Exxon Mobil DEF 14A 2006
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SCHEDULE 14A INFORMATION
Statement Pursuant to Section 14(a) of
Payment of Filing Fee (Check the appropriate box):
We invite you to attend the annual meeting of shareholders on Wednesday, May 31, 2006, at the Morton H. Meyerson Symphony Center, 2301 Flora Street, Dallas, Texas. The meeting will begin promptly at 9:00 a.m., Central Time. At the meeting, you will hear a report on our business and vote on the following items:
Only shareholders of record on April 6, 2006, or their proxy holders may vote at the meeting. Attendance at the meeting is limited to shareholders or their proxy holders and ExxonMobil's guests. Only shareholders or their valid proxy holders may address the meeting.
This booklet includes the formal notice of the meeting, the proxy statement, and financial statements. The proxy statement tells you about the agenda, procedures, and rules of conduct for the meeting. It also describes how the Board operates, gives personal information about our director candidates, and provides information about the other items of business to be conducted at the meeting.
Even if you own only a few shares, we want your shares to be represented at the meeting. You can vote your shares by Internet, toll-free telephone call, or proxy card.
To attend the meeting in person, please follow the instructions on page 2. A live audiocast of the meeting and a report on the meeting will be available on our Web site, exxonmobil.com.
Table of Contents
Who May Vote
Shareholders of ExxonMobil, as recorded in our stock register on April 6, 2006, may vote at the meeting.
How to Vote
You may vote in person at the meeting or by proxy. We recommend you vote by proxy even if you plan to attend the meeting. You can always change your vote at the meeting.
How Proxies Work
ExxonMobil's Board of Directors is asking for your proxy. Giving us your proxy means you authorize us to vote your shares at the meeting in the manner you direct. You may vote for all, some, or none of our director candidates. You may also vote for or against the other proposals, or abstain from voting.
If your shares are held in your name, you can vote by proxy in one of three convenient ways:
Your proxy card covers all shares registered in your name and shares held in your Computershare Investment Plan account. If you own shares in the ExxonMobil Savings Plan for employees and retirees, your proxy card also covers those shares.
If you give us your signed proxy but do not specify how to vote, we will vote your shares in favor of our director candidates; in favor of the ratification of the appointment of independent auditors; and against the shareholder proposals.
If you hold shares through someone else, such as a stockbroker, you will receive material from that firm asking how you want to vote. Check the voting form used by that firm to see if it offers Internet or telephone voting.
Voting Shares in the ExxonMobil Savings Plan
The trustee of the ExxonMobil Savings Plan will vote Plan shares as participants direct. To the extent participants do not give instructions, the trustee will vote shares as it thinks best. The proxy card serves to give voting instructions to the trustee.
Revoking a Proxy
You may revoke your proxy before it is voted at the meeting by:
Independent inspectors count the votes. Your individual vote is kept confidential from us unless special circumstances exist. For example, a copy of your proxy card will be sent to us if you write comments on the card.
In order to carry on the business of the meeting, we must have a quorum. This means at least a majority of the outstanding shares eligible to vote must be represented at the meeting, either by proxy or in person. Treasury shares, which are shares owned by ExxonMobil itself, are not voted and do not count for this purpose.
The director candidates who receive the most votes will be elected to fill the available seats on the Board. Approval of the other proposals requires the favorable vote of a majority of the votes cast. Only votes FOR or AGAINST a proposal count. Abstentions and broker non-votes count for quorum purposes but not for voting purposes. Broker non-votes occur when a broker returns a proxy but does not have authority from the beneficial owner to vote on a particular proposal.
Annual Meeting Admission
Only shareholders or their proxy holders and ExxonMobil's guests may attend the meeting. For safety and security reasons, no cameras, camera phones, recording equipment, electronic devices, large bags, briefcases, or packages will be permitted in the meeting. In addition, each shareholder and guest will be asked to present a valid government-issued picture identification, such as a driver's license, before being admitted to the meeting.
For registered shareholders, an admission ticket is attached to your proxy card. Please detach and bring the admission ticket with you to the meeting.
If your shares are held in the name of your broker, bank, or other nominee, you must bring to the meeting an account statement or letter from the nominee indicating that you beneficially owned the shares on April 6, 2006, the record date for voting. You may receive an admission ticket in advance by sending a written request with proof of ownership to the address listed under "Contact Information" on page 3.
Shareholders who do not present admission tickets at the meeting will be admitted only upon verification of ownership at the admission counter.
Audiocast of the Annual Meeting
You are invited to visit our Web site at exxonmobil.com to hear the live audiocast of the meeting at 9:00 a.m., Central Time, on Wednesday, May 31, 2006. An archived copy of this audiocast will be available on our Web site for one year.
Conduct of the Meeting
The Chairman has broad responsibility and legal authority to conduct the annual meeting in an orderly and timely manner. This authority includes establishing rules for shareholders who wish to address the meeting. Only shareholders or their valid proxy holders may address the meeting. Copies of these rules will be available at the meeting. The Chairman may also exercise broad discretion in recognizing shareholders who wish to speak and in determining the extent of discussion on each item of business. In light of the number of business items on this year's agenda and the need to conclude the meeting
within a reasonable period of time, we cannot assure that every shareholder who wishes to speak on an item of business will be able to do so. Dialogue can better be accomplished with interested parties outside the meeting and, for this purpose, we have provided a method for raising issues and contacting the non-employee directors either in writing or electronically. The Chairman may also rely on applicable law regarding disruptions or disorderly conduct to ensure that the meeting is conducted in a manner that is fair to all shareholders. Shareholders making comments during the meeting must do so in English so that the majority of shareholders present can understand what is being said.
If you have questions or need more information about the annual meeting, write to:
or call us at 1-972-444-1157.
For information about shares registered in your name or your Computershare Investment Plan account, call ExxonMobil Shareholder Services at 1-800-252-1800 (within the continental U.S. and Canada), 1-781-575-2058 (outside the continental U.S. and Canada), or access your account via the Web site at computershare.com/exxonmobil. We also invite you to visit ExxonMobil's Web site at exxonmobil.com. Web site materials are not part of this proxy solicitation.
The Board of Directors and its committees perform a number of functions for ExxonMobil and its shareholders, including:
The Board has adopted Corporate Governance Guidelines that govern the structure and functioning of the Board and set out the Board's position on a number of governance issues. A copy of our current Corporate Governance Guidelines is posted on the Corporate Governance section, listed under Investor Information, of our Web site. They are also available to any shareholder on request to the Secretary at the address given under "Contact Information" above.
Our Corporate Governance Guidelines require that a substantial majority of the Board consist of independent directors. In general, the Guidelines require that an independent director must have no material relationship with ExxonMobil, directly or indirectly, except as a director. The Board determines
independence on the basis of the standards specified by the New York Stock Exchange (NYSE) and other facts and circumstances the Board considers relevant.
Subject to some exceptions and transition provisions, the NYSE standards generally provide that a director will not be independent if: (1) the director is, or in the past three years has been, an employee of ExxonMobil; or a member of the director's immediate family is, or in the past three years has been, an executive officer of ExxonMobil; (2) the director or a member of the director's immediate family has received more than $100,000 per year in direct compensation from ExxonMobil other than for service as a director; (3) the director or a member of the director's immediate family currently is a partner of PricewaterhouseCoopers LLP (PwC), our independent auditors; or an employee in PwC's audit, assurance, or tax compliance practices; or within the past three years has been a PwC partner or employee who worked on ExxonMobil's audit; (4) the director or a member of the director's immediate family is, or in the past three years has been, employed as an executive officer of a company where an ExxonMobil executive officer serves on the compensation committee; or, (5) the director or a member of the director's immediate family is an executive officer of a company that makes payments to, or receives payments from, ExxonMobil in an amount which, in any 12-month period during the past three years, exceeds the greater of $1 million or 2 percent of that other company's consolidated gross revenues.
The Board has reviewed business and charitable relationships between ExxonMobil and each non-employee director to determine compliance with the NYSE standards described above and to evaluate whether there are any other facts or circumstances that might impair a director's independence including the matters described on page 10 under "Director and Officer Relationships." Based on that review, the Board has determined that all non-employee directors are independent.
Term of Office; Mandatory Retirement
All ExxonMobil directors stand for election at the annual meeting. Non-employee directors cannot stand for election after they have reached age 72.
Board Meetings and Attendance
The Board met 12 times in 2005. ExxonMobil's directors, on average, attended approximately 93 percent of Board and committee meetings during 2005.
ExxonMobil's non-employee directors held eight executive sessions in 2005. Normally, the Chair of the Board Affairs Committee and the Chair of the Compensation Committee preside at executive sessions on a rotational basis, but the non-employee directors may, in light of the subject matter under discussion, select another presiding director for a particular session.
Annual Meeting Attendance
As specified in our Corporate Governance Guidelines, it is ExxonMobil's policy that directors should make every effort to attend the annual meeting of shareholders. All directors attended last year's meeting except for Mr. Palmisano who became a director in January 2006.
Code of Ethics and Business Conduct
The Board maintains policies and procedures (which we refer to in this proxy statement as our Code) that represent both the code of ethics for the principal executive officer, principal financial officer, and principal accounting officer under Securities and Exchange Commission (SEC) rules, and the code of
business conduct and ethics for directors, officers, and employees under NYSE listing standards. The Code applies to all directors, officers, and employees.
The Code is posted on our Web site and is available free of charge on request to the Secretary at the address given under "Contact Information" on page 3. The Code is also included as an exhibit to our Annual Report on Form 10-K. Any amendment of the Code will be promptly posted on our Web site.
The Board Affairs Committee will review any issues under the Code involving an executive officer or director and will report its findings to the Board. The Board does not envision that any waiver of the Code will be granted, but should a waiver occur for an executive officer or director, it will also be promptly disclosed on our Web site.
The Board Affairs Committee has adopted Guidelines for the Selection of Non-Employee Directors that describe the qualifications the Committee looks for in director candidates. The Guidelines are posted on our Web site and are available free of charge on request to the Secretary at the address given under "Contact Information" on page 3.
In general, the Guidelines provide that candidates for non-employee director of ExxonMobil should be individuals who have achieved prominence in their fields, with experience and demonstrated expertise in managing large, relatively complex organizations, and/or, in a professional or scientific capacity, be accustomed to dealing with complex situations preferably with worldwide scope.
A substantial majority of the Board must meet the independence standards described in the Corporation's Corporate Governance Guidelines, and all candidates must be free from any relationship with management or the Corporation that would interfere with the exercise of independent judgment. Candidates should be committed to representing the interests of all shareholders and not any particular constituency.
