Timely Takes Podcast

Ning Chiu and David Kern joined us for an episode of the Timely Takes Podcast all about ExxonMobil's new retail voting program. Ning is a partner at Davis Polk, and David is Executive Counsel - Corporate and Securities Law at ExxonMobil.

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Meredith Ervine, Senior Editor, TheCorporateCounsel.net: Hi everyone, and welcome to the latest episode of the Timely Takes Podcast. I'm Meredith Ervine, and I'm a senior editor here at TheCorporateCounsel.net. Today, I am very excited to be discussing ExxonMobil's new retail voting program with both David Kern of Exxon and Ning Chiu of Davis Polk. David is Executive Counsel - Corporate and Securities Law at ExxonMobil. Of course, Davis Polk and Ning in particular worked with Exxon in developing and implementing this program. From what I can tell, there's been a lot of interest from other issuers in putting something in place that's similar to this program. I am really excited to hear their thoughts based on their experience to date in getting it up and running.

David and Ning, welcome. Thank you so much for being here. David, maybe I can start just by asking you what led ExxonMobil to create this program for retail holders and to seek no-action relief, and maybe in particular why now?

What Led ExxonMobil to Create This Program and Seek No-Action Relief From the SEC

David Kern, Executive Counsel - Corporate and Securities Law, ExxonMobil: Sure, Meredith, that's a great question. Let me start with the ‘why now’ piece of it. There's been some misunderstanding in the market that this may have been a quick process or happened instantaneously. I'll tell you, that can't be further from the truth. This was about a two-and-a-half-year effort from idea to execution. It took a lot of thought. We went back to conversations with our retail voters and how we could provide a differentiated offering to them and show that we were listening to them and wanted their voices to participate in the future of the company. During my time here, we've spent a lot of time trying to engage with a number of different shareholders, and what we found is that they all have different needs to participate or engage.

We've looked to provide differentiated offerings that match the investor. One of the things we've noticed is that's different for large and small shareholders. That may be obvious when you say it, but putting that into practice of how you provide that differentiated offering for each of them isn't necessarily so simple. For large investors, you're looking at: What sort of engagement do they want? What information is important to them? Who do they want to talk to from the company? Are they interested in talking the board? All things like that.

For smaller shareholders, it's really harder to figure that out because it's harder to get them to speak to you. We've spent multiple years talking to them to figure out what their issues are, what their concerns are, or how they're thinking about the company. What we've heard from them is that they have a real passion for the company and frankly, that they were frustrated by how this process worked. The frustration we'd hear is that they felt that they had to take steps to participate and had costs put on them to participate that investors who held through large funds did not. What it came down to was they had their preferences, but no one was executing them.

As we went and looked at that, what we saw was that our retail voters are voting fully aligned with management over 90% of the time, and in some years over 95%. In taking those conversations and the data and looking at that, this program's an outgrowth of that, to provide a differentiated offering to our retail holders about how they can participate in this process on the same playing field as investors who hold through a larger financial agent.

Ervine: That was a really helpful overview of the two-and-a-half-year process that has led up to this and really helpful to hear the feedback that you were getting that instigated the conversations. Ning, I wondered if I could ask you to talk about the basics of the program, maybe focusing on pieces that were probably critical in terms of obtaining the staff's no-action relief.

The Basics of the Program, Focused on the Aspects That Were Critical to the No-Action Relief

Ning Chiu, Partner, Davis Polk: Sure, definitely happy to do that. As David mentioned, the whole process took several years, and the SEC process, while it did not take several years, it took many, many months and there were several conversations with the SEC staff. Some were very deep in detail, and some were more around the description of the program because once they understood it, they wanted to make sure that everyone else also understood the same way, but even more important than that, they wanted to make sure that anyone else who wants to do the program has to fit within the four corners of the no-action letter, of course. We had to be very precise about what was permitted, what it did, and how it worked for that reason, so that if you follow the program exactly as it's been set up so far, then you can rely on this no-action letter.

If you wanted to do something different, and there's been some innovative ideas that have been thrown around, then you need to at least go speak to the SEC even if it might be an adjacent idea and it's not completely different. That was really important to them, of course. That makes sense for anybody who's gotten a no-action letter on anything similar in capital markets. As I said, it took many months. I think one thing that might be surprising to people is the question you asked first about the rationale, about the reasons for the program, the story that David told was actually very compelling to the staff. That mattered too.

There's a lawyer element, a legal technical part to this that is, of course, critical, but the people, personal element was really important to them as well. Because as you know one of their mandates is investor protection, and they think a lot about retail shareholders, and they think a lot about how to reach retail shareholders for both investment, voting, and the information that retail shareholders have. That rationale for the program, the way David explained it to you, David also explained that to the SEC staff in the office of M&A.

