Exxon Signs Agreement with Tillerson; Questions Remain

The conflicts of interest in the emerging Trump administration is the stuff of daily headlines. On January 4, Exxon Mobil filed a Cancellation and Exchange Agreement with the SEC that outlined the treatment of a portion of retired CEO Rex Tillerson’s holdings. Under the agreement “Tillerson will surrender all unpaid ExxonMobil restricted stock and restricted stock units he holds, consisting of 2,026,000 underlying shares,” and a lump sum cash payment will be paid to an Ethics-Compliance Trust.

Note that these restricted stock units are in addition to shares of Exxon that Tillerson owns outright. For those, he would be required under 18 USC 208 to either divest himself of the conflicting stocks or recuse himself from taking official actions that directly and substantially impact the holdings. As Secretary of State, recusal would interfere with his official duties so he will divest himself of the conflicting stock and then turn the proceeds over to a blind trust to be administered by an independent executor.

This novel agreement raises several concerns:

The agreement imposes a significant cost onto shareholders.

Pursuant to this agreement, Tillerson will not be selling his shares on the open market, as he would have under normal conditions. Instead, shareholders will bear the cost. According to the agreement Exxon – and thus Exxon shareholders – will “make a cash payment” into the Tillerson trust. One source estimates the cost of payment could be as high as $180 million.

This payment represents a reversal of long-stated policy.

One feature of Exxon Mobil’s executive compensation program that has earned praise from corporate governance experts for years is its long term holding requirements. Again and again, the company has touted its objective of “alignment of executive interests with the long-term interests of shareholders” by extending stock holding requirements up to 10 years beyond retirement. In fact, the most recent proxy statement notes that: “Equity awards are not subject to acceleration, even at retirement, except in the case of death.”

The compensation committee has essentially gone back on that commitment to execute this agreement to award Rex Tillerson an extraordinary windfall (albeit one held in a trust).

Tillerson locks in current value of Exxon stock

The company, to appease federal ethics authorities, is discounting the amount to be paid to Tillerson by 1.6%. Consider, however, that the stock price has increased by over 6% since Trump’s election. Tillerson appears likely to lock those gains (depending on exact timing). What will happen to the value of that stock in the next 10 years? The price of oil rises and falls on externalities. Some of the externalities we expect to see over the coming years are:

– ongoing oil supply glut

– continued increase in cost of finding and developing new oil sources

– sharp reductions in cost of alternative energy sources
– growing adoption of electric drive
– declining oil dependence in OECD nations
– decarbonization trends in developing economies, including leapfrogging of fossil fuels
We believe these factors, combined, make it likely that Exxon stock will fall by far more than 1.6%.

There were alternatives available

The board and compensation committee could and should have taken a harder bargaining position. For many years, Rex Tillerson has been among the highest paid CEOs in the United States. Tillerson could have surrendered at least a portion of the shares at issue, rather than foisting the costs of a highly preferential package onto shareholders. Typically, when an executive changes jobs, pending shares are simply forfeited.

Tillerson already has substantial accumulated shares and vested retirement benefits. The agreement notes that: “Tillerson’s vested and unpaid benefits pursuant to the ExxonMobil Savings Plan, the ExxonMobil Supplemental Savings Plan, the ExxonMobil Pension Plan, the ExxonMobil Supplemental Pension Plan, and the ExxonMobil Additional Payments Plan shall be paid pursuant to the terms and conditions of the applicable plan.” The totals from those plans, according to the most recent proxy statement, reach over $70 million. Although, Tillerson’s life insurance under the company will be cancelled, “The Corporation agrees to use its commercially reasonable best efforts to obtain and, if so, pre-pay a life insurance policy from an independent third party providing substitute coverage as comparable as possible to the terminated coverage.” The value paid to his survivors will be about approximately $13 million. To be fair, Tillerson will need to give up his retiree dental insurance coverage from the company.