Exxon, Rockefeller family , talk future , not pockLast week, the Rockefeller family made an historic challenge toExxon Mobil Corp., the company founded by John D. Rockefeller in 1870(as Standard Oil), and in which dozens of family members still holdstock. The challenge came in the form of a
shareholder resolutionto require an independent chairman of Exxon's board of directors, sothat the company can better maximize long-term shareholder value in arapidly changing energy environment.
Making the board chair independent of the CEO may seem a technicalgovernance matter, but it has great significance. The family arguedthat having a board that was independent from the day-to-day operationsof company management would enable Exxon to better assess the risks andopportunities that are altering the energy and environmental landscape— and that Exxon might alter its business strategy based on a differentset of assumptions than those under which the company has beenoperating.
Research conducted by my colleague Ron Pernick and me at Clean Edgein 2006 looked into Exxon and its set of assumptions about our energyfuture. Exxon has long adopted a stance that renewable energy will be anegligible part of the energy mix for the foreseeable future, and thatoperational and market conditions will remain static and relativelyunchanging. At the time, we wondered, given the realities of ourincreasingly volatile global energy marketplace — growing demand,declining production, global security issues, climate change, risingfood costs, and other business, social, and environmental challenges —whether Exxon's narrow view would leave the company at risk fromcompetitors and less able to seize new opportunities and adapt toshifting market conditions.
We found some of Exxon's assumption flying in the face of the facts— for example, that only 2% of the world's energy will come fromrenewable sources by 2030, despite estimates by the Renewable EnergyPolicy Network that already attribute 4% of the world's energy to newrenewable sources. The company consistently underestimates the annualgrowth of solar, wind, geothermal, biofuels, and other alternativeenergy resources. Moreover, company statements — as underscored by itsactions — is that they are waiting for a major breakthrough inrenewable energy technology, at which point it will deploy itssignificant resources in bringing that technology to market.
There is good reason for the Rockefellers and other shareholder tobe concerned about this strategy. By placing nearly all of its emphasisand focus on oil and gas, Exxon risks losing out on the new markets forrenewables and places the company strategy within an outdated model ofenergy markets. As the renewable energy market has developed, it hasbecome clear that our energy future won't be based on a singlebreakthrough, but on dozens, even hundreds, of smaller ones — newtechnologies, products and services, and business models. Everyone fromGE to Goldman Sachs to Google seems to get this, and are investingaccordingly.
So, diversifying investments more aggressively into clean-energyresearch and development would position Exxon to be better able toadapt to changes, capitalize on anticipated carbon trading schemes andexpected developments in the regulatory environment, hedge its bets,and build new business opportunities as alternatives to petroleum-basedtechnologies gain market traction.
Instead, the company seems to be biding its time, waiting forrenewable energy markets to develop rather than jumping in to helpbuild them. As a result, rather than taking a proactive role inadvancing these technologies, Exxon runs the risk of either not havingsufficient access to a viable partner when it finally decides to enterthe renewables market in a substantive way, or of arriving too late andlosing first-mover advantage, if not significant market share. Most ofthe other majors — BP, Chevron, Shell — have at least some robustrenewable energy programs in place — wind, solar, geothermal, fuelcells, tidal power, and more — albeit relatively small ones in terms ofrevenue. But at least they're gaining experience and partners in therenewables space.
There are billions of dollars being invested by some pretty smart people in the notion that there's a Moore's Lawof energy — that is, that innovation can make clean energy bothubiquitous are cheap. They're betting that energy can follow the pathof microprocessors, hard-disk storage, and wireless telecommunications,where costs have plummeted as technology has steadily improved — andcarbon can, in effect, be taken out of the energy equation. If evensome of these bets pay off, Exxon's assumption — that oil and naturalgas will remain the dominant energy sources for decades to come — couldput them at a competitive disadvantage. Hence, the interest oflong-term, multi-generational shareholders like the Rockefeller family.
It doesn't take much to roil the markets, as Exxon found out last week. At the same time that it revealed gusher-level profits,it's stock took a dive. The reason: Exxon's oil production was down 10percent, continuing a yearlong decline. It's unclear whether thecompany will continue to have difficulty finding sufficient newreserves to replenish the billions of barrels it is pumping out of theplanet, but if the trend continues, Exxon could find itself in trouble.
It's not too late. By changing strategies, Exxon stands to capture abetter foothold in the evolving energy market and a significantpercentage of revenues that would otherwise be lost.
Experts believe that the most viable technologies for the near term— such as cellulosic ethanol, next-generation solar technology, andplug-in hybrid technology, along with copious amounts of energyefficiency — represent the future of energy. With the likelihood ofsuch events as a carbon tax or carbon caps within the next decade, theconditions for market acceptance of lower-carbon solutions become moreattractive. The concept of negawattprograms is gaining traction, with power companies investing inconservation (average cost of $350/kilowatt) over coal($1,000/kilowatt). The emergence of small, lightweight, long-runninglithium-ion batteries has helped create a market for notebookcomputers, cell phones, and other portable devices. Efforts to scalethat technology for use in automobiles could do for that industry whatimproved batteries did for computer and phone companies, building amarket for hybrid, plug-in, or electric vehicles with great efficiency,acceleration, and range — at the same price or cheaper than today'sgas-powered vehicles.
It's not just technologies that are changing. So are markets. Forexample, until relatively recently, the distribution of gasoline hasbeen controlled by entities with an interest in keeping alternativesout of the infrastructure — the oil companies. But Wal-Mart and otherindependent retailers with large fuel distribution networks are largelyimpartial to the type of fuel they carry, and their market reach toconsumers can accelerate the growth of alternative products andinfrastructure. Large fuel purchasers like the Defense Department areactively creating conduits for the market acceptance of oil and gasalternatives by encouraging economies of scale and increased R&D.There are other disruptive technologies on the horizon that could gainmarket acceptance, further dampening demand for oil and gas. By waitingfor a single "breakthrough" technology, Exxon is overlooking that thissector is engaged in an iterative process that is building a newapproach to energy applications; waiting for the perfect solution is apotentially dangerous approach, from a business strategy perspective.
The modern history of innovation suggests that being big is noassurance of survival. Consider that six of the thirty multinationalsincluded in the Dow Jones Industrial Average 20 years ago are gonetoday (Allied-Signal, American Can, Bethlehem Steel, Texaco, UnionCarbide, and Woolworth), and a seventh, AT&T, exists in name only,the original entity having been scattered into multiple companies.Several others — Eastman Kodak, IBM, Sears, and Westinghouse — lookradically different today than then. In many industries, the dominantplayers not that long ago are gone. Burroughs, Data General, DigitalEquipment, NCR, Sperry, Univac, Wang — all leading computermanufacturers of the 1970s and 1980s — are cases in point.
The Rockefellers' efforts are aimed at ensuring that Exxon doesn'tfollow this path, and that it will overcome its stubborn, decidedlynon-green, outlook toward one that recognizes the realities of a worldin which carbon and climate become significant business considerations.
Will the strategy work? The odds are long, but we'll know more afterthe company's annual meeting on May 28. If history is any indicator,Exxon is likely to downplay dissent in favor of its own hellbent course.