That's where we started. Then there are several components of the program that they found really important. The ease of understanding it. It is plain English. If you haven't seen it, you should go read Exxon’s filing so you can see it. It took a lot of time to design it to be plain English. There was even a debate about PowerPoint versus Word documents, and there were advertising people involved and there were people who were definitely not lawyers writing it.

That ease of understanding of the program, making sure people knew what they were signing up for, was critical to the SEC as well as obviously to us because we want to make sure that those who opt in have a full and clear understanding of what they're opting in for. The opt-in versus an opt-out that was actually discussed and the fact that Exxon went in with an opt-in program, it's voluntary, you actually have to take an affirmative action to sign up for it. That was important. They did not, by the way, in case somebody else wants to do a different program, suggest that an opt-out program is something that they would not endorse, but the fact that this was an opt-in program was an important part of our discussion of facilitating how it worked, the fact that there was no cost.

The fact that you can opt out as a participant anytime you want, and the timing of all that, like the timing of the opt-in, the timing of the opt out, which is anytime, but then what are you opting out for? Which meeting? All those very important technical, weedy details were discussed ad nauseam. They really dug into all of that. How the retail participants who opt into the program will continue to receive their proxy materials and continue to have the ability to vote just like they do today, and they can override the opt-in vote by casting their own.

Just like today, they can revoke the opt-in vote, they can revoke their own vote, they can keep voting until the day of the meeting and even at the meeting. All of that was very important. Those are components that the SEC staff totally understood. We shared all the materials with them; they looked at everything. They knew what we were filing.

It was a really great relationship. Transparency on our side was paramount. We went in telling them we were going to be transparent. We answered all their questions. As I said, there were several meetings to discuss how the program worked and then the wording of the no-action letter, because it was really important to all of us who were involved that the no-action letter was crystal clear about how it worked and what it did and what it doesn't do.

Ervine: Well, I'm sure you've gotten feedback from people much more important than me, but I commend the whole team on the clarity of the materials. I think they were very well written. They're succinct. They are very understandable. The team did a great job from my perspective on those.

Ervine: We all need that. David, I wondered if I could ask you to turn to the process of getting the program up and running and if you've learned any lessons along the way.

Kern: Sure. The first thing was working with Broadridge on this, and that was a multi-year process to figure out what does the proxy plumbing look like here. There were a lot of conversations about how the system works. It's a fairly opaque box from a company perspective, and we had a lot of learning to do. They were very open to us and helpful about, here's what we could do and here's how this works. It took a long time because there's so many different pieces to think through. I don't think that will be the experience of others if they try to replicate this.

I think now that that brain damage has been done to those involved, I'd expect a fairly quick turn on this and setting up a program. I'd expect it to take about two months to put up a similar platform and be able to roll it out, but you'd have to confirm that with Broadridge, I think. What we see is once we'd figured out how that's going to work, it was actually very simple. Broadridge went and built it as we were talking at the SEC.

Then the use case is actually very simple for us and has been easy. All we ended up having to do once they were building that was to work on those emails as we've already talked about, and we prepared to file that and get that ready. Then really it was just the push of a button. Our experience has been that it's very easy to use and manage internally, your only real decisions are: How many communications do you want to do? What do you want those to look like? When do you want to do it?

From our thoughts, the user experience seems to be very easy as well. I have a colleague in investor relations. The day our program came out, he got a call from his mother who lives abroad, who was having trouble with a travel site trying to get a ticket to come see him. He helped her with that. Then he said, "Hey, by the way, did you see this program?" She said, "Oh, yes, I already saw that and signed up for it." Our view was, "All right, well, it's easier to use than a travel site." We were very pleased when that happened. We hope that's the experience people have generally.

Ervine: I love that story and I'm sure it's music to everyone's ears that'll be easier for them now that the program is up and running for one company. Thank you on behalf of everyone else interested in this for the efforts that you've put in already. I wondered if I could maybe ask this question to both of you in terms of the level of interest you've seen and heard so far on the program. Whether you've gotten any input from retail holders. Obviously, you did before putting the program in place, but maybe since putting the program in place, what you've heard.