The Board believes a director should be able to serve for at least several years. Candidates should bring integrity, insight, energy, and analytical skills to Board deliberations, and must have a commitment to devote the necessary time and attention to oversee the affairs of a corporation as large and complex as ExxonMobil. ExxonMobil recognizes that the strength and effectiveness of the Board reflect the balance, experience, and diversity of the individual directors; their commitment; and importantly, the ability of directors to work effectively as a group in carrying out their responsibilities. ExxonMobil seeks candidates with diverse backgrounds who possess knowledge and skills in areas of importance to the Corporation. The Board must include members with particular experience required for service on key Board committees, as described in the committee charters on our Web site.
The Committee identifies director candidates primarily through recommendations made by the non-employee directors. These recommendations are developed based on the directors' own knowledge and experience in a variety of fields, and research conducted by ExxonMobil staff at the Committee's direction. The Committee also considers recommendations made by the employee directors, shareholders, and others, including search firms. The Committee has the authority to engage consultants to help identify or evaluate potential director nominees but has not done so recently. All recommendations, regardless of the source, are evaluated on the same basis against the criteria contained in the Guidelines.
Shareholders may send recommendations for director candidates to the Secretary at the address given under "Contact Information" on page 3. A submission recommending a candidate should include:
Communications with Directors
The Board Affairs Committee has approved and implemented procedures for shareholders and other interested persons to send communications to individual directors or the non-employee directors as a group.
The Corporate Governance section of our Web site contains additional information, including our Certificate of Incorporation and By-Laws, written charters for each Board committee, and Board policy statements.
ITEM 1 ELECTION OF DIRECTORS
The Board of Directors has nominated the director candidates named on the following pages. Personal information on each of our nominees is also provided. All of our nominees currently serve as ExxonMobil directors. Messrs. S.J. Palmisano and J.S. Simon were elected by the Board in January 2006. The recommendation of Mr. Palmisano was made by the incumbent non-employee directors on the Board Affairs Committee. Mr. Simon also serves as Senior Vice President of the Corporation. Mr. Lee R. Raymond elected to resign as director effective December 31, 2005, and is not standing for election.
If a director nominee becomes unavailable before the election, your proxy authorizes the people named as proxies to vote for a replacement nominee if the Board names one.
The Board recommends you vote FOR each of the following candidates:
Director and Officer Relationships
ExxonMobil and its affiliates have business relationships involving the purchase or sale of goods or services in the ordinary course of business with companies for which our non-employee directors serve as executives. In no case does any director have an interest in these transactions other than in his or her capacity as an executive of the other corporation, and in all cases such purchases or sales in 2005 were less than 1 percent of the other company's 2004 revenues. The Board believes that these relationships are not directly or indirectly material to the director or ExxonMobil.
ExxonMobil and its subsidiaries have over 83 thousand employees around the world and some of these employees are related by birth or marriage. At present, three executive officers have family members who are also employed by the Corporation. No ExxonMobil employee receives preferential treatment by reason of his or her relationship to an executive officer, and we do not consider specific information concerning these relationships to be material by any reasonable standard.
The table below shows the total compensation paid in 2005 to each of our current non-employee directors (excluding Mr. Palmisano who was elected in January 2006).
ExxonMobil employees receive no extra pay for serving as directors. Non-employee directors receive compensation consisting of cash and restricted stock. The base fee is $75,000 a year. We also pay members of the Audit and Compensation Committees a fee of $15,000 per year, and an additional fee of $10,000 per year to the Chairs of those Committees. For other Committees, non-employee directors receive $8,000 per year for each Committee on which they serve, and the Chairs receive an additional fee of $7,000 per year. No fees are paid to members of the Executive Committee. Non-employee directors are reimbursed for actual expenses to attend meetings.
Non-employee directors may elect to defer all or part of these fees either into ExxonMobil stock equivalents with dividends or into a deferred account that earns interest at the prime rate. Deferred fees are payable in one to five annual installments after the director leaves the Board.
In addition to the fees described above, we pay a significant portion of director compensation in stock. At present, each incumbent non-employee director receives an annual award of 4,000 shares of restricted stock. Each new non-employee director receives a one-time grant of 8,000 shares of restricted stock upon first being elected to the Board. While on the Board, the non-employee director receives the same cash dividends on restricted shares as a holder of regular common stock, but the director is not allowed to sell the shares. The restricted shares can be forfeited if the director leaves the Board early.
Current and former non-employee directors of Exxon Mobil Corporation are eligible to participate in the ExxonMobil Foundation's Educational and Cultural Matching Gift Programs under the same terms as the Company's U.S. employees.
The Board appoints committees to help carry out its duties. In particular, Board committees work on key issues in greater detail than would be possible at full Board meetings. Only non-employee directors may serve on the Audit, Compensation, Board Affairs, Contributions, and Public Issues Committees. Each Committee has a written charter. The charters are posted on our Web site and are available free of charge on request to the Secretary at the address given under "Contact Information" on page 3.
The table below shows the current membership of each Board committee and the number of meetings each Committee held in 2005.
C = Chair
The Audit Committee met 11 times during 2005. The Committee oversees accounting and internal control matters. Its responsibilities include appointing the independent auditors to audit ExxonMobil's financial statements. The Committee's report on its activities for the fiscal year 2005 is on page 29. The Committee's policy and procedures for pre-approving fees paid to the independent auditors are set forth on pages 30 through 32 and are posted on our Web site. Fees paid for 2005 and 2004 are provided on pages 32 through 34. The Committee's charter is attached as Appendix B to this proxy statement.
The Board has determined that all members of the Committee are independent within the meaning of both the SEC rules and the NYSE listing standards. The Board has further determined that all members are financially literate within the meaning of the NYSE standards, and Mr. Houghton, Mr. Howell, Mr. Lippincott and Dr. McKinnell are "audit committee financial experts" as defined in the SEC rules.
The Compensation Committee met nine times during 2005. The Committee oversees compensation for ExxonMobil's senior executives, including their salary, bonus, and incentive awards. The Committee also reviews succession plans for key executive positions. The Committee's report on executive compensation starts on page 14. The Board has determined that all members of the Committee are independent within the meaning of the NYSE listing standards.
Board Affairs Committee
The Board Affairs Committee met six times during 2005. The Committee recommends director candidates, reviews non-employee director compensation, and reviews other corporate governance practices, including the Corporate Governance Guidelines available on our Web site. The Board has determined that all members of the Committee are independent within the meaning of the NYSE listing standards.
Advisory Committee on Contributions
The Advisory Committee on Contributions met three times during 2005. The Committee reviews the level of ExxonMobil's support for education and other public service programs, including the Company's contributions to the ExxonMobil Foundation. The Foundation works to improve the quality of education in America at all levels, with special emphasis on math and science. The Foundation also supports the Company's other cultural and public service giving. The Board has determined that all members of the Committee are independent within the meaning of the NYSE listing standards.
The Finance Committee met one time during 2005. The Committee reviews ExxonMobil's financial policies and strategies, including our capital structure, and authorizes the issuance of corporate debt within limits set by the Board.
Public Issues Committee
The Public Issues Committee met three times during 2005. The Committee reviews the effectiveness of the Corporation's policies, programs, and practices on safety, health, the environment, and social responsibility. The Committee hears reports from operating units on safety and environmental activities. The Committee also visits operating sites to observe and comment on current operating practices. The Board has determined that all members of the Committee are independent within the meaning of the NYSE listing standards.
The Executive Committee met one time during 2005. The Committee has broad power to act on behalf of the Board. In practice, the Committee meets only when it is impractical to call a meeting of the full Board.
These tables show the number of ExxonMobil common stock shares each executive named in the Summary Compensation Table on page 20 and each non-employee director owned on February 28, 2006. In these tables, ownership means the right to direct the voting or the sale of shares, even if those rights are shared with someone else. None of these individuals owns more than 0.13 percent of the outstanding shares.
On February 28, 2006, ExxonMobil's directors and executive officers (28 people) together owned 9,800,576 shares of ExxonMobil stock and 11,092,286 shares covered by exercisable options, representing about 0.34 percent of the outstanding shares.
This report by the Compensation Committee will focus on the following:
Objectives of the Compensation Program
The Company's executive compensation program is designed with the following primary objectives:
Compensation is part of a fully integrated system of multiple programs, which include:
The performance assessment process is the integrating factor in this system, thus it warrants a brief explanation before discussing the elements of compensation.
Performance Assessment Process
Each executive is assessed annually through a well-defined process in which all executives worldwide are ranked against other executives with comparable responsibilities. The assessment of individual performance and ranking takes into account results and the means through which those results are achieved. Results include the achievement of financial and operating objectives identified for all executives at the beginning of each performance period. These objectives can vary depending on the business function in which the executive works. Ranking results are translated into salary and other compensation targets to create a wide differentiation in pay between the lowest and highest
performers. This performance assessment process applies to over 45,000 managers and professionals worldwide (including over 1,700 executives). The process takes about three months to complete in over 80 countries and across several business and staff functions. Assessments of executive career potential are conducted concurrently and implemented through a consistently applied, single process. The results of these processes are also primary inputs to the executive development process which is described later in this report.
Compensation and Benefits: Elements of Compensation Selected to Achieve Objectives
This section of the report describes the elements of compensation and benefits, why they were selected, and how the amounts of each element are determined.
Salaries provide executives with a base level of monthly income. The salary program helps achieve the objectives outlined above by attracting and retaining strong talent. The amount of annual salary an individual executive receives is based on the results of the performance assessment and ranking process. As described, salaries vary between the highest and lowest-rated performers by a wide margin. This differentiation in salary helps reward continuous improvement in individual performance and key business indicators. Performance-based salaries also affect the level of retirement benefits, since salary is typically included in retirement-benefit formulas in most countries.
The competition for high-caliber executives extends beyond the oil industry. Therefore, we compare our salary structure with the largest multinational companies and integrated oil companies. Because ExxonMobil is significantly larger and more diverse than most of the other comparison companies, we do not target an exact percentile at which to align salaries. We focus on a broader and more flexible target, generally a wide range around the 50th percentile. This allows us to respond better to changing business conditions, manage salaries more evenly over a career, and minimize the potential for automatic ratcheting-up of salaries that could occur with an inflexible and narrow competitive target among benchmarked companies. This orientation also provides more flexibility to differentiate salaries to reflect a range of experience and performance levels among executives.
Short-Term Cash Awards
Short-term awards are designed to help achieve the objectives of the compensation program and may vary significantly year-over-year, versus other forms of compensation. Short-term awards help stress that results and contributions in any year affect future years.
