Exxon Agonistes

Department of Irony: On Tuesday, members of the Rockefeller family won media huzzahs for airing their grievances against Exxon Mobil, the oil and gas giant in which they are the oldest continuous shareholders but which they say isn't doing enough to prepare for a greener world. Then yesterday, Exxon reported a 17% rise in first-quarter profit, to $10.9 billion. It was merely the second-largest quarterly profit in U.S. corporate history, though Exxon still holds the quarterly and annual records.

Could it be that the heirs of John D. Rockefeller's Standard Oil empire (founded 1870) are angry that Exxon's management made them too much money? Probably not. Instead, the family warns that the company will lose out to competitors in the future if it doesn't shift its climate-change policies and invest more in alternative energy. Along with institutional investors like Connecticut's state pension fund, the Rockefellers are pushing corporate governance reforms that they say will give the Exxon board a more "independent" tilt.

John D. Rockefeller by John Singer Sargent.

Despite – or perhaps because of – their handsome returns, a large part of this exercise seems to be political. The well-to-do Rockefellers have embraced the eco-enthusiasms of the day, and perhaps for some of them this is one way of assuaging any guilt over a multibillion-dollar fortune built on carbon. One of their clan, Senator Jay Rockefeller of West Virginia, blazed this trail in 2006 with a letter demanding that Exxon management cut off funding for global warming skeptics – or else.

But even if they're not dressing up their political goals as concern about Exxon's long-term viability, it's useful to ask whether their agenda serves the interests of all shareholders, which is maximizing returns on investment. Certainly Exxon's earnings are high in absolute terms, given surging crude oil prices, but they have to be compared to the huge capital requirements for exploration and development. In 2007, the company spent nearly $21 billion on exploration and capital spending, and that will increase by at least 20% over the next five years or so.

Such long-range strategy to span both up and down cycles is essential because profits fall when commodity prices dip. That happened in the 1990s, with oil crashing below $20 a barrel after the altitudes of the 1970s. The oil majors and their shareholders swallowed these declines, as they should have.

Against such market fluctuations and supply shocks, what's distinguished Exxon is its discipline. The company is known for its careful budgeting and for avoiding speculative risks. More than others, Exxon seems to be guided by the fact that the current historic rise in oil and gas prices won't last forever, and that its spending decisions need to make sense in a world of $60 or even $30 per barrel oil. Such business prudence has paid off. Exxon's earnings per dollar of sales stood at 10% for 2007, compared to 8.3% for the larger oil and gas industry and 7.8% for the Dow Jones Industrial Average for major industries.

It's the prerogative of shareholders like the Rockefellers, even those without a major equity stake, to second-guess Exxon's results. Still, they've also got plenty of other investment opportunities, and they're welcome to try out Vinod Khosla and the other venture capitalists pursuing "clean tech." But these energy sources still can't compete economically with oil despite government handouts and other regulatory props, and the Chapter 11 courts are littered with companies that made such energy bets.

Anyway, a company that specializes in oil and gas isn't necessarily the best situated to operate, say, wind turbines. It may lack the expertise, or the fads might divert management focus from the main business. But even if Exxon chose to diversify more into alternatives, it would still be far more profitable to continue providing a product that the world can't do without. The notion that the carbon era is coming to an end is for the foreseeable future little more than a fantasy. Everyone – from the U.S. Energy Information Agency to the U.N. – agrees that fossil fuels will still account for as much as 80% of the world's energy needs though 2030, even with efficiency gains and major growth in alternatives.

The chief specific Rockefeller goal seems to be to sever the roles of CEO and chairman of the Exxon corporate board, both currently filled by Rex Tillerson. There are plenty of cases where that division of labor works and makes good business sense. But it is not a self-evidently superior arrangement. While it's never a good idea for a CEO to "own" his board, the last thing a business needs is a board operating at cross-purposes with management – in this case, presumably, with management wanting to continue with its record-breaking model, and a board beholden to every environmental interest group that happens to pass by.

One luxury of being a Rockefeller is that you are wealthy enough to live in style even if Exxon's performance starts to slide. The same can't be said of millions of pensioners and small investors for whom Exxon's profits may be the main source of a secure retirement. If John D.'s heirs aren't satisfied with Exxon, they're welcome to invest elsewhere. Our guess is that few will, given how much money they've made over the decades on fossil fuels.