Chiu: Yes. It turns out that I have clients who turned out to be Exxon retail shareholders, and they can also attest that it's easy to use. Of course, each of them thought, "Well, it's because I'm pretty smart." That's probably why. I'm sure that's also true. I at least agreed with them. With companies who want to actually also develop the program for their own use, I start with explaining how it works, that actually doesn't take terribly long. Then really sync with the company about what their goals and objectives are, and what they're trying to accomplish. What is the best way to do it? How do you explain this to a board or a board committee? What are the things you should be prepared for in terms of questions, criticisms, comments? All those things. We go through all of that looking at what the ballot items might be for upcoming meetings, and then a lot of the technical side too. Some of that I can now answer. Some they have to ask Broadridge. And then helping them actually understand, what they need to know, and what other questions they might get internally.

Initially, and not really a surprise, but there was some, I would call it just misinformation about maintenance and upkeep and churn, and there were just a lot of words thrown around that made it seem, I believe, more complicated than it really is. I think they were giving, at least me, too much credit for having built something super-duper complicated. It is designed to be simple on purpose. David has heard me say that.

I just keep repeating it, and once I explain it to people, I think we're now at a stage where it's not just sort of first-level use case, but maybe there's other things or other ways to use this. It's obviously unfortunate for many, many reasons that we're in the middle of a government shutdown, because there were questions that we did want to ask the staff that I will eventually get around to asking them about different ideas that people might have. I think we're just really at the beginning stages.

Kern: Yes, let me echo that: proxy plumbing has been an area that hasn't been thought about for a while. This is maybe a toehold in how this works, but I think there's a lot to think through how we can make things more accessible for investors and how we can provide things that are useful to them here. My hope is that there's further innovation from us or others, and that this is the tip of the iceberg and creating a differentiated offering that's helpful to the market.

Chiu: This is part of the voting ecosystem. David and I have talked about this. We're seeing a lot of different things that institutional investors are doing on their own with pass-through voting. We're seeing some changes with the proxy advisory firms around the policies they're going to offer people. I just see this as one part of the voting ecosystem that might get shaken up a little bit.

Kern: I think our principle was: What can we do that's additive that doesn't take away any of the opportunities that they currently had? Once you start thinking that way, there's actually a lot that this doesn't cover that could be done here. I'm excited to see how this proceeds. From our side, I'll tell you, we've taken an approach this year that's kind of a no-frills approach.

I've heard people suggesting we're doing some big campaign, and honestly it couldn't be further from the truth. What we're planning this year is to send out three emails saying, "Hey, would you like to be part of this program?" That's really it. The response so far has been delightful to us. We've been very happy with the uptake and frankly, a little bit surprised because you never know when you start something like this, you have the good intention to provide something differentiated, but you don't know if you've hit the mark.

I think we feel we have because it keeps growing and it keeps getting a positive response. We haven't, unfortunately, shared numbers yet because honestly, each week it increases and it changes. We don't want to put out something that won't be the case when we get to our proxy, but we do plan to disclose it in our proxy each year and so you'll be able to see it there and that's something we're committed to doing as we go forward.

Ervine: Oh, that's great. Ning, you teed up my next question that I think is for both of you, which is just talking about going forward maintenance and how new holders opt in, how the opt-out options are presented, what this looks like going forward.

Chiu: I can start with the maintenance part. There isn't actually a lot to maintain. This could literally be a one-time and then you decide you're done. I was talking to a company yesterday when we were talking about costs and they said, "Well, this is just an upfront cost." I said, "That's your choice. You could decide as a company, that you want to make this upfront investment and you just want to let it go and see what happens, and then you don't have to do anything."

If you wanted to try to, I call it sweeping in new shareholders, your retail shareholders, you could decide to do that. You can decide when you want to do that. The program maintenance, there is a fee that Broadridge charges for that. I don't want to give anything away because obviously, all the data they have is proprietary, but it's not a huge amount of money in the scheme of things.

In terms of how new holders opt in, the site is there, it's available. It's going to be sitting there, so anybody can opt in at any time. The site is also available for you to opt out. It's just sitting there and people can take either action. There will be proxy statement disclosure that actually talks about this. Like David said, that explains the vote override in particular, which is very important. It also explains that you can opt out. You'd be opting out for the next meeting because the votes have been cast by the time you file the proxy. There is also the opportunity to opt out, and there will be a reminder that will be sent about how to opt out.

It is, again, and I know I'm making it sound simple, but it is actually pretty straightforward in that the site is there, just like any other site that you sign up for or subscription you sign up for, and you can opt in, you can opt out, and it's available to you. The question about capturing new investors is the one that a company would have to think about how much they want to do that, but it's an alternative. It is not required.