Short-term incentive awards consist of cash bonuses and earnings bonus units. (See page 23 for a description of the terms of earnings bonus units.) Cash bonuses are granted to executives to reward their contributions to the business during the past year. Earnings bonus units are granted as incentives for posting strong, mid-term corporate performance.
Cash awards and earnings bonus units are granted once a year and are based on two factors. First, the size of the annual bonus pool (including cash and earnings bonus units) is based on the annual earnings performance of the Company and other factors. Second, the size of individual awards within the bonus pool is differentiated significantly among participants based on individual performance assessments, as well as level of responsibility. Only about 60 percent of executives are eligible for annual cash and earnings bonus unit grants each year, depending on their level of individual performance.
The Committee establishes a ceiling each year for cash bonuses and earnings bonus units. The combined ceiling for 2005 was $214 million. This ceiling was increased from the 2004 level by about
16 percent. In reaching this decision, the Committee considered several factors. These included the record-setting financial performance of the Company in 2005, demonstrated by a 43 percent increase in net income over 2004; strong operating performance in our business; strengthening of our worldwide competitive position; and progress toward long-range strategic goals, which include objectives in the areas of safety, health, and environment. The Committee does not give specific weights to these measures, nor is a particular formula applied. The entire amount was granted in awards to approximately 1,300 employees.
In 2005, approximately one-half of executive short-term award value was in the form of earnings bonus units. Cumulative earnings of $3.75 per share are required for each earnings bonus unit granted in 2005 to pay out in full, which is an increase from $3.25 in 2004. Payout occurs on the third anniversary of the grant up to the cumulative earnings per share at that time, or when the maximum settlement value of $3.75 per unit is reached, if earlier. An individual earnings bonus unit award may be forfeited before it is settled if the executive leaves the Company before the standard retirement age, or engages in activity that is detrimental to the Company. Detrimental activity could include a violation of the Company's code of ethics.
It is important to note that tax assistance is not provided by the Company for either short-term awards or the long-term awards discussed below.
Long-Term, Stock-Based Awards
Restricted stock forms the basis of awards under this program, which is referred to as the Long Term Incentive Program. It is intended to help achieve the objectives of the compensation program, including the retention of high-performing and experienced talent, a career orientation, and strong alignment with the interests of shareholders. To help achieve these objectives, the program includes some of the longest holding restrictions in corporate America, as described in more detail below. These restrictions ensure that the value received by executives depends on strong performance of the Company over a very long time period.
The petroleum business requires long-term, capital-intensive investments. These investments often take many years to generate returns to shareholders. The Long Term Incentive Program is intended to emphasize the need for executives to maintain a focus on the long-range, strategic goals of the business. It balances the emphasis on long-term versus short-term business objectives, and reinforces that one should not be achieved at the expense of the other. Long-term incentive awards also facilitate the development and retention of strong management through share ownership and recognition of future performance. Long-term incentives have less year-to-year variability due to these design considerations and the nature of the Company's business.
Alignment with shareholder interests is reflected in current stock ownership among senior executives, the value of which ranges from 27 to 51 times base salary for the named executive officers, and from 13 to 35 times for the other officers of the Company. These levels of ownership far exceed common practice across industries in the U.S., and they reflect a significant personal investment in the Company by the same executives responsible for determining the future success of the organization and the return to shareholders.
The minimum restricted period for restricted stock is three years. For most recipients, 50 percent of each grant is subject to a three-year restricted period, and the balance of the grant is subject to a seven-year restricted period. However, for our most senior executives, significantly longer restricted periods apply. Specifically, 50 percent of each grant to the most senior executives is subject to a five-year restricted period and the balance of each grant is restricted for 10 years or until retirement,
whichever is later. Page 21 provides more information on the terms of our restricted stock, but three key points should receive further emphasis:
Restricted stock awards must be sufficient in size to provide a strong, long-term performance and retention incentive for executives, and to increase their vested interest in the Company. The number of restricted shares granted to executive officers is based on Company results and individual performance assessments. The number of shares held by an executive is not a factor that is used in determining subsequent grants. We believe that annual grants at a competitive level, along with significant vesting requirements, are the most effective method of reinforcing the long-term nature of our business. In addition, annual grants of stock, rather than cash, reinforce ownership levels and alignment with shareholder interests.
The total number of shares granted under this approach is substantially less than the number that would be required under an option program designed to deliver equivalent levels of compensation. However, the alternative of using options is retained under the 2003 Incentive Program approved by shareholders.
In administering the Long Term Incentive Program, we are sensitive to the potential for dilution of future earnings per share. For this reason and because of other compensation design considerations, we do not administer a broad-based stock program. Instead, we focus the program on employees who will have the greatest impact on the strategic direction and long-term results of the Company by virtue of their senior roles and responsibilities. Restricted stock awards were granted to executive officers and just over 5,000 other select employees in 2005, or about six percent of total employees. The resulting level of share utilization in the Long Term Incentive Program is substantially less than share usage at other large, multinational companies of similar scope and size.
Pension and Savings Plans
Senior executives participate in the same pension and savings plans as other eligible employees. These include qualified and non-qualified defined contribution and defined benefit plans. The plans are designed in combination to provide an appropriate level of replacement income upon retirement. The defined benefit pension plan also provides an incentive for a long-term career with the Company which is a key business objective. This is accomplished through a formula that delivers the highest benefit accumulation at later career stages. Like all other forms of compensation, the level of retirement benefit is determined by individual performance assessments throughout a career, since individual performance determines the level of compensation, which is an integral component of savings and pension benefit formulas. The value of company contributions to the savings plan is included in the Summary Compensation Table. To supplement the required Pension Plan Table, we provide a complete estimate of pension plan benefits for the Named Executive Officers on page 25.
A key, related principle at work throughout these compensation and benefit programs is commonality of program application to executives. In most countries, including the U.S., senior executives and lower-level executives are eligible to participate in the same compensation, retirement, and benefit programs.
Executive Development, Succession Planning, and Continuity of Leadership
This process is the third part of the integrated system described above. It warrants a brief summary in this report to complete the full picture of how rigorous performance assessments lie at the center of this integrated system, which is critical to the long-term success of our Company.
The executive development process ensures continuity of leadership over the long term, and it forms the basis on which the Company makes ongoing executive assignments. The executive development process is a key success factor in managing the long investment lead times of our business. Through the integration of the performance assessment and executive development processes, position assignments are based on the most qualified and ready executives. The future leaders of the Company are developed through these carefully selected assignments.
Through a common system of measuring executive performance and applying it to our executive development and succession planning process, we reinforce common standards and values. Shareholders benefit from assignments throughout the Company of executives who understand the Company's underlying core values and high standards. The performance assessment of all managers in the Company is determined, in part, on how well they implement the executive development process. A career orientation and the culture of promotion-from-within are key fundamentals that underpin and help sustain the process. We believe that consistent and ongoing application of this process meets the long-range requirements of the business and achieves competitive advantage.
Within the framework described above, the Committee determines the salary and bonus of the CEO based on leadership, the execution of business plans, and strategic results. Key considerations include long-term returns on capital, growth in earnings per share, and the operating results of the business, which include the achievement of safety, health, and environmental objectives. The size and complexity of the business, and the CEO's experience are also key factors. As explained earlier, the Committee does not use narrow, quantitative measures or formulas in determining compensation levels.
The restricted stock granted to Mr. Raymond in 2005 recognizes his outstanding leadership of the business, continued strengthening of our worldwide competitive position, and continuing progress toward achieving long-range strategic goals. Like the other most senior executives, 50 percent of Mr. Raymond's stock grant in 2005 will be restricted for five years and the remaining 50 percent will be restricted for 10 years or retirement, whichever is later. These restrictions are not accelerated upon retirement, and a significant number of Mr. Raymond's shares will therefore remain restricted for a period ranging from one to over nine years after his retirement.
The value of Mr. Raymond's pension on page 25 reflects the accrual of pension credits earned over more than 40 years of service. The value realized on stock option exercises shown on page 23 reflects the value of grants issued in prior years as early as 1996. The Compensation Committee has not granted any stock options to Mr. Raymond since 2001.
The Committee believes Mr. Raymond's total compensation is appropriately positioned relative to CEOs of U.S.-based, integrated oil companies and other major U.S.-based corporations, particularly in view of the long-term performance of the Company and the substantial experience and expertise that Mr. Raymond has brought to the job. Mr. Raymond had over 12 years of service as CEO of the Company at year-end 2005.
As previously announced, Mr. Raymond resigned as Chairman at the end of 2005, and the Board has elected Rex W. Tillerson to succeed Mr. Raymond. Mr. Tillerson's compensation has been and will be determined by the Committee in accordance with the long-standing and successful principles described
in this report. Information on Mr. Tillerson's compensation for 2005, during which he served as President of the Corporation, is set forth in the compensation tables.
U.S. Income Tax Limits on Deductibility
U.S. income tax law limits the amount ExxonMobil can deduct for compensation paid to the CEO and the other four most highly paid executives. Performance-based compensation that meets Internal Revenue Service requirements is not subject to this limit. The short-term awards and restricted stock grants described above are designed to meet these requirements so that ExxonMobil can continue to deduct the related expenses. Specifically, the shareholders have approved the material terms of performance goals for awards to the top executives. These material terms limit short-term and long-term awards to these executives to 0.2 and 0.5 percent of operating net income, respectively. Actual award levels have been significantly less based on the factors and judgments described in the preceding sections of this report.
Salaries for senior executives may be set at levels that exceed the U.S. income tax law limitation on deductibility. While the Company seeks to take advantage of favorable tax treatment for executive compensation where appropriate, the primary drivers for determining the amount and form of executive compensation must be the retention and motivation of superior executive talent rather than the U.S. tax code.
Role of the Compensation Committee
The Compensation Committee reviews all compensation paid or awarded to senior executives and approves the salary and incentive awards of the CEO and other top executives. The Committee is made up solely of non-employee directors who do not participate in the ExxonMobil Compensation and Benefit Programs described above. The Committee utilizes the expertise of an external consultant, whom it retains and meets with during the year, to provide insight into compensation trends and issues. The consultant also provides a perspective on the structure and competitive standing of the ExxonMobil compensation program for executives.
ExxonMobil continues to have an appropriate and competitive executive compensation program, which has served the Company and shareholders well. The program is part of a fully-integrated, performance-based system that provides a balanced and stable foundation for strong and effective leadership going forward.
