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Hedge fund manager who fought and won Exxon

Christopher James’ decision to fight one of the world’s largest oil companies began with a family dinner in 2019. Hedge fund manager’s school-age son asked how he could be considered an environmentalist if he invested in an energy company. James said he had a hard time explaining him.

“When I was listening to my story, I thought,’This really tears my hair,'” said one of his sons. “I had this look on my forehead wrinkled face. He didn’t buy it.”

Two years later, James persuaded Wall Street’s largest money manager to support a dramatic change in ExxonMobil’s board directors. Co., Ltd.

, The largest company in the United States, is a turning point in its commitment to more environmental, social and governance changes. He donated nearly $ 250 million to support the campaign and launch a new fund called Engine No. 1 LLC. The resulting shareholder vote, aggregated last month, secured board seats for three of his carefully selected candidates.

51-year-old James was an energy giant with little chance of making a difference. After making a name for himself between the dot-com boom and the bust, he ran a coal mine in Illinois and built a storage facility for use by oil and gas companies. But apart from work, he endorsed the cause of conservationists. The Exxon campaign provided an opportunity to match his personal values ​​with investment treatises. In short, oil giants will reduce their value unless they accept the move to renewable energy.

He benefited from good timing. Exxon was weakened with a loss of $ 22 billion in 2020, making it more vulnerable to investor concerns about shrinking profits and concerns about the company’s future.Black lock Co., Ltd.

Vanguard Group and State Street Global Advisors typically campaign or suspend activists as the largest shareholder in the market, but when big-money managers are pressured companies to change their practices. I got to his corner. According to data compiled by S & P Global Market Intelligence, the three managers work together to manage more than 20% of Exxon’s shares issued for investors.

James’ hedge fund plans to reduce the cost of projects that can lose money when oil and gas prices are low, readjust management incentives, and plan to invest in renewable energy. I asked for it. The photo shows the Exxon Refinery in Baton Rouge, Louisiana.


Photo:

Kathleen Flynn / Reuters

He also proved that change can be claimed without any of the usual fierce tactics activists employ to rush to raise stock prices. Instead, the engine No. 1 request list reads like a corporate sustainability report. In a December note to Exxon’s board, James’s fund reduced the cost of projects that could lose money when oil and gas prices were low, readjusting management incentives, and I asked the company to make a plan to invest in renewable energy.

“If Exxon is right to mitigate these effects, inventories should increase,” James said in an interview. “And maybe Exxon has a future.”

So far, he said, the fund is making money from its investment. Currently, we are aiming to raise external capital and launch an exchange-traded fund. Exxon shares purchased by Engine No. 1 for about $ 36 have exceeded $ 62. Friday’s share price closed at $ 62.17. Rising oil prices have helped boost energy companies’ share in recent weeks.

“We are focused on implementing strategies for long-term success through the energy transition and strengthening shareholder returns,” said an Exxon spokesman. He said the company’s first-quarter results show that the strategies implemented before and during the pandemic are paying off.

Go west

James grew up in a place that once relied heavily on the energy industry. His hometown of Harrisburg, Illinois, prospered as a coal-mining region before it declined in the 20th century as jobs were depleted. James went to Tulane University in New Orleans, where he studied economics and knew where he wanted to go after graduation. It’s Wall Street. When refused by many investment banks and brokerage firms, he taped a letter of refusal to the wall of his room as a motivation to move forward.

After graduating from college, he was able to find a job in the hedge fund industry and toured several companies in New York City in the 1990s. He first experienced a tech stock cut when he attended a roadshow presentation by Netscape founder Marc Andreessen prior to the initial public offering of an internet search engine. “I got out of his meeting thinking that this internet would really be a big deal,” James said.

He decided to move to California. So he wanted to use the money he earned in the hedge fund world to invest in technology and open a winery with his friends on farmland in Sonoma County. A fellow tech investor, Dan Benton, was impressed with James’ contact with the industry and his relationship with company executives. “He was passionate, enthusiastic and impatient,” Benton said. Benton eventually asked James to work with him at his company, Peacot Capital.

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When the bubble burst in 2000, Ms. Benton and Ms. James reversed the course by selling some positions and betting that the value of other positions would decline. The two investors started a new fund together in 2001 and broke up in 2004. Later, James helped launch a new company, Partner Fund Management LP.

James sought to invest in other industries, including an unlucky bet on blood diagnostics startup Theranos. He turned to energy and founded a coal company called White Oak Resources, which operates a mining facility near his hometown. The venture brought new jobs to the region, but by the time White Oak Mine No. 1 opened, natural gas had taken over the role of coal as the United States’ primary source of energy. In 2015, James sold White Oak to Alliance Resource Partners...

