Make love, not law – lawfare as warfare, or as unfair?

Exxon filling station (Image: ajay_suresh, CC BY 2.0, via Wikimedia Commons)

In the upside-down world of corporate governance, ExxonMobil has sued its shareholders. Well some, or maybe only one, of them. A small Dutch shareholder, Follow This, and Arjuna Capital, an investment adviser, initially brought forward non-binding shareholder votes for the annual meeting that took place on May 29, urging Exxon to reduce oil and gas production combat climate change. Exxon took Arjuna to court in Texas, even after Arjuna had withdrawn the resolution.

Exxon seems to want the US Securities and Exchange Commission to stop allowing such resolutions at all.

[Update 18jun24: A judge in Texas dismissed Exxon’s suit, saying that Arjuna had said definitively that it would not file that motion again. It had thus “eliminated any case or controversy”.]

This is the same oil giant that was forced to take on directors with an environmental focus in 2021, in the fabled case when another small investor, Engine No. 1, mobilised a coalition to back its resolution.

It’s “lawfare”, not “warfare”, but it’s pretty much the same thing, just with a quieter sort of noise, and with bank accounts scorched, not the earth. Not yet.

Exxon isn’t the only one pursuing such a tactic. At a recent conference of academics and practitioners, a lawyer working with investor groups praised lawfare in the other direction. Activist investors are bringing increasing firepower into action. They’re now suing companies and their boards of directors when they fail to take environmental issues seriously. (The conference operated under “Chatham House rules”; you’re allowed to report what someone said but not who said it.)

For shareholders to sue the company whose shares they own looks like aiming their artillery at their own pocketbooks. Not so, the lawyer assured the audience. These are not class action suits, he explained, in which all shareholders would receive the (dubious) benefit, minus a large bit for the lawyers.

No, these suits come from a single shareholder who stands a chance of extracting “damages” from the company at the expense of all the others.

Those other shareholders could aim and fire at their opponents, of course. But all’s fair in love (of profits) and lawfare. So, the next time those other investors might just be convinced that joining less costly shareholder resolutions, like the one Engine No. 1 used, might amount to a temporary ceasefire. Time to catch breath, clear the air of the smoke (and carbon emissions).

But Exxon didn’t stop with levelling its arsenal against the little guys. It took aim as well as one of the largest pension funds in America, the California Public Employees' Retirement System, known as Calpers, accusing it of playing politics by voting against the management’s slate of directors this year. Another political showdown between “red” Texas and “blue” California.

At the annual meeting, a motion seeking to force the board to link executive pay to greenhouse gas reductions was soundly defeated, by 1.7 per cent in favour and 98.3 per cent against, a more lopsided margin than the votes for election of directors.

The emergence of lawfare, especially in the context of climate issues for listed companies, is a tricky one. On the one hand, public policy in many countries has been trying to nudge investors to become more engaged with the companies in which they invest. This type of investor stewardship (ISG, 2017; Nordberg, 2024; Wong, 2015) involves dialogue; negotiation, not combat; mutual appreciation of issues. But there are a lot of impediments along the way, not least that stewardship is often seen as involved loyalty through developing a sense of psychological ownership alongside the legal ownership of the shares (McNulty & Nordberg, 2016).

If lawfare pits one set of shareholders against the others, and the response is that the territory being fought over itself starts firing back, how will we ever get to dialogue? And this:

And where’s the fairness in lawfare?

Let’s be fair: Investor stewardship hasn’t developed into the harmonious approach to resolving tension across the boundary between big oil and big climate. Maybe battle is the only strategic option left.

Like a lot of issues in our current state of political governance, this bit of corporate governance hasn’t ended the conflict, or even allowed us to see a path to its resolution. It’s …

ISG. (2017, January). Corporate Governance Principles For US Listed Companies. Investor Stewardship Group policy statement. Retrieved from https://www.isgframework.org/corporate-governance-principles/

McNulty, T., & Nordberg, D. (2016). Ownership, Activism and Engagement: Institutional Investors as Active Owners. Corporate Governance: An International Review, 24(3), 346–358. doi:https://doi.org/10.1111/corg.12143

Nordberg, D. (2024). Governing corporations with ‘strangers’: Earning membership through investor stewardship. Philosophy of Management, 23(2), 85-107. doi:https://doi.org/10.1007/s40926-023-00237-4

Wong, S. C. Y. (2015, September). Is Institutional Investor Stewardship Still Elusive? Northwestern Law & Econ Research Paper No. 15-16. Retrieved from http://ssrn.com/abstract=2654229