ExxonMobilXOM has taken an aggressive stance against activist investors who wanted a vote on reducing the company’ s emissions, and the tactic is obviously controversial. Without commenting on that specific case, there are some guidelines that I would suggest companies follow.
The reasons for not listening to such activists are many. In the first place, the youth tend to have unreliable views on appropriate strategy because, well, they’re young. That means that they have minimal life experience and so are prone to perception bias: they have little sense of whether any given event is unusual or not. An oil price spike or an extreme weather event will seem to them to be much more meaningful—and scary—than to someone who has decades of experience.
Second, the young are less likely to be taxpayers and/or have lower tax rates and thus don’t consider the costs of their proposals. I’m reminded of the case years ago when an anti-nuclear activist, remarking on a study that suggested shutting all U.S. nuclear power plants would cost hundreds of billions of dollars, said he was willing to pay that. Needless to say, he didn’t pull out his checkbook:
Then there are the single-issue activists, for oil companies, usually environmentalists. Their stance is generally (but not always) driven by environmental and only environmental factors. They are unconcerned with the costs of a proposal or its impact on the company’s operations and profits. Not their job, admittedly, but it is the company’s job to have a more inclusive view of costs and benefits.
This shortcoming is similar to the attitude of those proposing, for example, mandates for purchases of technologies or fuels. Their only goal is promotion of a technology like electric vehicles, rather than a goal of reducing emissions, and the use of mandates obscures their costs.
Some years ago, when I pointed out that the 1990s era California zero emission vehicle mandates was a failure, an environmentalist on the panel remarked that at least it had advanced the technology. Except the technology being considered then was not the current technology; companies like GM that developed electric cars lost all their money and learned very little that was applicable to the current generation of EVs.
Which highlights the failure to employ cost/benefit analysis in policymaking. Proponents of, for example, fossil fuel bans act as if there is no downside or cost. That this is nonsense can be seen when, for example, oil pipeline protesters ask for donations of propane for their stoves and heaters. Or the bumper sticker I designed “Don’t like oil? Trying biking to the ER.”
Activists also often suffer from faux expertise, something much more prevalent in the days of the internet and its many search engines. (Well, I heard there’s more than one.) It is very easy to find stories and research that insist that adherence to, for example, ESG goals will improve profits, and few will note the many qualifications in such research. The same is true of those arguing that adopting ESG policies are detrimental to a company’s performance, profits, stack price, etc.
Given all these caveats, companies should realize that activists can provide a useful service. Safety advocates who promoted the installation of seat belts in American cars in the 1950s faced resistance from the auto industry. The industry saw only the cost of adding seat belts to cars, because they didn’t face the costs incurred from injuries suffered in crashes. The cost benefit analysis in such a case is probably the most egregiously favorable in history—okay, hyperbole, but it was huge. Minimal cost and massive savings in lives.
Similarly, in the 1970s, some voiced concerns about the lack of containment domes for nuclear power plants in early designs, something the industry felt was unneeded. While the domes have probably been necessary in only a few instances, I personally think they have been valuable.
Here are some suggested guidelines for how to treat activists’ concerns:
First, some people oppose anything, like Groucho Marx’s character Professor Wagstaff who sang, “Whatever it is, I’m against it.” (Yes, NIMBY is not a new phenomenon.)
Second, modernism is scary to some. In the 19th century, neurasthenia was a psychological ailment related to the rapid societal changes. (I experience that every time I wake up and find my computer’s software has been updated and settings changed.)
Third, ‘small is beautiful’ appeals to many. The idea of rooftop solar panels seems more attractive than a large power plant. Economies of scale are…
Read More: Oil Companies Should Listen To Activists—But Skeptically