The following tables show the compensation of ExxonMobil's Chairman and the four other most highly paid executives in 2005. See the Compensation Committee Report beginning on page 14 for an explanation of our compensation philosophy.
Summary Compensation Table
Long Term Incentive Plans Awards in Last Fiscal Year
The awards shown above are earnings bonus units. Each earnings bonus unit entitles the executive to receive an amount equal to ExxonMobil's cumulative net income per common share as announced each quarter beginning after the grant. Payout occurs on the third anniversary of the grant or when the maximum settlement value of $3.75 per unit is reached, if earlier. SEC rules classify earnings bonus units as long-term incentives, but because of the long-term nature of ExxonMobil's business, we view earnings bonus units as mid-term incentive awards. See page 15 for more details.
Pension Plan Table (Hypothetical Yearly Benefit)
Employees who meet the age, service, and other requirements of ExxonMobil's defined benefit plans are eligible for a pension after retirement. There is no special program for senior executives. This table shows the approximate yearly benefit that would be paid to an ExxonMobil employee in the compensation and period of service categories shown. The table reflects combined benefits under ExxonMobil's tax-qualified pension plan, non-qualified supplemental pension plan, and non-qualified additional payments plan.
The qualified pension plan benefit is based on average annual salary over the highest paid consecutive 36-month period during the employee's last 10 years of employment. The supplemental pension plan provides higher-paid employees with the full salary-based pension benefit to which they would otherwise be entitled under the qualified plan but for limitations under the tax code. For employees granted a bonus under our Short Term Incentive Program, the additional payments plan provides a pension benefit based on the average of the three highest cash bonus and earnings bonus unit awards during the employee's last five years of employment if the employee attains 15 years of service and reaches age 55 before separating from the Company. Benefits accrue to all participants in these three plans on the same basis. The non-qualified plans are unfunded.
The benefit shown in the table reflects a five-year certain and life annuity form of payment for an employee retiring after age 60. For an employee who retires before age 60, the benefit would be reduced. The actual benefit is also reduced by a portion of the employee's Social Security benefits.
Under the ExxonMobil plans, covered compensation for the named executive officers includes the amount shown in the "Salary" column of the Summary Compensation Table plus the regular bonus shown in the "Bonus" column of that table and the earnings bonus unit award shown in the Long Term Incentive Plans table. The value of restricted stock is not included as covered compensation. As described above, if an executive separates from the Company before attaining 15 years of service and reaching age 55, covered compensation would include only salary. Since Mr. Tillerson is under age 55, his covered compensation currently includes only salary.
Historically, retiring employees have had the option to receive an annuity as described above or an equivalent lump sum payment instead of an annuity. The lump sum represents the discounted net present value of the annual annuity payments to which the employee would otherwise be entitled, based on the employee's actuarial life expectancy and the government discount rate in effect at the time. As a result of changes in U.S. tax law, however, starting in 2005, distributions under the non-qualified plans are only available in the form of lump sums. In addition, for the Company's highest ranking executives, including the executives named in the Summary Compensation Table, payment of the non-qualified lump sum must be deferred for six months after retirement. To keep these executives whole during the required deferral period, the amount payable to these executives will be the amount calculated at the date of retirement plus interest at the prime rate for six months or the amount calculated using the government discount rate in effect at the date of distribution, whichever is greater. The amounts could vary over the six-month deferral period due to changes in the government discount rate. As mentioned previously, these amounts are based on the same pension formula that applies to all other U.S. dollar paid employees in the ExxonMobil Pension Plan, which covers over 100,000 active and retired employees.
The chart below shows the covered compensation and years of service for each of the named executive officers in the Summary Compensation Table. Mr. Raymond retired from the Company on January 14, 2006, and Mr. Galante retired on February 1, 2006. The chart shows the actual lump sum pension benefit for Mr. Raymond and the discounted lump sum pension benefit for Mr. Galante on their retirement in lieu of an annual pension under the qualified and non-qualified pension plans. The chart also shows an estimate of the lump sum pension benefit that would be payable to the other named executive officers in lieu of an annual pension based on a hypothetical retirement date of February 28, 2006.
Executive Life Insurance/Death Benefit Program
The Company offers coverage for senior executives in the form of term life insurance or a company-paid death benefit. Coverage under either option equals four times base salary until age 65 and a declining multiple thereafter. For executives electing life insurance coverage, annual costs are included in the "All Other Compensation" column of the Summary Compensation Table on page 20. Messrs. Raymond, Tillerson, and Simon have elected death benefit coverage. Mr. Galante converted from life insurance to death benefit coverage in March 2005 and Mr. McGill converted in January 2006. Death benefit coverage represents an unfunded promise by the Company to pay the benefit and therefore is not reflected in the Summary Compensation Table.
Administrative Services for Retired Executives
The Company currently makes administrative assistants available for use by certain retired senior executives and their spouses. The Company also allows certain retired senior executives to use otherwise vacant office space at the Company's headquarters. The aggregate incremental cost of these services to the Company is approximately $200 thousand per year for Mr. Raymond and approximately $155 thousand per year for all other currently covered persons.
As previously reported, Mr. Raymond has entered into an agreement with the Company regarding the services described below. The agreement was negotiated and approved on behalf of ExxonMobil by the Compensation Committee of the Board of Directors, which consists solely of independent directors.
For a one-year period commencing January 1, 2006, Mr. Raymond has agreed to assist in the transitioning of major strategic corporate relationships and to participate in external activities and events as requested by ExxonMobil's Chairman. In consideration of Mr. Raymond's agreement to provide these services, ExxonMobil will pay Mr. Raymond a one-time fee of $1 million, payable in a single installment in December 2006, plus reimbursement of Mr. Raymond's reasonable expenses incurred in providing such services.
For a two-year period commencing January 1, 2006, based on a security risk assessment, ExxonMobil will provide the following protective services to Mr. Raymond and his spouse:
Mr. Raymond will reimburse ExxonMobil for any personal car use on the basis of the annualized lease value plus fuel charges. Mr. Raymond will reimburse ExxonMobil for any personal use of private aircraft at a rate equal to twice the applicable Standard Industry Fare Level published from time to time by the U.S. Department of Transportation.
We cannot predict the actual future cost to ExxonMobil of providing the protective services described above since the actual cost will depend on a number of highly variable factors. These factors include Mr. Raymond's actual future business and personal travel needs; the fact that a portion of the cost of protective services during the first year of the agreement will relate to Mr. Raymond's agreement to
provide transition services and thus will represent an ExxonMobil business expense; the availability of Company aircraft and the actual future cost of any leased aircraft; and other changes in applicable cost and reimbursement levels.
Based solely on historical usage and cost patterns, the total incremental cost to ExxonMobil of providing these services, excluding services related to ExxonMobil business and before deducting amounts to be reimbursed by Mr. Raymond, is estimated to be less than $1 million per year.
Equity Compensation Plan Information
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities and Exchange Act of 1934 requires that our executive officers and directors file reports of their ownership and changes in ownership of ExxonMobil stock on Forms 3, 4, and 5 with the Securities and Exchange Commission and New York Stock Exchange. We are not aware of any late or unfiled reports for 2005.
Annual total returns to ExxonMobil shareholders were 12 percent in 2005, 28 percent in 2004, 20 percent in 2003, and have averaged nearly 8 percent per year over the past five years. Total returns mean share price increase plus dividends paid, with dividends reinvested. The graphs below show the relative investment performance of ExxonMobil common stock, the S&P 500, and an industry competitor group over the last five and 10 years. The industry competitor group consists of three other international integrated oil companies: BP, Chevron, and Royal Dutch Shell.
FIVE-YEAR CUMULATIVE TOTAL RETURNS
TEN-YEAR CUMULATIVE TOTAL RETURNS
The primary function of our Committee is oversight of the Corporation's financial reporting process, public financial reports, internal accounting and financial controls, and the independent audit of the annual consolidated financial statements. Our Committee acts under a charter attached to this proxy statement. We review the adequacy of the charter at least annually. All of our members are independent, and four of our members are audit committee financial experts under Securities and Exchange Commission rules. We held 11 meetings in 2005 at which, as discussed in more detail below, we had extensive reports and discussions with the independent auditors, internal auditors, and other members of management.
In performing our oversight function, we reviewed and discussed the consolidated financial statements with management and PricewaterhouseCoopers LLP (PwC), the independent auditors. Management and PwC told us that the Corporation's consolidated financial statements were fairly stated in accordance with generally accepted accounting principles. We discussed significant accounting policies applied by the Corporation in its financial statements, as well as alternative treatments. We discussed with PwC matters covered by the Statement on Auditing Standards No. 61 (Communication with Audit Committees). In addition, we reviewed and discussed management's report on internal control over financial reporting and the related audit performed by PwC, which confirmed the effectiveness of the Corporation's internal control over financial reporting.
We also discussed with PwC its independence from the Corporation and management, including the matters in Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees) and the letter and disclosures from PwC to us pursuant to Standard No. 1. We considered the non-audit services provided by PwC to the Corporation, and concluded that the auditors' independence has been maintained.
We discussed with the Corporation's internal auditors and PwC the overall scope and plans for their respective audits. We met with the internal auditors and PwC at each meeting, both with and without management present. Discussions included the results of their examinations, their evaluations of the Corporation's internal controls, and the overall quality of the Corporation's financial reporting.
Based on the reviews and discussions referred to above, in reliance on management and PwC, and subject to the limitations of our role described below, we recommended to the Board, and the Board has approved, the inclusion of the audited financial statements in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2005, for filing with the Securities and Exchange Commission.
We have also appointed PwC to audit the Corporation's financial statements for 2006, subject to shareholder ratification of that appointment.
In carrying out our responsibilities, we look to management and the independent auditors. Management is responsible for the preparation and fair presentation of the Corporation's financial statements and for maintaining effective internal control. Management is also responsible for assessing and maintaining the effectiveness of internal control over the financial reporting process in compliance with Sarbanes-Oxley Section 404 requirements. The independent auditors are responsible for auditing the Corporation's annual financial statements, and expressing an opinion as to whether the statements are fairly stated in conformity with generally accepted accounting principles. In addition, the independent auditors are responsible for auditing the Corporation's internal controls over financial reporting, and for expressing opinions on both the effectiveness of controls and management's assertion as to this effectiveness. The independent auditors perform their responsibilities in accordance with the standards of the Public Company Accounting Oversight Board. Our members are not
professionally engaged in the practice of accounting or auditing, and are not experts under the Securities Act of 1933 in either of those fields or in auditor independence.