People can decide to do it, or people can decide they're happy with the uptake or people can do it, wait a while. It could be a multi-year program in terms of maybe one year you get a certain number, and then you see that number dwindling, just because people have sold or whatever it is that happens, and then you can do a sweep or you could just do a one year and decide, "I'm done, because this is all I wanted to accomplish and monitor just it over time." There's not a daily, monthly, weekly maintenance.

Kern: I'll speak to this from our side, if that's okay, Meredith. I think our view is, we probably will do something each year just to kind of make this opportunity available to people because I think we're looking to make sure that all holders current and then those who buy in the future and those that we don't know how to reach now or that haven't participated have the opportunity to do so.

I'd see that as ongoing for us. The other thing I'd say in terms of maintenance is to think about the disclosure maintenance. We came into this really trying to think about how we can be as transparent as possible. In that reminder they get each year that they can opt out, you're going to have disclosure in there that says, "Here's the proposals this year or this last year, and if you didn't override them, here's how your shares would have been voted."

Just to try to be as clear as we possibly can to people. Also in the proxy, I think you're going to see disclosure around this on, here's who's in the program, here's what the program does, and here's how you can move forward to be part of or opt out of the program. We'll be looking at those disclosures each year and making sure that we're hitting the mark on those as well.

Ervine: That's great. I love the transparency associated with that. That's wonderful. You both teed this up and already hit on some of these points. I wondered if maybe, Ning, you could talk through the timing and process during proxy season.

Chiu: The idea is that you have a whole cohort of people who have already opted in. They can continue to opt in. There's no endpoint or deadline. It's just, at a certain point in time, the votes have to be cast for the meeting that's coming, but it doesn't mean they can't continue to opt into the program. The only distinction is what are you opting in for. Up to the time that the company, a company, not just Exxon, but any company that's in this program, files its proxy statement, everybody who's opted in has opted in to that meeting that the proxy statement is for. This year, it'll be for everybody's opted into the 2026 and annual meeting.

At the time that the proxy statement for the 2026 annual meeting is filed, that's when all the shares of the participants who opted in will be voted. Now, that doesn't mean it's over because all those people, there'll be disclosure in the proxy statement that says, "You know what? You can still vote." In fact, there will be people who will have forgotten they opted in, and they will vote anyway. They may vote the exact same way as we voted, but they will have forgotten.

Then there will be other people who are wondering why they got a proxy statement, because they probably think they opted into never getting another proxy statement. That's what they really want. Up until between the filing of the proxy statement and annual meeting, just like today, they can cast their vote. If it's a different vote than in favor of management in all matters, and that's what they opted in for, then that's a vote override. If it's the same vote, then it's just a duplicative vote.

Chiu: Exactly. Always. Just like the way it works now. That's the process and timing. There's literally nothing the company can or needs to do. I think this is a little challenging for companies to appreciate. At that point in time, the votes are cast by Broadridge, then you just wait to see what the shareholder does. It's not as if the company can do anything or need to do anything after all that.

They could do more if they wanted to. There's a lot of optionality in the program in terms of, if a company wanted to remind people they could vote or override, or anything. Remember, we're operating within the four corners of a no-action letter that described this process precisely. We're going to follow this process because that's what we agree to in the no-action letter. Like I said, in the future, there might be modifications or amendments that people want to pose to the SEC about how they would like to do it, but we're doing what we said we will do in the no-action letter that we got.

Ervine: David, I wondered if I could turn to you and ask if you could share your hopes from ExxonMobil's perspective of how the program will benefit the company.

Kern: Sure. I think if it benefits our investors, it benefits the company. That's how we're looking at this to start. Retail investors represent almost 40% of all of our investors. I think we've always been very proud to offer the dividend we do. We know that many of those retail holders rely on it in retirement or as an essential income stream. We're proud to have kept that through COVID. We're proud to have been able to raise it for the last 43 years in a row.

It's who we are, and we think this program's another piece of who we are, and that if it's a benefit to them, that goes to the brand. That goes to why you'd want to hold our shares, that goes to why you'd want to keep our shares, and why you can be proud of it. We think providing that as a differentiated offering really shows our commitment to investors, and it shows what makes us unique.

We want to lean into that. We want to be unique. We want to stand out on these things. We want them to see that we care. That's what we're seeing and what we're hoping for. I think to date, we felt really, really happy with that. More broadly, I think our view is this program enhances shareholder democracy. Shareholder democracy is enhanced by participation, and any way that we can think of in the future to lessen the costs that inhibit participation for retail holders, we believe, will be a benefit to the company.

Ervine: I think Liz had said this in a blog about the program at some point, but we draft proxies for a living. We enjoy this. We love all the governance topics, but we also don't want to review a million proxies the same month every year.

