Managing more than $300 billion worth of assets is not an easy job. Managing those assets in a way that promotes more sustainable business practices—during a pandemic and looming climate crisis—is even harder. But despite all the challenges of this past year, the California State Teachers’ Retirement System (CalSTRS)’s chief investment officer of 21 years, Christopher Ailman, took shareholder activism into uncharted territory. Together with the fledgling hedge fund Engine No. 1, CalSTRS-endorsed candidates managed to win three of the four seats on ExxonMobil’s board, beating out the management’s candidates.

It was something nobody even dreamed was possible just a year earlier, not even Ailman himself. “I had been on record saying that ExxonMobil had a deaf ear and was a lost cause,” he said. The board’s transformation made front-page news around the world, with many hailing it as a major victory against climate change.

Pension funds had tried unsuccessfully multiple times to change Exxon’s board composition in the past. “New York [State] Common [Retirement Fund] and the Church of England had made an all-out effort in a shareholder resolution at ExxonMobil,” Ailman said. “We were behind that, everyone was behind that, but they just smacked into the wall and fell back.” And, similarly, Ailman said there was another attempt led by the California Public Employees’ Retirement System (CalPERS) and Climate Action 100+. “We recognized this was a reach from the get-go,” he said.

But what made things different this past May and June, was the help of a previously little-known hedge fund called Engine No. 1.

“It took a small firm that had everything to gain and nothing to lose,” Ailman said. “I don’t know that some of the other established activists would have been willing to put their entire reputations on the line.”

Engine No. 1 is an impact investing firm founded in December 2020 by Christopher James, with the stated goal of harnessing the power of capitalism to create long-term value. Ailman, who, too, believes that long-term capitalism is a force for social and environmental change, quickly found common ground with the hedge fund. “To me, sustainability and ESG [environmental, social, and governance] factors are long-term business risks,” Ailman said. “And if you talk the right language, CEOs pay a lot of attention to long-term business risks.”

Although Engine No. 1 owned only 0.02% of Exxon’s shares, it had a thought-out plan for how to change the company. But even more importantly, it had the willpower. In its first summer, Engine No. 1 nominated new Exxon board members with clean energy expertise. CalSTRS staff went back and forth, debating whether to support the nominations from such a small hedge fund. “There was a lot of concern because Engine No. 1 was brand new,” Ailman said. “We didn’t want to back a firm that was simply trying to make a name for itself.”

It was a gamble, but Ailman and the CalSTRS board ultimately decided to go for it in December 2020. Ailman knew he could be risking CalSTRS’ reputation and relationship with Exxon, but decided the risk was worth it.

“I was very blatant with the board: If we try and we fail, we’re going to dust ourselves off and try again,” he said. “The one thing ExxonMobil perhaps did not realize is we’re not going away. We’re going to keep challenging  them to strengthen their long-term resilience.”

After CalSTRS announced its decisions, other major pension funds got on board with the effort, with both New York Common and CalPERS signing on this April.

When May finally came and it was time to vote, pressure was building. “I remember that morning, we all got up early. We’re all texting each other, watching it live,” he said. The big three index funds, BlackRock, Vanguard, and State Street, hadn’t made their official decisions public, leaving much uncertainty as to what the outcome would be. To make the suspense even worse, the board meeting was suspended in the middle of the day for an hour while the votes were still open­—an extremely unusual event, according to Ailman.

During the break, he received even more disheartening news. “We started hearing from other investors that ExxonMobil was on the phone trying to call them to convince them to change their vote,” he said.

But against all odds and Exxon’s best efforts, Engine No. 1’s candidates had secured two board seats and a third seat was too close to call. “It was earth-shaking in terms of corporate governance,” Ailman said. Engine No. 1’s endorsed candidate also ended up securing the third board seat later in June.

While the exact ramifications of the board change remain to be seen, Ailman said he is already noticing a shift in tone from the company’s leadership. “I am no longer hearing Darren Woods talk about oil and gas. I hear him talk about energy,” he said. That subtle difference in the way the Exxon CEO speaks is important, Ailman noted, because it shows that Exxon is looking at a future away from pure oil and gas and broadly inclusive of more environmentally friendly energy sources. “Even though fossil free advocates hate these firms, we’re going to need energy of some form,” he said. “And these companies have many of the best engineers in the world.”

And while the ExxonMobil board change is by far the most well-known incidence of successful shareholder activism, the CalSTRS CIO says there are hundreds of other instances in which the pension engages in shareholder activism but does not make the front-page news. Some examples he highlighted were convincing Apple to implement a screen-time calculator on phones, and the system’s ongoing efforts to implement transparent and fair executive compensation at Disney. But whether it’s Disney, Apple, or Exxon, one thing is for certain: Ailman’s commitment to shareholder activism as a way to drive long-term value for CalSTRS is here to stay.

­—Anna Gordon