The Audit Committee of the Board of Directors has adopted the following Pre-Approval Policy and Procedure Memorandum for Audit, Audit-Related, and Tax Services:
Under the Sarbanes-Oxley Act of 2002, ExxonMobil's Audit Committee is responsible for the appointment, compensation, and oversight of the work of the independent auditor. As part of this responsibility, the Audit Committee is required to pre-approve audit and non-audit services provided by the independent auditor in order to ensure the services do not impair the auditor's independence. The Securities and Exchange Commission (SEC) has issued rules specifying the types of services that an independent auditor may not provide to its audit client, as well as the Audit Committee's responsibility for administering the engagement of the independent auditor, including pre-approval of fees. Accordingly, ExxonMobil's Audit Committee has adopted the following Pre-Approval Policy and Procedure Memorandum for Audit, Audit-Related, and Tax services. This Memorandum sets forth procedures and conditions whereby permissible services provided by the independent auditor will be pre-approved.
The Audit Committee has adopted an approach whereby all services obtained from the independent auditor will be pre-approved. Under this approach, an annual program of work will be approved for each of the following categories of services: Audit, Audit-Related, and Tax. Engagement-by-engagement pre-approval will not be required, except for exceptional or ad hoc incremental engagements with fees resulting in the fee category exceeding the aggregate pre-approved program of work for that category. In general, a work program for each category of services can be supplemented with additional pre-approved amounts after appropriate review of the additional services with the Audit Committee. It is not envisioned that ExxonMobil will obtain non-audit services (other than Tax services) from the independent auditor; however, the Audit Committee may consider specific engagements in the All Other Services category on an engagement-by-engagement basis.
For all services obtained from the independent auditor, the Audit Committee will consider whether such services are consistent with the SEC's rules on auditor independence. The Audit Committee will consider the level of Audit and Audit-Related fees in relation to all other fees obtained from the independent auditor, and will review such level each financial year.
The remainder of this Memorandum sets forth the procedures by which the Audit Committee will fulfill its responsibilities for pre-approving services. The Audit Committee will obtain appropriate input from ExxonMobil management on the general level of fees, the process for negotiating and reporting fees from the numerous locations where ExxonMobil operates and the independent auditor provides services, and the level of Audit and Audit-Related fees compared to all other fees.
Pre-Approval Process and Delegation of Authority
The primary review and pre-approval of services to be obtained from the independent auditor and related fees will be scheduled for the Audit Committee meeting each October for the following financial year. If fees might otherwise exceed pre-approved amounts for any category of
permissible services, then incremental amounts can be reviewed and pre-approved at subsequent Audit Committee meetings prior to commitment. If needed, time will be set aside in any scheduled Audit Committee meeting for review and pre-approval of additional services. No additional authority is delegated for pre-approval of services obtained from the independent auditor.
The term of any pre-approval applies to ExxonMobil's financial year. Thus Audit fees for the financial year may include work performed after the close of the calendar year. The pre-approval for Audit-Related and Tax fees is on a calendar year basis. Unused pre-approval amounts will not be carried forward to the next year. Pre-approvals will be made by category of service, and cannot be transferred between categories.
Engagement term, scope of service, and fees for the annual examination of ExxonMobil's financial statements will be pre-approved by the Audit Committee. These Audit services include the annual financial statement audit (including required quarterly reviews), affiliate and subsidiary statutory audits, and other procedures required to be performed by the independent auditor to be able to render an opinion on ExxonMobil's consolidated financial statements. Other procedures include information systems reviews and testing performed in order to understand and place reliance on the system of internal control, and procedures to support the independent auditor's report on management's report on internal control for financial reporting consistent with Section 404 of the Sarbanes-Oxley Act of 2002.
The Audit Committee will be responsible for direction and oversight of the engagement of the independent auditor. At its discretion, the Audit Committee will obtain input from ExxonMobil management on the terms of the engagement, the effectiveness with which the engagement is carried out, and the amount of Audit fees. The independent auditor is responsible for the cost-effective management of the engagement, and for ensuring that audit services are not provided prior to review and pre-approval by the Audit Committee.
The independent auditor and ExxonMobil management will jointly manage a process for collecting and reporting Audit fees billed by the independent auditor to ExxonMobil for each financial year.
Audit-Related services include services that are reasonably related to the performance of the review of ExxonMobil's financial statements. These services include benefit plan and joint venture audits, attestation procedures related to cost certifications and government compliance, consultations on accounting issues, and due diligence procedures. Each year the Audit Committee will conduct a broad review of the proposed services to ensure the independence of the independent auditor is not impaired.
General pre-approval will occur in October of each year coincident with pre-approval of Audit services. Applicable operating and staff functions will be requested to assign a process-owner to monitor the engagement of the independent auditor for Audit-Related services. This will provide assurance that the aggregate dollar amount of services obtained does not exceed the pre-approval amount at any time, and that new engagements not contemplated in October are pre-approved prior to commitment.
The Audit Committee concurs that the independent auditor may provide certain Tax services without impairing its independence. These services include preparing local tax filings and related
tax services, tax planning, preparing individual employee expatriate tax returns, and other services as permitted by SEC regulations. The Audit Committee will not permit engaging the independent auditor: (1) in connection with a transaction, the sole purpose of which may be impermissible tax avoidance; (2) for other tax services that may be prohibited by SEC rules now or in the future; or, (3) to perform services under contingent fee arrangements.
The following process-owners are assigned to review the scope of major engagements, monitor the pre-approved level of all services, and ensure that fee proposals for engagements beyond the pre-approved amount, at any time, are appropriately reviewed and pre-approved prior to commitment. For Expatriate Tax services, the Manager, Global Human Resources Expatriate Services will be the process owner. These services will be subject to a periodic competitive bidding process.
Significant engagements of outside accounting firms for Tax services (other than Expatriate Tax services) require the endorsement of the Exxon Mobil Corporation General Tax Counsel. Accordingly, an Associate General Tax Counsel within the ExxonMobil Tax Department will act as primary contact on behalf of the General Tax Counsel, and monitor the engagement of the independent auditor or other firms for such Tax services.
All Other Services
In general, except for the Audit, Audit-Related and Tax services described previously, ExxonMobil does not envision obtaining other services from the independent auditor. If permissible other services are requested by ExxonMobil business units, each engagement must be pre-approved by the Audit Committee. Such requests should be supported by endorsement of the Exxon Mobil Corporation Controller and the Exxon Mobil Corporation General Auditor prior to review with the Audit Committee.
Independent auditors may not provide the following prohibited services: Bookkeeping, Financial Information Systems Design and Implementation, Appraisals or Valuation (other than Tax), Fairness Opinions, Actuarial Services, Internal Audit Outsourcing, Management Functions, Human Resources, such as Executive Recruiting, Broker-dealer Services, Legal Services, or Expert Services such as providing expert testimony or opinions where the purpose of the engagement is to advocate the client's position in an adversarial proceeding. ExxonMobil personnel may not under any circumstances engage the independent auditor for prohibited services. Potential engagements not clearly permissible should be referred to the Exxon Mobil Corporation Controller or the Exxon Mobil Corporation General Auditor.
ITEM 2 RATIFICATION OF INDEPENDENT AUDITORS
The Audit Committee has appointed PricewaterhouseCoopers LLP (PwC) to audit ExxonMobil's financial statements for 2006. We are asking you to ratify that appointment.
The total fees paid to PwC for professional services rendered to ExxonMobil for the fiscal year ended December 31, 2005, were $46.1 million, a decrease of $1.4 million from 2004. The Audit Committee reviewed and pre-approved all services in accordance with the service pre-approval policies and procedures described above. The Audit Committee did not use the "de minimis" exception to pre-approval that is available under SEC rules. The following table summarizes the fees, which are described in more detail below.
The aggregate fees paid to PwC for professional services rendered for the annual audit of ExxonMobil's financial statements for the fiscal year ended December 31, 2005, and for the reviews of the financial statements included in our quarterly reports on Form 10-Q for that fiscal year were $25.6 million (versus $27.6 million for 2004). The decrease of $2.0 million from 2004 primarily reflects efficiencies from the integration of Sarbanes-Oxley Section 404 audit work and financial statement audit work.
The aggregate fees billed by PwC for Audit-Related services rendered to ExxonMobil for the fiscal year ended December 31, 2005, were $3.9 million (versus $3.5 million for 2004). These services were mainly comprised of benefit plan and joint venture audits, and attestation procedures related to cost certifications and government compliance.
The aggregate fees billed by PwC for Tax services rendered to ExxonMobil for the fiscal year ended December 31, 2005, were $16.6 million (versus $16.4 million for 2004). These services are described below.
All Other Fees
The aggregate fees billed by PwC for services rendered to ExxonMobil, other than the services described above under "Audit Fees," "Audit-Related Fees," and "Tax Fees," for the fiscal year ended December 31, 2005, were zero (also zero in 2004).
Other than Audit-Related and Tax services of the type described above, ExxonMobil does not envision obtaining other non-audit services from PwC.
PwC has been ExxonMobil's independent auditing firm for many years, and we believe they are well- qualified for the job. A PwC representative will be at the annual meeting to answer appropriate questions and to make a statement if he desires.
The Audit Committee recommends you vote FOR this proposal.
We expect Items 3 through 15 to be presented by shareholders at the annual meeting. Following SEC rules, other than minor formatting changes, we are reprinting the proposals and supporting statements as they were submitted to us. We take no responsibility for them. On request to the Secretary at the address listed under "Contact Information" on page 3, we will provide information about the sponsors' shareholdings, as well as the names, addresses, and shareholdings of any co-sponsors.
The Board recommends you vote AGAINST Items 3 through 15 for the reasons we give after each one.
ITEM 3 CUMULATIVE VOTING
This proposal was submitted by Mr. Emil Rossi, P.O. Box 249, Boonville, CA 95415.
"RESOLVED: Cumulative Voting. Shareholders recommend that our Board adopt cumulative voting (in our charter or bylaws if practicable). Cumulative voting means that each shareholder may cast as many votes as equal to number of shares held, multiplied by the number of directors to be elected. A shareholder may cast all such cumulated votes for a single candidate or split votes between multiple candidates, as that shareholder sees fit. Under cumulative voting shareholders can withhold votes from certain nominees in order to cast multiple votes for others.
Cumulative voting increases the possibility of electing at least one director with a specialized expertise needed at our company. For example, one director with expertise in avoiding expensive litigation and regulatory problems.
Cumulative voting won impressive yes-votes of 54% at Aetna and 56% at Alaska Air in 2005. Cumulative voting also won an all-time record support for any GM shareholder proposal topic at the 2005 GM annual meeting more than 49% of the yes and no votes.
