by: Joel Makower

Last week, the Rockefeller family made an historic challenge to Exxon Mobil Corp., the company founded by John D. Rockefeller in 1870 (as Standard Oil), and in which dozens of family members still hold stock. The challenge came in the form of a shareholder resolution to require an independent chairman of Exxon's board of directors, so that the company can better maximize long-term shareholder value in a rapidly changing energy environment.

Making the board chair independent of the CEO may seem a technical governance matter, but it has great significance. The family argued that having a board that was independent from the day-to-day operations of company management would enable Exxon to better assess the risks and opportunities that are altering the energy and environmental landscape — and that Exxon might alter its business strategy based on a different set of assumptions than those under which the company has been operating.

Research conducted by my colleague Ron Pernick and me at Clean Edge in 2006 looked into Exxon and its set of assumptions about our energy future. Exxon has long adopted a stance that renewable energy will be a negligible part of the energy mix for the foreseeable future, and that operational and market conditions will remain static and relatively unchanging. At the time, we wondered, given the realities of our increasingly volatile global energy marketplace — growing demand, declining production, global security issues, climate change, rising food costs, and other business, social, and environmental challenges — whether Exxon's narrow view would leave the company at risk from competitors and less able to seize new opportunities and adapt to shifting market conditions.

We found some of Exxon's assumption flying in the face of the facts — for example, that only 2% of the world's energy will come from renewable sources by 2030, despite estimates by the Renewable Energy Policy Network that already attribute 4% of the world's energy to new renewable sources. The company consistently underestimates the annual growth of solar, wind, geothermal, biofuels, and other alternative energy resources. Moreover, company statements — as underscored by its actions — is that they are waiting for a major breakthrough in renewable energy technology, at which point it will deploy its significant resources in bringing that technology to market.

There is good reason for the Rockefellers and other shareholder to be concerned about this strategy. By placing nearly all of its emphasis and focus on oil and gas, Exxon risks losing out on the new markets for renewables and places the company strategy within an outdated model of energy markets. As the renewable energy market has developed, it has become clear that our energy future won't be based on a single breakthrough, but on dozens, even hundreds, of smaller ones — new technologies, products and services, and business models. Everyone from GE to Goldman Sachs to Google seems to get this, and are investing accordingly.

So, diversifying investments more aggressively into clean-energy research and development would position Exxon to be better able to adapt to changes, capitalize on anticipated carbon trading schemes and expected developments in the regulatory environment, hedge its bets, and build new business opportunities as alternatives to petroleum-based technologies gain market traction.

Instead, the company seems to be biding its time, waiting for renewable energy markets to develop rather than jumping in to help build them. As a result, rather than taking a proactive role in advancing these technologies, Exxon runs the risk of either not having sufficient access to a viable partner when it finally decides to enter the renewables market in a substantive way, or of arriving too late and losing first-mover advantage, if not significant market share. Most of the other majors — BP, Chevron, Shell — have at least some robust renewable energy programs in place — wind, solar, geothermal, fuel cells, tidal power, and more — albeit relatively small ones in terms of revenue. But at least they're gaining experience and partners in the renewables space.

There are billions of dollars being invested by some pretty smart people in the notion that there's a Moore's Law of energy — that is, that innovation can make clean energy both ubiquitous are cheap. They're betting that energy can follow the path of microprocessors, hard-disk storage, and wireless telecommunications, where costs have plummeted as technology has steadily improved — and carbon can, in effect, be taken out of the energy equation. If even some of these bets pay off, Exxon's assumption — that oil and natural gas will remain the dominant energy sources for decades to come — could put them at a competitive disadvantage. Hence, the interest of long-term, multi-generational shareholders like the Rockefeller family.

It doesn't take much to roil the markets, as Exxon found out last week. At the same time that it revealed gusher-level profits, it's stock took a dive. The reason: Exxon's oil production was down 10 percent, continuing a yearlong decline. It's unclear whether the company will continue to have difficulty finding sufficient new reserves to replenish the billions of barrels it is pumping out of the planet, but if the trend continues, Exxon could find itself in trouble.

It's not too late. By changing strategies, Exxon stands to capture a better foothold in the evolving energy market and a significant percentage of revenues that would otherwise be lost.

Experts believe that the most viable technologies for the near term — such as cellulosic ethanol, next-generation solar technology, and plug-in hybrid technology, along with copious amounts of energy efficiency — represent the future of energy. With the likelihood of such events as a carbon tax or carbon caps within the next decade, the conditions for market acceptance of lower-carbon solutions become more attractive. The concept of negawatt programs is gaining traction, with power companies investing in conservation (average cost of $350/kilowatt) over coal ($1,000/kilowatt). The emergence of small, lightweight, long-running lithium-ion batteries has helped create a market for notebook computers, cell phones, and other portable devices. Efforts to scale that technology for use in automobiles could do for that industry what improved batteries did for computer and phone companies, building a market for hybrid, plug-in, or electric vehicles with great efficiency, acceleration, and range — at the same price or cheaper than today's gas-powered vehicles.

It's not just technologies that are changing. So are markets. For example, until relatively recently, the distribution of gasoline has been controlled by entities with an interest in keeping alternatives out of the infrastructure — the oil companies. But Wal-Mart and other independent retailers with large fuel distribution networks are largely impartial to the type of fuel they carry, and their market reach to consumers can accelerate the growth of alternative products and infrastructure. Large fuel purchasers like the Defense Department are actively creating conduits for the market acceptance of oil and gas alternatives by encouraging economies of scale and increased R&D. There are other disruptive technologies on the horizon that could gain market acceptance, further dampening demand for oil and gas. By waiting for a single "breakthrough" technology, Exxon is overlooking that this sector is engaged in an iterative process that is building a new approach to energy applications; waiting for the perfect solution is a potentially dangerous approach, from a business strategy perspective.

The modern history of innovation suggests that being big is no assurance of survival. Consider that six of the thirty multinationals included in the Dow Jones Industrial Average 20 years ago are gone today (Allied-Signal, American Can, Bethlehem Steel, Texaco, Union Carbide, and Woolworth), and a seventh, AT&T, exists in name only, the original entity having been scattered into multiple companies. Several others — Eastman Kodak, IBM, Sears, and Westinghouse — look radically different today than then. In many industries, the dominant players not that long ago are gone. Burroughs, Data General, Digital Equipment, NCR, Sperry, Univac, Wang — all leading computer manufacturers of the 1970s and 1980s — are cases in point.

The Rockefellers' efforts are aimed at ensuring that Exxon doesn't follow this path, and that it will overcome its stubborn, decidedly non-green, outlook toward one that recognizes the realities of a world in which carbon and climate become significant business considerations.

Will the strategy work? The odds are long, but we'll know more after the company's annual meeting on May 28. If history is any indicator, Exxon is likely to downplay dissent in favor of its own hellbent course.

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