Evaluating hedge fund activism: Engine Number 1 and ExxonMobil

Abstract

We analyze efforts by a small activist hedge fund, Engine Number 1 to affect financial and environmental performance by electing directors to ExxonMobil’s Board. We compare the performance of ExxonMobil to six peers by expanding a five-factor statistical model for asset returns to include oil prices, oil price volatility, and variables that identify one-time and sustained changes in returns. Low returns to ExxonMobil stock may be caused by its position along the supply chain, and not poor management of climate risk, which suggests that electing directors to ExxonMobil’s board will not raise returns. Efforts by Engine Number 1 affect returns to ExxonMobil stock for short periods, but electing its candidates have no permanent effect during the sample period. These results suggest that markets react to information that may not be available to the public and that using windows around public announcements may be too blunt to accurately assess the effects of hedge fund activism on stock returns. Although it is too soon to judge the new directors’ impact on environmental management, the lack of a negative effect on stock returns in the sample period contradicts the economic notion that firms who voluntarily ameliorate externalities put themselves at a competitive disadvantage relative to firms that ignore externalities. If no negative effects appear in the future, this would imply that hedge fund activism can be judged successful if it generates social benefits without negative effects on financial performance, which we call a ‘win-draw’ outcome.