Progress Begins with One Step
It is important to take one step forward in our corporate governance and adopt the above RESOLVED statement since our 2005 governance standards were not impeccable. For instance in 2005 it was reported (and certain concerns are noted):
in Overall Board Effectiveness.
These less-than-best practices reinforce the reason to take one step forward and adopt cumulative voting.
The Board recommends you vote AGAINST this proposal for the following reasons:
Cumulative voting provides an opportunity for special interests to gain a disproportionate voice in shareholder voting. The Corporation's current and long-standing method of voting for directors has resulted in a balanced and highly effective Board of Directors who have represented the best interests of all shareholders, as demonstrated by ExxonMobil's superior long-term performance.
ITEM 4 MAJORITY VOTE
This proposal was submitted by Mr. William Steiner, 112 Abbottsford Gate, Piermont, NY 10968.
"Resolved: Directors to be Elected by Majority Vote. Shareholders request that our Board initiate an appropriate process to amend our Company's governance documents (charter or bylaws if practicable) to provide that director nominees must be elected or re-elected by the affirmative vote of the majority of votes cast at an annual shareholder meeting.
This proposal requests that a majority vote standard replace our Company's current plurality vote. The new standard should provide that our director nominees must receive a majority of the votes cast in order to be elected or re-elected to our Board. To the fullest extent possible this proposal asks that our directors not make any provision to override our shareholder vote and keep a director in office who fails this criteria.
This proposal is not intended to unnecessarily limit our Board's judgment in crafting the requested governance change. For instance, our Board should address the status of incumbent directors who fail to receive a majority vote when standing for election under this standard and whether a plurality director election standard is appropriate in an election where the number of nominees exceeds the available board seats.
Currently if 99% of shareholders vote against a director, but he votes for himself, he will win. Policies that allow director nominees, with minuscule votes, to get away with only offering to resign are inadequate because they are still based on plurality voting. Changing the legal standard to a majority vote is a superior solution that merits shareholder support.
A Single Yes-Vote from Our 6 Billion Shares Can Now Elect a Director
Our directors can be complacent because our directors can now be re-elected with one yes-vote from our 6-plus billion voting shares. This is possible through plurality voting.
If our directors must obtain a majority vote they may exercise restraint and not allow a recurrence of our flawed executive compensation. For example, almost 90% of the stock held by our 1993-2005 CEO Mr. Raymond had been gifted to him. It did not require him to devote any of his considerable cash pay to purchase it. Such stockholdings are far less effective at aligning management's interests and stockholders' interests than open-market purchases of stock by executives. Mr. Raymond's stockholdings do not reflect a significant 'personal' investment on his part at all.
The Corporate Library (TCL) http://www.thecorporatelibrary.com/ a pro-investor research firm said that our executive pay disclosure is so vague that it is impossible to discriminate how much of a performance influence there is.
Fifty-four (54) shareholder proposals in 2005
Fifty-four (54) shareholder proposals on this topic won a significant 44% average yes-vote in 2005 through late-September especially good for a new topic. The Council of Institutional Investors www.cii.org, whose members have $3 trillion invested, recommends adoption of this proposal topic. Additionally the Council is sending letters asking the 1,500 largest U.S. companies to comply with the Council's policy and adopt this topic.
Directors to be Elected by Majority Vote
The Board recommends you vote AGAINST this proposal for the following reasons:
The Corporation's current method of electing directors has resulted in a long record of excellence in corporate governance and superior corporate performance. In light of legal and practical uncertainties (including the rapid pace of change in the area of director elections), the Board believes adoption of the majority vote process described in the proposal could be detrimental to shareholder interests, particularly when the number of nominees exceeds the number of open board seats.
Majority voting raises potential problems that have not yet been resolved. For example, majority voting is not appropriate in a contested election, where the number of nominees exceeds the number of open board seats. An election contest increases the likelihood that no candidate for a particular seat would achieve a majority vote. Under current law in most states, including New Jersey where ExxonMobil is incorporated, failure to elect a new director means that the incumbent director remains in office. Thus, a majority vote requirement could actually prevent the election of a shareholder nominee who receives more votes than an incumbent director. The SEC has recently proposed rules that would facilitate electronic election contests, making such contests more likely in the future.
Even without an election contest, campaigns to withhold votes from director candidates have grown rapidly in recent years. Many institutions and voting advisors now use withheld vote campaigns to protest particular corporate policies or issues. Such campaigns do not necessarily represent real opposition to election of an individual director nominee, but under a majority vote requirement could result in failed elections or situations in which a board was not able to meet regulatory or stock exchange requirements regarding the board's makeup.
ITEM 5 INDUSTRY EXPERIENCE
This proposal was submitted by the Sisters of St. Dominic of Caldwell New Jersey, 52 Old Swartswood Station Road, Newton, NJ 07860, as lead proponent of a filing group.
Exxon Mobil Corporation is one of the largest companies in the world in investment capitalization, revenue and in profit. It is also the world's largest energy company.
Although the independent members of the Board of Directors have the responsibility of protecting the interests of the shareholders, none of our outside directors have any day-to-day expertise in the core part of the company's business.
Many of our independent directors are active CEOs of large companies, and sit on many large cap corporate boards and non-profit organizations, all of which involve large commitments of time.
We believe that evaluation of the performance of the corporation, and effectiveness in improving the performance of the company, necessitates both a serious time commitment and an in-depth understanding of the energy business.
We believe that the oversight function of Board Members would be lacking if Board Members were to be uninformed about or misunderstand the core operations of the business, e.g. oil and gas availability, exploration and production, opportunities for investment in renewable energy resources and environmental impacts.
The proponents of this resolution contend that the oversight function of the outside directors would be enhanced if some had personal experience with the specialized problems of the industry.
Other publicly owned oil companies, such as Chevron, ConocoPhillips, Apache, Anadarko and Devon have outside directors with industry expertise.
Although the share price of ExxonMobil stock has thus far done well, the energy industry is changing rapidly. The proponents of this resolution believe that having outside board members with solid expertise in the industry could enhance the company's ability to adapt to changing circumstances and thus improve its long term fiscal performance and reputation.
Be it Resolved that the shareholders of ExxonMobil request the Nominating Committee of the Board of Directors to adopt a policy of annually nominating, whenever possible, at least two independent Directors who, without any conflicts of interest vis a vis ExxonMobil, hold expertise in the oil, gas or energy industry."
The Board recommends you vote AGAINST this proposal for the following reasons:
ExxonMobil's non-employee directors have diverse backgrounds with knowledge and skills important to the Corporation, and as a group they hold substantial expertise in the oil and gas industry in general and ExxonMobil's operations in particular. Therefore, the Board believes this proposal is unnecessary.
Non-employee directors are well informed on the oil and gas business. While non-employee directors may not have direct oil and gas experience when they join the Board, they participate in a comprehensive orientation program regarding ExxonMobil's business and affairs. In addition, over the course of each year, Board members receive detailed reviews of all aspects of ExxonMobil's operations from Company executives. These various reviews are part of the agenda of regular Board meetings and cover such topics as safety, health, and environmental performance; capital and expense budgets; product development; the energy outlook; and long-range strategic planning. Finally, the Board makes on-site visits to ExxonMobil facilities where it reviews business performance and meets business-line management and non-management employees.
ITEM 6 DIRECTOR QUALIFICATIONS
This proposal was submitted by Mr. Kenneth Steiner, 14 Stoner Avenue, 2M, Great Neck, NY 11021.
"RESOLVED: Shareholders request that our board of directors adopt a policy (in our bylaws if practicable) that our key board committees of audit, nomination and compensation be chaired by highly-qualified and highly-performing independent directors who are not over-committed. The definition of highly-performing director includes the individual director's performance on other boards he or she may serve on.
This proposal gives our company an opportunity to cure director disqualification should it exist or occur once this proposal is adopted. This proposal is not intended to unnecessarily limit our Board's judgment in crafting the requested change in accordance with applicable laws, our charter and bylaws and existing contracts.
For example it would be consistent with this proposal that a chairman of a key board committee would not serve on more than 3 boards (to avoid over-commitment), not have more than 15-years tenure
(long-tenure impacts independence), not have non-director links to our company and not have a record of serving on boards with poor governance ratings unless it was clearly a turnaround situation.
For example under this proposal the following directors in 2005 may not have been qualified to chair a key committee:
Adopting this policy is a good way to assure shareholders that our key board committees are chaired by highly qualified and highly performing independent directors who are not over-committed.
The Board recommends you vote AGAINST this proposal for the following reasons:
The Board maintains policies designed to ensure that all of its non-employee directors, including the Chairs of the key Board committees, are highly qualified and not over-committed. Therefore, an additional policy is not warranted.
Current policies, under which a director's outside commitments are evaluated on a case-by-case basis, are preferable to arbitrary numeric standards as suggested by the shareholder proposal. These policies have served the Company's shareholders well, as evidenced by ExxonMobil's superior long-term
performance. Under ExxonMobil's existing policies, the average number of other public company boards on which the Company's current non-employee directors serve is less than three.
ITEM 7 DIRECTOR COMPENSATION
proposal was submitted by The Catholic Equity Fund, 1100 West Wells Street,
Excessive CEO pay is now a matter of national concern and debate. We believe that any board that pays excessive CEO compensation fails in one of its most important duties. There is evidence that directors who enjoy high director compensation are more likely to pay excessive CEO compensation and that high director pay coupled with high CEO pay correlates with underperformance of the company. (Note 1) We believe that many employees regard excessive CEO compensation as a breach of trust and demeaning of their value as employees and human beings. We believe that directors who recommend excessive CEO pay packages should be held accountable. One way to do this is to allow shareholders to vote on the directors' compensation.
There are indications that our board has not paid sufficient attention to CEO compensation:
RESOLVED, the shareholders request the following of the board:
The Board recommends you vote AGAINST this proposal for the following reasons:
Non-employee director compensation is fully disclosed in the proxy, and the restricted stock program for non-employee directors has already been approved by shareholders. The Board believes submitting our non-employee director compensation package to shareholder vote every year would be an unnecessary effort and expense and would detract from the Company's ability to attract and retain the best director candidates through loss of flexibility.
The compensation program for the CEO and non-employee directors is an integral part of the Company's strategy for achieving high levels of business performance over the long term and the retention of superior talent.
