In recent years, environmental and social (E&S) issues have taken center stage in corporate governance. Hedge fund activists and institutional investors have increasingly used shareholder proposals and proxy fights to influence companies’ E&S policies. While the rise of E&S activism reflects growing societal pressure on corporations, it raises a critical question: Should corporate E&S strategy be shaped by activist investors or entrusted to corporate boards?

This piece argues that corporate boards, not activist hedge funds, are best positioned to lead E&S initiatives. Boards have fiduciary duties to balance shareholder returns with broader stakeholder interests and are equipped with the institutional knowledge necessary for integrating E&S strategies into long-term corporate objectives. In contrast, hedge fund activists and proxy advisors often prioritize short-term gains, undermining sustainable, holistic governance.

Hedge fund activism, once focused primarily on financial engineering, has increasingly targeted E&S issues. Recent analysis from leading corporate governance experts highlights how E&S concerns have become central to activist campaigns, with environmental and social topics gaining prominence in shareholder proposals and proxy contests.[1]

Engine No. 1’s successful proxy fight at ExxonMobil in 2021 is often cited as a landmark ESG victory. With just a 0.02% stake, the hedge fund secured three board seats by appealing to Exxon’s financial underperformance and strategic stagnation.[2] However, in the years since, little suggests that the campaign yielded meaningful environmental or social progress. Exxon has continued expanding fossil fuel production, including a $60 billion acquisition of Pioneer Natural Resources, a move projected to dramatically increase its Scope 3 emissions. Engine No. 1’s appointed directors did not oppose this acquisition, and the firm itself has since pivoted away from proxy activism.[3] Its lead strategist, Charlie Penner, left shortly after the Exxon campaign, and founder Chris James has distanced the firm from the “activist” label altogether.[4]

This trajectory has fueled criticism that Engine No. 1’s climate rhetoric was strategic rather than substantive, less about sustainability and more about advancing a conventional governance agenda. While Exxon’s stock price soared in the wake of the campaign, driven by oil market tailwinds, its climate strategy has remained largely unchanged.[5] The company has even taken legal action to block future climate-focused shareholder proposals, signaling a hard turn away from ESG engagement.[6] In retrospect, the campaign reflects how ESG framing can serve as a useful proxy fight tactic without translating into durable environmental outcomes.[7]

Activist hedge funds often leverage informal alliances, known as “wolf pack” tactics, to intensify pressure on corporate boards while avoiding disclosure obligations.[8] These coordinated efforts typically aim to accelerate financial returns through divestitures, cost-cutting, or governance overhauls. However, such strategies can fracture board unity and divert attention from developing consistent, long-term environmental and social priorities.[9]

Proxy advisors, particularly Institutional Shareholder Services (ISS) and Glass Lewis, further amplify activist influence. Together, these two firms control 97% of the proxy advisory market.[10] Research shows a strong correlation between proxy advisor recommendations and institutional investor voting patterns. One study reveals that over 25% of mutual funds follow ISS recommendations almost exactly.[11] Proxy advisors frequently recommend in favor of shareholder proposals, including those focused on environmental and social causes, even when they may pose conflicts with management’s long-term strategy.

While well-intentioned, this dynamic can sideline corporate boards’ nuanced understanding of E&S challenges and operational realities. The low correlation between proxy advisor recommendations and management’s positions (0.06 for ISS, 0.15 for Glass Lewis) demonstrates the divergence.[12] Rather than allowing boards to balance stakeholder interests and financial sustainability, proxy advisors and activists often prioritize check-the-box E&S metrics or headline-grabbing proposals that may lack feasibility or long-term alignment.

Corporate boards are uniquely equipped to lead on environmental and social (E&S) strategy because they combine fiduciary responsibility, institutional knowledge, and long-term accountability. Directors are legally obligated to act in the best interests of the company and its shareholders, giving them a built-in incentive to evaluate E&S goals through a strategic, risk-adjusted lens. Unlike hedge fund activists, who typically operate on short time horizons and may exit after a campaign, boards maintain continuous oversight and can embed sustainability into the company’s core operations over time.

Boards also possess a deeper understanding of a company’s internal dynamics, stakeholder relationships, and operational constraints. This allows them to integrate E&S initiatives with other corporate priorities such as innovation, employee retention, and long-term growth, rather than viewing sustainability as a standalone objective. In contrast, activist-driven E&S proposals often reflect outsider assessments that may overlook the trade-offs and complexities involved in implementation.

Martin Lipton’s governance framework, referred to as the New Paradigm and endorsed by leading institutional investors, argues that boards and CEOs, rather than shareholder activists, should be responsible for setting high standards on human rights, sustainability, and stakeholder engagement. Under this framework, institutional investors are encouraged to act as stewards rather than disruptors, engaging privately and supporting the board’s long-term vision when possible.[13] Board-led E&S governance is not just preferable in theory, but essential in practice. The responsibility for environmental and social priorities must rest with leaders who are embedded in the company, legally accountable, and capable of aligning these goals with long-term strategy.

In the evolving landscape of E&S governance, activist hedge funds and proxy advisors may play supporting roles, but true leadership must reside with the board. Only boards possess the fiduciary responsibility, operational insight, and long-term accountability necessary to integrate environmental and social priorities sustainably. A boardroom committed to stability, accountability, and long-term value is the cornerstone of sustainable corporate governance.

 

 

[1] Harvard Law School Forum on Corporate Governance, “M&A Developments: Hedge Fund Activism” (May 6, 2024). https://corpgov.law.harvard.edu/2024/05/06/ma-developments-hedge-fund-activism/

[2] Andrew Ross Sorkin et al., What Did Exxon’s Main Agitator Actually Achieve?, The New York Times DealBook (Mar. 27, 2024), https://messaging-custom-newsletters.nytimes.com/dynamic/render?productCode=DK&uri=nyt%3A%2F%2Fnewsletter%2Fd3f94039-2d4e-5630-9a8d-94573e5cada5.

[3] Michael D. Goldhaber, The Revolution That Wasn’t: Exxon Doubles Down on Fossil Fuels Three Years After a Vaunted ESG Proxy Fight, NYU Stern Ctr. for Bus. & Hum. Rts. (Mar. 19, 2024), https://bhr.stern.nyu.edu/quick-take/the-revolution-that-wasnt-exxon-doubles-down-on-fossil-fuels-three-years-after-a-vaunted-esg-proxy-fight/.

[4] Sorkin et al., What Did Exxon’s Main Agitator Actually Achieve?

[5] Id.

[6] Goldhaber, The Revolution That Wasn’t.

[7] Id.

[8] John C. Coffee & Darius Palia, The Wolf at the Door: The Impact of Hedge Fund Activism on Corporate Governance, Columbia Law School (2024).

[9] Wachtell, Lipton, Rosen & Katz, Dealing with Activist Hedge Funds and Other Activist Investors (Sept. 2024), https://corpgov.law.harvard.edu/2024/09/04/dealing-with-activist-hedge-funds-and-other-activist-investors-7/.

[10] Jonathan Zytnick, Imputing Proxy Advisor Recommendations (June 2024), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4878758.

[11] Peter Iliev & Michelle Lowry, Are Mutual Funds Active Voters?, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2145398.

[12] Zytnick, Imputing Proxy Advisor Recommendations.

[13] Martin Lipton, The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth (2016), https://www.wlrk.com/webdocs/wlrknew/AttorneyPubs/WLRK.25960.16.pdf.