Hedge Funds Are Missing a Very Obvious Target

Employees manufacture a Dodge Viper vehicle on the production line in Detroit, Michigan. (Photographer: Jeff Kowalsky/Bloomberg)

Hedge Funds Are Missing a Very Obvious Target

The little hedge fund that took on Big Oil should make Detroit its next target. The auto industry is ripe for a shakeup.

Engine No. 1, the six-month-old activist fund with around $240 million in assets, went up against Exxon Mobil Corp., the oil heavyweight with a $258 billion market capitalization — and won. On Wednesday, the investor expanded its presence on the board to three seats, giving it more sway against the company’s nine other directors. There wasn’t even any traditional hedge fund-style stake-building involved: It managed to create a lot of noise and instigate change with just 0.02% ownership. 

This wasn’t a fringe, tree-hugging-meets-highbrow-finance activist campaign, either. Engine No. 1 made a real business case for companies to quickly get in line with greener and cleaner ways, no matter what power they exert on markets. Exxon’s other, far bigger shareholders like BlackRock Inc. and State Street Corp. also got on board.

For all the talk of climate change and transitions, the biggest corporate carbon emitters aren’t doing enough, nor are they giving shareholders much confidence about their plans for the future. In that sense, the Exxon shakeup serves as a warning to its peers.

Automakers should also take note. Engine No. 1’s assessment sounds all too familiar: a large company resistant to change, with all the airs and graces of being ESG-friendly while eroding shareholder value. Car companies like General Motors Co.  and Ford Motor Co. have been hiding behind the flimsy veil of ambitious targets and  big spending on electrification, with no disclosure or real strategy to cut carbon emissions. While investors are asking the right questions, carmakers are resisting.

According to its 2021 proxy statement, General Motors’ board recommended knocking down the one shareholder proposal that could have held its executives accountable for some climate change-related goals through compensation. “A remuneration structure that links compensation awards with progress in achieving such [climate related] targets,” they said, is “a governance best practice for reducing climate risk.”

The proposal also noted that while the company is aligned with the the Paris Agreement’s goal to limit global warming closer to 1.5 degrees Celsius, its current trajectory is moving toward a level well above 2 degrees. The proposal added that General Motors has continued to increase the size of its large sport utility vehicles and trucks.

That brings us to the composition of the board. Much like Exxon, there is no shortage of well-credentialed directors at General Motors or Ford. But few of them have obvious experience in new energy or the environment. Part of Engine No. 1’s biggest accomplishment was bringing on members with the right expertise. It wasn’t because existing members were unqualified; they just weren’t going to be evangelists of a fast-changing future that has little tolerance for lip service or dirty emissions.

General Motors seems to recognize what needs to be done. In its latest proxy statement in April, Chairman and Chief Executive Officer Mary Barra said that 2021 “is a tipping point for EVs and an inflection point on sustainability, inclusion, and growth,” adding that “the Board has continued to evolve its membership to ensure it has the right mix” of skills and perspectives.

To that end, the company added two new directors: Meg Whitman, a technology expert who ran Hewlett Packard Enterprise and eBay Inc., among her other accomplishments, and Mark Tatum, the deputy commissioner and chief operating officer of the National Basketball Association. Admirable as those choices may be for gender and racial diversity goals, neither of them seem to tap the core of the issue: the rapidly changing industry and landscape.

At Ford, meanwhile, board seats aren’t necessarily indicative of deep corporate commitments. Alexandra Ford English, daughter of Executive Chairman Bill Ford Jr. and great-great granddaughter of Henry Ford, sits on the board of the hot electric SUV startup Rivian Automotive. But that’s more because the legendary American carmarker put $500 million into the company in April 2019, and an additional equity investment eight months later. The following year, the duo canceled plans to build an all new electric vehicle based on the startup’s platform.

In its annual filing, Ford noted that regulations aimed at cutting emissions, increasing fuel efficiency “and other factors that accelerate the transition to electrified vehicles, may increase the cost of vehicles by more than the perceived benefit to consumers and dampen margins.” They don't seem all that incentivized to make a deep push, and haven't made capital allocation particularly efficient or transparent.

The climate transition is unprecedented, and no one knows quite what it will look like. Whatever shape it takes, it’s undeniable that going green will require preparation and the right kind of expertise, not just money-slinging and talk. For investors, that means it’s time for a different, more aggressive tactic.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.

©2021 Bloomberg L.P.

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