Exxon’s Auto-Voting Plan: Implications for Shareholder Activism and Considerations for Companies

This week, the U.S. Securities and Exchange Commission issued a no-action response stating that it would not recommend enforcement action against Exxon’s proposed auto-voting plan for retail investors. Under the plan, Exxon’s retail investors (including retail investors who beneficially own Exxon shares through a bank, broker or plan administrator) may elect to have their shares automatically voted in accordance with the board’s recommendations. Shareholders who opt into the auto-voting plan can later opt out by either casting their vote at a shareholder meeting or revoking their auto-voting instructions. Exxon intends to issue annual notices to its retail holders reminding them of their enrollment in the auto-voting program.

Exxon’s plan tackles a long-standing dilemma facing companies with a large retail shareholder base. Most retail shareholders do not vote their shares, but when they do, they tend to overwhelmingly vote in favor of management. While the retail base of most large public companies ranges from 15% to 25%, the retail stake in legacy companies that went public decades before the rise of institutional investing can be as high as 40%.

The impact of a large retail base can be particularly consequential in activist campaigns, where a combination of a large retail base coupled with a relatively small actively managed base can meaningfully tilt the outcome of a proxy contest in favor of the company. However, retail holders can be difficult and costly to reach during proxy contests (and for the most part, have been overlooked by both companies and activists in favor of institutional investors). By attempting to “lock in” retail investors in advance, Exxon’s auto-voting plan aims to tilt the outcome of future shareholder proposals or proxy contests in the company’s favor, and appropriately so, given the high level of support retail holders generally have had for incumbent boards of directors.

We set forth below some considerations for companies as they evaluate whether to adopt similar voting plans for their retail investors.

1. Relative Influence of Proxy Advisors. For most public companies, a significant portion of the shareholder base comprises institutional investors whose voting decisions are influenced by proxy advisory firms. Notwithstanding ongoing regulatory efforts to curtail the influence of proxy advisors, proxy advisors continue to wield significant influence and tend to support dissident slates in approximately half of all proxy contests, making them a critical source of support for activists. By contrast, the largest passive investors generally support management. The growth of pass-through voting programs adopted by passive investors, allowing clients to vote in accordance with proxy advisor policies may only further increase the influence of proxy advisors. While securing the support of retail investors can be helpful, in many situations, retail votes may not offset the votes of investors who vote in accordance with proxy advisor recommendations.
2. Retail Base Stability and Composition. Retail investing has seen noticeable growth in recent years amid the proliferation of online trading tools and social media platforms discussing trading strategies. Retail volumes have doubled during the past decade with more growth expected. Retail investing has also become more volatile, with a growing list of companies finding themselves caught in meme stock trading. An unstable retail base can make it complex, time-consuming and costly to administer an auto-voting plan. While an exception rather than the norm, a retail base with a high level of churn may also be an indicator of a predominance of growth-oriented and/or short-term retail shareholders who could be more inclined to vote with an activist instead of supporting management. For example, activist investor Ryan Cohen successfully rallied the support of retail investors for his campaigns at GameStop and Bed Bath & Beyond.
3. Potential Uptake Rate. The advantage of Exxon’s auto-voting plan is that it provides ample time for Exxon to secure the support of retail investors unlike in proxy contests where even concerted proxy solicitation efforts tend to only attract a fraction of the overall retail base. However, Exxon’s auto-voting plan may still prove challenging to administer as retail holders can be difficult to reach and disinclined to vote. Many retail holders do not vote because of the complexities of the proxy voting process. These same retail holders may find an auto-voting plan to be similarly complex and fail to opt in.
4. Cost Considerations. An auto-voting program can be costly to administer both in absolute terms and relative to the benefits reaped. The decision whether to adopt an auto-voting plan should take into consideration factors such as the size of the company’s retail base, overall shareholder base composition, historical voting patterns among the company’s retail investors, likely receptiveness of retail investors to an auto-voting plan and the ongoing costs and infrastructure required to administer the plan.
   
   Exxon’s auto-voting plan can be a useful tool for preemptively mobilizing a supportive but difficult-to-reach retail base. This plan is likely to be most effective at companies with a large and stable retail shareholder base, such as legacy companies with income-oriented investors. For many other companies, it remains to be seen whether an auto-voting plan will have a meaningful impact in the context of shareholder activism.
   
   The best defense against activism (other than strong performance) remains staying closely attuned to shareholder sentiment and being ready to respond when an activist emerges.

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