Current and former non-employee directors of Exxon Mobil Corporation are eligible to participate in the ExxonMobil Foundation's Educational and Cultural Matching Gift Programs under the same terms as the Company's U.S. employees. However, the director compensation program does not include a special perquisite whereby directors can direct specific contributions to charities of interest. Of course, all directors take an active interest in ExxonMobil's charitable contributions as part of their oversight of the contributions programs and goals. The Contributions Committee reviews the overall contributions objectives, and policies and programs. This includes goals and criteria, the level of corporate contributions, and the subject areas to which contributions are to be made. The full Board approves the contributions budget.
ITEM 8 BOARD CHAIRMAN AND CEO
This proposal was submitted by clients of Ram Trust Services, 45 Exchange Street, Portland, MA 04101.
"RESOLVED, that the shareholders urge the Board of Directors to take the necessary steps to amend the by-laws to require that, whenever possible and subject to any presently existing contractual obligations of the Company, an independent director shall serve as Chairman of the Board of Directors, and that the Chairman of the Board of Directors shall not concurrently serve as the Chief Executive Officer.
According to ExxonMobil's proxy statement filed in connection with the Company's 2005 annual meeting, '[t]he Board of Directors and its committees perform a number of functions for ExxonMobil and its shareholders, including:
We believe that the most important function of the Board of Directors is to protect shareholders' interests by providing independent oversight of management, including the CEO. We believe that this role may be compromised when the CEO, whose performance should be independently monitored, is also the Chairman of the very Board charged with evaluating his or her performance.
We further believe that separation of the roles of Chairman of the Board and CEO will provide greater accountability of management to shareholders, will strengthen the integrity of the Board, and will better ensure that the Board will be able to effectively perform the important functions described above.
The Conference Board Commission on Public Trust and Private Enterprise noted that the separation of the roles of the Chair and CEO is one of the principal approaches that should be taken to provide the 'appropriate balance' between board and management: 'The roles would be performed by two separate individuals...the chair would be one of the independent directors.'*
Additionally, we believe that combining the roles of Chairman and CEO can interfere with effective communication between shareholders and members of the Board. We believe that this occurred at the Company's 2004 annual meeting when a shareholder was prevented by the CEO, who was also conducting the meeting as Chairman of the Board, from asking questions directly to a member of the Board's Audit Committee relating to what provisions the Company made on its financial statements for potential liability arising from climate change. We believe that a risk exists that a shareholder who wishes to communicate with the Board of Directors with respect to a topic upon which the shareholder and the Company's management do not agree could be discouraged or prohibited from engaging in such communication when the positions of CEO and Chairman of the Board are occupied by the same individual.
Vote 'YES' on this proposal to support Board independence!
*Source: The Conference Board Commission on Public Trust and Private Enterprise, Part 2: Corporate Governance, released on January 9, 2003."
The Board recommends you vote AGAINST this proposal for the following reasons:
The Board elects the Chairman who serves without contract and, at present, the Board believes it is appropriate and efficient for the Chairman to also serve as CEO. The Board retains the authority to separate the positions of Chairman and CEO if it deems such a change appropriate. However, the Board believes the rotational presiding director structure described below effectively meets the concerns expressed by the shareholder proposal, and that implementing the proposal would reduce Board effectiveness.
Ten of ExxonMobil's 12 current directors are independent. The independent directors hold regular and frequent executive sessions. These sessions currently scheduled for eight times a year take place outside the presence of the CEO or any other Company employee.
Under ExxonMobil's Corporate Governance Guidelines, the Chair of either the Board Affairs Committee or the Compensation Committee normally presides at executive sessions. The Compensation Committee Chair serves as presiding director for executive sessions when the primary topics of discussion relate to matters such as the performance evaluation and compensation of the CEO or CEO succession planning. The Board Affairs Committee Chair serves as presiding director for executive sessions when the primary topics of discussion relate to corporate governance. The independent directors also have authority to designate a different presiding director depending on the primary subject matter of a particular executive session.
A premise of the shareholder proposal appears to be that the CEO's service as Chairman could impair the Board's independence. As demonstrated above, this is not the case at ExxonMobil. Rather, the Board believes combining the offices of CEO and Chairman contributes to a more efficient and effective Board. The CEO bears primary responsibility for managing the Company's business day to day. As such, the Board believes the CEO is the person in the best position to chair regular Board meetings and help ensure that key business issues and stakeholder interests are brought to the Board's attention. However, as provided in ExxonMobil's Corporate Governance Guidelines, any director may request the inclusion of specific agenda items for Board meetings.
The supporting statement for the proposal specifically implies that by serving as Chairman, the CEO participates in his own performance evaluation. This is false. At ExxonMobil, the CEO's performance is evaluated solely by the independent directors meeting outside the presence of the CEO or any other Company employee. Performance feedback is provided to the CEO by the Chair of the Compensation Committee.
ITEM 9 EXECUTIVE COMPENSATION REPORT
This proposal was submitted by Northstar Asset Management Inc., 43 St. John, Boston, MA 02130.
The total compensation of our CEO Lee Raymond, including salary, bonus, and non-restricted stock and the value of the stock options exercised, exceeded $80 million dollars in 2004. He also was awarded stock options valued at $65 million.
The median pay for the CEOs of the nation's 350 largest companies was $5.9 million according to the Wall Street Journal (4/11/2005). Our competitor ChevronTexaco paid CEO David O'Reilly $8.1 million, one-tenth of Raymond's compensation. Our competitor Conoco paid CEO James Mulva $16.7 million, one-fifth of Raymond's compensation.
ExxonMobil prides itself in being a low cost operation. Yet we clearly pay our CEO much more than our competitors. As shareholders, it is essential to understand specifically how this level of compensation creates shareholder value.
Additionally, legislation currently being considered in the U.S. Congress requires shareholders' approval of executive compensation packages and forces companies to take back executive bonuses that were based on faulty accounting.
Shareholders request the Board to initiate a review of our company's executive compensation policies and to make available, upon request, a report of that review by December 1, 2006 (omitting confidential information and prepared at a reasonable cost). We request the report include:
We believe all ExxonMobil employees work together to create value for shareholders and customers. We also believe the company has the ability to increase shareholder value by reinvesting in the whole company, not just a single individual. It is not clear how the company's executive pay incentives are creating the desired and beneficial effect on shareholder value. As shareholders we are concerned that the over-compensation of top executives has a negative effect on employee morale and customer trust.
Please vote FOR this resolution."
The Board recommends you vote AGAINST this proposal for the following reasons:
The Board does not support this proposal as executive compensation is already reviewed annually, and the Board believes the compensation information that is disclosed provides more meaningful information for shareholders than the report that is requested.
long-term features, and is monitored through regular surveys of other large firms with whom the Company competes for management talent.
The basis of ExxonMobil's compensation program is to compensate each individual, executive or non-executive, at a level that recognizes the individual's experience, performance and level of responsibility. Compensation should also be competitive with the compensation of persons performing similar jobs at other companies with whom the Company competes for employee talent. ExxonMobil's compensation programs are internally aligned, but the Committee does not believe that a specific numeric ratio between the compensation of the CEO and the compensation of an employee in an entirely different job is meaningful or an appropriate factor for setting compensation.
The technical, financial, and operating complexity of the Company requires strong leadership with broad experience in the oil and gas business. It takes years to develop this experience. Therefore, retention of a strong leader with these capabilities is critical to the long-term success of the Company.
The Committee believes Mr. Raymond's total compensation was appropriately positioned relative to CEOs of U.S.-based integrated oil companies and other major U.S.-based corporations, particularly in view of the long-term performance of the Company and the substantial experience and expertise that Mr. Raymond possesses.
It should be noted that Mr. Raymond's restricted stock grant in 2004 includes restriction periods that are among the longest in any industry. Fifty percent of his 2004 stock grant is restricted for five years; the remaining 50 percent is restricted for 10 years or retirement, whichever is later. These restrictions are not accelerated upon retirement. In addition, the last stock option grant Mr. Raymond received was in 2001. The value of Mr. Raymond's stock options referenced in this proposal is the value of unexercised stock options that were granted to him between 1996 and 2001. The compensation referenced in this proposal for the CEOs of ChevronTexaco and ConocoPhillips excludes the value of the stock option grants they received in 2004.
ITEM 10 EXECUTIVE COMPENSATION CRITERIA
This proposal was submitted by the School Sisters of Notre Dame Milwaukee Province, 13105 Watertown Plank Road, Elm Grove, WI 53122.
"WHEREAS, the size of executive compensation has become a major public policy as well as corporate issue. In setting executive compensation, we believe:
RESOLVED shareholders request the Board's Compensation Committee, when setting executive compensation, to include explicit and detailed social responsibility and environmental (as well as financial) criteria among the goals that executives must meet.
We believe that XOM should include such criteria, in part, because:
The general reference in last year's proxy statement, that 'safety, health and environmental objectives' are considered, is too vague and inapplicable to senior executives, other than the CEO.
In its 2005 Forbes Efficiency Ranking, based on a CEO's performance-to-pay score, ExxonMobil ranked 180th out of 189 companies (1 being the best).
In 2005, after allegations that it violated environmental rules, ExxonMobil agreed to reduce emissions at seven U.S. refineries at an estimated cost of $571,000,000.
Because of 'excessive' profiteering in the wake of Hurricanes Katrina and Wilma, our company's CEO had to testify before a skeptical U.S. Congress, while our Company was ridiculed in press cartoons.
ExxonMobil alienated some 11,000 service-station owners when it resisted paying $1.3 billion in promised fuel discounts. In 2005 it was ordered to do so by the U.S. Supreme Court.
Our Company faces continued criticism on human rights issues, including charges of environmental racism and community contamination in the Gulf States region and close ties with oppressive elements in Aceh, Indonesia and Equatorial Guinea.
The public believes XOM works behind-the-scenes to impact energy policy in ways that deny the risks of global warming and efforts toward cleaner energy sources.
In the USA, ExxonMobil has funded 'front groups' questioning the scientific consensus regarding global warming and the need for industry action. In the EU (12.05) it was 'nominated' for 'worst' lobbying because of its 'generous funding of think tanks that resist EU action on climate change.'
Boycotts of ExxonMobil products have begun here and abroad because of our Company's position on climate change. Deutsche Bank noted: 'While the company insists that it has suffered no fiscal impact from the boycott, being handed a reputation as environmental enemy number one for such a customer-facing business has to be considered a brand risk.' "
The Board recommends you vote AGAINST this proposal for the following reasons:
The Board agrees that nonfinancial factors, including social and environment concerns, are important to consider in determining compensation for top executives, and this is done. However, the Board believes that a change in the Company's executive compensation program to a formula-driven system as proposed would not be in the best interests of shareholders because it could jeopardize the Corporation's ability to respond to unexpected events and to maintain a competitive compensation system that attracts, retains, and motivates senior executives.
addition, corporate citizenship, safety performance, environmental performance, and operational excellence are important factors that are reviewed with and considered by the Compensation Committee in setting compensation levels.
