debt at all) has resulted in “market skepticism that it can maintain its current dividend.”

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