He invested in storage facilities used in the oil and gas industry through Pelican Advisors LLC, a company that manages some of James’ assets.

James also faced opposition from his own activists. He manages a company seeking approval to build a grain warehouse in Wallace, Laos, and locals are complaining about the potential air pollution from dust emissions. They also expressed concern about the construction of a former plantation site where the remains of formerly enslaved African-Americans could sleep.

A spokesman for James said the project “provides the cleanest, safest and most efficient way to support US farmers,” and residents and civil servants to bring industrial development and employment to the region. Obtained support from.

There is no more “compartmentalization”

By 2019, James had a hard time squared his investment career with his other interests. He served on the board of the National Fish and Wildlife Foundation, a group with a conservationist mission, and his sons challenged his ideas about energy companies after discussing climate change at school.

“I kept wondering if there was a way to wake up in the morning, and everything I do is focused on one thing,” he said.

In September of that year, he came up with a new investment idea while hiking alone in the Bridger-Titon National Forest in western Wyoming. His hedge fund conducted an internal investigation into retailers and found that many of their ratings began to shrink long before they were in imminent danger. He said the same could happen in the energy sector if those companies ignored the move to renewable energy sources. So he sought to form socially responsible activist hedge funds and force those companies to make that change.

“I can get rid of this compartmentalization,” he said. “I was able to readjust my values ​​with my investment treatise.”

He got help from Charles Penner, a former partner of Jana Partners LLC, who led an activist campaign to put pressure on Apple. Co., Ltd.

Helps deal with children’s addiction to mobile devices. Penner and James shared the views gained from a survey of stock performance data. The more open a company is about a problem, the more likely it is to outperform its performance. They agreed to join forces with the No. 1 engine, named after the San Francisco Fire Department, a block away from the company’s office. It was released in December. It was Mr. Penner’s idea to look at Exxon.

They chose Exxon as their first big target. That’s because Exxon had already angered many other major shareholders due to poor performance and refusal to engage. The engine team also knew that Exxon was a familiar name to investors of all sizes, ensuring that the campaign resonated with many individual shareholders of the company. Some Exxon investors also questioned why Exxon did not add directors with industry expertise.

The engine campaign included a letter outlining the advertisement, website, and request to Exxon shareholders. The fund has hired people from the world of activists and index fund investments, including two former BlackRock executives. The company has 31 employees.

Asking oil companies to reduce emissions was a test of how far activists could go to challenge their business models. It was also one of the first significant tests of unintended consequences of the rise of index fund giants such as BlackRock, Vanguard and State Street...

For years, the theoretical fear of these companies was ultimately to distort prices and destroy competition. Now, if they vote for the engine, they can show the power to change the company. They didn’t buy these stocks to change the way activists did, but index funds were able to claim their power as if they did.

Engine No. 1 hired a search company, interviewed 60 candidates, and then selected 4 candidates on the board’s slate. They alleviated concerns that none of them were James’ close friends and hedge fund activists often marketed their peers, or themselves, as the most qualified. Everyone had a lot of experience in the energy industry.

Mr Penner led the call to shareholders, and his proposal was to avoid ideological debates on climate change. Instead, he said investors should focus on how much value has been lost. The directors proposed on these calls said the company needed to perform better and had under-allocated capital for more than a decade.

“We welcome new directors to the board and look forward to working with them constructively and collectively on behalf of all shareholders,” said an Exxon spokesman.

Engine Slate addressed key concerns that other shareholders had with the company, such as BlackRock and the retirement plan for the California civil servant, a public pension giant. Few people on the board had real energy industry experience. CalPERS, a public pension, was usually reluctant to support activist campaigns directed by hedge funds, said Anne Simpson, managing investment director for pension board governance and sustainability. It was. However, Exxon’s reluctance to engage with shareholders demanded more daring action, Simpson said, and the decisive difference from engine No. 1 is that the fund focuses on future performance. Said there is. Calpers not only voted for the engine slate, but also introduced the fund to Climate Action 100+, an investor group that oversees assets totaling $ 54 trillion.

Ali Saribas, a partner at SquareWell Partners, a shareholder advisory firm, said: “The stars were in a straight line.”

— —Christopher M. Matthews contributed to this article..

Write to Justin Baer at Justin.baer@wsj.com and Dawn Lim at dawn.lim@wsj.com

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Hedge fund manager who fought and won Exxon

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