Kern: It wasn't that long ago that our proxy was 13 pages and then 31 pages, and now it's 80-plus pages. This is making available again to those who were happy with that. What they're really interested in and what they care about. We're happy to do the 80 pages of disclosure. If that's what people have asked us for, that's part of their differentiated offering. We want to be clear that to keep those options open for everyone, as we know different shareholders have different things they're looking for.

Ervine: Absolutely. Ning, you've spoken a little bit already about things other companies should think about if they're considering a similar program, but if you have any further thoughts on that, I think our listeners would be very interested to hear them.

Chiu: A couple of things have come up in talking to other companies I'll share, but just to go back on a point that you and David made, I think there's been some concern that maybe people who are signing up don't quite know what they're signing up for. Just remember, you're expecting these people to read 80 to 100 plus pages of disclosure about some pretty complicated stuff.

I think if you're expecting that and you expect them to understand your comp programs, all of those things, and I think they hopefully do know what they're signing up for, they can absorb all of that. In terms of things that companies have raised that I'll mention for those who haven't thought of it yet, one is that the two biggest ones is some people have been surprised by who their so-called retail shareholder base is when they actually went and asked for a cost estimate and asked for that.

Part of it's because the way the program's designed, a "retail shareholder," is basically anybody who qualifies for a program. I'm not sure there is a universal understanding of what a retail shareholder is, but for purposes of the program, because it's whoever qualifies for the program, it's not necessarily just individuals. It could be funds, small funds, hedge funds, trusts, all other entities, and so people have been surprised that that's a bigger base than they thought.

Everybody, it's been a bigger base than they thought. Multiple companies have said, "My retail shareholders base is X." It's been exponentially larger than X. That's one thing before you say, "Oh, I have a very small retail shareholder base." I have a way larger one than you think, who actually qualify for the program, so I always say that. The second is a lot of people have talked about is what's the cost. The cost is different for everyone, and that is because the largest portion of the cost is proxy distribution cost, because you are sending something out.

The variability in that number is based on whether a bunch of your people have signed up for email or you're still sending paper, and how many people you have. Not just the number of shares, but how many different entities, individuals, those number of shares represent. I've seen a pretty big range in terms of what that cost is for that reason. It is hard to predict. There are some companies where I would've thought, just because it's a large company, you assume a certain level. That's not true. There's actually pretty big variations even at the largest companies.

In fact, it might be all the large companies focus on this just because large companies tend to innovate first but at the end of the day, there might be some smaller companies, mid-cap companies, who find that they can do this without nearly as much cost as they might initially think. That's why I think of this as a multiple-year project. I think those are two things that have come up a lot: what's the right base that I'm going to reach, and what is the cost outlay? I think those are important components to the discussion.

A third one, which is a new one, is you can actually – because, as David said, it takes a while to design it for a particular company, you can actually, and I checked this with Broadridge, pay a fee to Broadridge to actually just get you set up and not launch it yet. You can launch it at a time when you think it's optimal, but actually just get ready. That cost is not as high as people think, because as I said, the biggest bulk of the cost is actually launching the program and sending stuff out. That's a relatively new question that's come up.

There's been, as I mentioned, ideas around different things that people might be able to do. Different people who you can reach, and you said, Meredith, a keyword. How do people adopt a similar program? Right now, you have to adopt this same program under the no-action letter we've got. You can't really adopt a similar program, but in the future, you may be able to adopt a similar program. What is similar enough to fit within the no-action letter depends a little on the SEC, and we can have conversations about that.

You might be able to do something completely different within one of the component pieces I've mentioned that might entail a new no-action letter. I think the SEC is willing to entertain it. Now, of course, they're going to be behind because of the shutdown, but they definitely appear to be willing to entertain it. There might be further innovation. It's good for corporates themselves to participate in the voting ecosystem around innovation. I think that's really useful for all of us.

Kern: As intermediate steps people might want to think through – Broadridge offers retail voting services. The reason we knew that our retail was so high was that wasn't our first guess, but for several years, we've been working with those retail voting services through Broadridge and identifying the population and talking to them and doing these different things. As an intermediate step, you can look at that, figure out where they are, how big it is. Things of that nature that you may be surprised by.

Ervine: That's a great point. I had read a fair amount about this program before this podcast, and I learned a lot in the last 35 minutes. Thank you both so much for being here, for taking the time to talk about this some more. This was a really helpful conversation from my perspective. I'm sure it will be really helpful to our members, so thank you. To everyone listening, thank you so much for joining us, and have a great day.

Timely Takes Podcast: ExxonMobil's Retail Voting Program