As described in the Compensation Committee Report on page 14, the system of developing and compensating executives is critical to the achievement of business objectives at ExxonMobil. Executive performance assessments, the compensation program, and executive development are fully integrated. This integrated system and the principles on which it is based have been successful in supporting long-term business and shareholder objectives.
As part of this system, each executive is assessed annually through a well-defined process in which all executives are ranked based on individual performance. This assessment takes into account results and the means through which those results are achieved. A key requirement for every executive is an ongoing improvement in his or her performance to drive world-class business performance, which includes annually measuring social and environmental (as well as financial) results.
The determination of compensation levels for top executives requires significant judgment in evaluating the overall performance of the organization against expectations. In any given year, the relative weight of performance objectives can change depending on the business challenges facing the Company and how executives deal with these challenges, including external events like the hurricanes in 2005 that affected many communities in which the Company creates jobs and conducts business.
ITEM 11 POLITICAL CONTRIBUTIONS REPORT
This proposal was submitted by Ms. Tracy Burt, 464 Alvarado Street, San Francisco, CA 94114.
"Resolved, that the shareholders of Exxon Mobil Corp. ('Company') hereby request that the Company provide a report, updated semi-annually, disclosing the Company's:
This report shall be presented to the board of directors' audit committee or other relevant oversight committee, and posted on the company's website to reduce costs to shareholders.
As long-term shareholders of Exxon Mobil Corp., we support policies that apply transparency and accountability to corporate political giving. In our view, such disclosure is consistent with public policy in regard to public company disclosure.
Company executives exercise wide discretion over the use of corporate resources for political purposes. In 2003-04, the last fully reported election cycle, ExxonMobil contributed at least $100,000 at the federal level. (http://www.politicalmoneyline.com/cgi-win/irs_ef_indiv.exe?)
Relying only on the limited data available from the Federal Election Commission and the Internal Revenue Service, Political Money Line, a leading subscription campaign finance reporting service, provides an incomplete picture of the Company's political donations. Complete disclosure by the company is necessary for the Company's Board and its shareholders to be able to fully evaluate the political use of corporate assets.
Although the Bi-Partisan Campaign Reform Act of 2002 prohibits corporate contributions to political parties at the federal level, it allows companies to contribute to independent political committees, also known as 527s.
Absent a system of accountability, corporate executives will be free to use the Company's assets for political objectives that are not shared by and may be inimical to the interests of the Company and its shareholders. There is currently no single source of information that provides the information sought by this resolution. That is why we urge your support for this critical governance reform."
The Board recommends you vote AGAINST this proposal for the following reasons:
The Corporation's policy on political activities is available on our Web site and all political contributions are consistently reported to governing agencies as and when required by law. Accordingly, the Board believes the adoption of this proposal would result in duplication of effort that would not provide additional benefit to shareholders.
ExxonMobil has a clear business rationale for political contributions. That rationale is to contribute to candidates and organizations that favor the strengthening of the free enterprise system and hold views consistent with the best interests of the Corporation.
It is the Corporation's policy to communicate information and views on issues of public concern that have an important impact on the Corporation and our shareholders.
ITEM 12 CORPORATE SPONSORSHIPS REPORT
This proposal was submitted by Dr. Martha Burk, 1735 S Street NW, Washington, DC 20009, as lead proponent of a filing group.
ExxonMobil has a strong anti-discrimination statement, which states in part:
'ExxonMobil's policy on discrimination is clear and straightforward. Our all-inclusive, intentionally broad policy prohibits any form of discrimination or harassment, in any company workplace, anywhere in the world and this policy applies equally to employees, supervisors, contractors, or anyone else in the company's employ.'
Yet the company's anti-discrimination statement is not so clear and straightforward when it comes to expending company funds for sponsorships and executive perks with institutions that do not comply with the clear intent of ExxonMobil's anti-discrimination statement.
ExxonMobil is a lead sponsor of the Masters Golf Tournament, owned by and held at Augusta National Incorporated, an organization that explicitly excludes women from membership.
Shareholders request the Board of Directors to conduct a special review of the company's anti-discrimination statement as it pertains to corporate sponsorships and executive perks and publish a summary report. This report shall address the following questions:
The report, prepared at reasonable cost and omitting proprietary information, shall be available to shareholders upon request no later than December 1, 2006.
ExxonMobil's strong anti-discrimination statement demonstrates a commitment to workplace diversity, inclusion and opportunity. Failing to extend the reach of this statement to corporate sponsorships and executive perks undermines our company's laudable aspirations. Club memberships are more than about recreation, they are places where important business is conducted. Excluding people from these networking opportunities and decision-making venues on the basis of gender, race, religion or sexual orientation, denies equal opportunity on the basis of discriminatory practice.
Would our company sponsor an event at a club that explicitly barred African-Americans or Jews from membership? If the answer is 'no,' then why would we sponsor events at institutions that explicitly bar women? Such sponsorships send a message to customers, employees, and potential investors that gender discrimination is not taken seriously by ExxonMobil.
ExxonMobil has many talented women in high-ranking positions. Why shouldn't these women in their own right be able to avail themselves of the networking opportunities that come with club membership, rather than having to be invited into these settings by a male colleague, who because of his gender alone is eligible for membership?
Our company rightly extends coverage of its anti-discrimination statement to contractors. Why not then also to sponsorships and executive perks purchased with shareholder funds?
Please join us in assuring that the ExxonMobil logo stands for the highest standards of anti-discrimination and human dignity wherever it is displayed and vote FOR this proposal."
The Board recommends you vote AGAINST this proposal for the following reasons:
ExxonMobil prohibits discrimination of any kind in its employment policies everywhere in the world. The Company is committed to fostering diversity in the workplace, as well as contributing to organizations that support diversity, especially in the area of education. The Board believes the report requested is unnecessary given ExxonMobil's nondiscrimination policy.
ExxonMobil's policies on nondiscrimination are clear and comprehensive. The Company is committed to fostering diversity in the workplace, as well as contributing to organizations that support diversity, especially in the area of education. Reflecting its commitment to diversity, the Company is a significant supporter of organizations such as the Society of Women Engineers and the South East Consortium of Minority Engineers. ExxonMobil is also the lead supporter of the National Action Council for Minorities in Engineering, the largest privately funded source of minority student scholarships in the U.S. The Procurement Supplier Diversity Program encourages the hiring of women- and minority-owned companies that provide materials and services that are essential to ExxonMobil's businesses.
ITEM 13 AMENDMENT OF EEO POLICY
proposal was submitted by the New York City Employees' Retirement System, 1 Centre Street,
"WHEREAS: ExxonMobil does not explicitly prohibit discrimination based on sexual orientation in its written employment policy;
Many of our peers, including Amerada Hess, BP, ChevronTexaco, ConocoPhillips, Marathon Oil, Occidental Petroleum, Shell Oil, and Sunoco explicitly prohibit this form of discrimination in their written policies, according to the Human Rights Campaign;
Over 80% of the Fortune 500 companies have adopted written nondiscrimination policies prohibiting harassment and discrimination on the basis of sexual orientation, as have more than 95% of Fortune 100 companies, according to the Human Rights Campaign;
We believe that corporations that prohibit discrimination on the basis of sexual orientation have a competitive advantage in recruiting and retaining employees from the widest talent pool;
According to a September 2002 survey by Harris Interactive and Witeck-Combs, 41% of gay and lesbian workers in the United States reported an experience with some form of job discrimination related to sexual orientation; almost one out of every 10 gay or lesbian adults also stated that they had been fired or dismissed unfairly from a previous job, or pressured to quit a job because of their sexual orientation;
Minneapolis, San Francisco, Seattle and Los Angeles have adopted legislation restricting business with companies that do not guarantee equal treatment for lesbian and gay employees;
Fourteen states, the District of Columbia and more than 150 cities and counties, including the city of Dallas, have laws prohibiting employment discrimination based on sexual orientation;
Our company has operations in, and makes sales to institutions in states and cities that prohibit discrimination on the basis of sexual orientation;
National public opinion polls consistently find more than three quarters of the American people support equal rights in the workplace for gay men, lesbians and bisexuals; for example, in a Gallup poll conducted in March 2003, 88% of respondents favored equal opportunity in employment for gays and lesbians;
RESOLVED: The Shareholders request that ExxonMobil amend its written equal employment opportunity policy to explicitly prohibit discrimination based on sexual orientation and to substantially implement that policy.
SUPPORTING STATEMENT: Employment discrimination on the basis of sexual orientation diminishes employee morale and productivity. Because state and local laws are inconsistent with respect to employment discrimination, our company would benefit from a consistent, corporate-wide policy to enhance efforts to prevent discrimination, resolve complaints internally, and ensure a respectful and supportive atmosphere for all employees. ExxonMobil will enhance its competitive edge by joining the growing ranks of companies guaranteeing equal opportunity for all employees."
The Board recommends you vote AGAINST this proposal for the following reasons:
Discrimination and harassment of any form, including sexual orientation, are not tolerated at ExxonMobil and the Company's steadfast adherence to these policies ensures that employees worldwide understand and enforce them. Based on these zero-tolerance policies, the Board believes amending the Company's policies on discrimination and harassment is unwarranted and unnecessary.
In responding to this proposal for the eighth consecutive year, the Board reaffirms its strong position that the Company's policies are both comprehensive to address its worldwide operations, and explicit to meet country-specific laws and regulations.
ITEM 14 BIODIVERSITY IMPACT REPORT
This proposal was submitted by Green Century Capital Management, Inc., 29 Temple Place, Suite 200, Boston, MA 02111.
"WHEREAS, biodiversity is being lost at an alarming rate and there is a need to preserve the Earth's remaining species of plants and animals;
WHEREAS, protected and sensitive areas are essential for supporting biodiversity. Oil and gas drilling and development in these areas are likely to have negative impacts on biodiversity. For example, the U.S. Department of the Interior estimates that oil and gas drilling in the coastal plain of the Arctic National Wildlife Refuge will displace or damage up to 40 percent of the Porcupine River Caribou herd, threaten denning areas for polar bears, and disturb ecosystems that support more than 120 species of migratory birds. The company has already started drilling off of Sakhalin Island in eastern Russia. The Sakhalin I project, which is being developed by Exxon Neftegaz Limited, will adversely impact the world's last remaining Western Pacific grey whales and important fisheries including Pacific salmon;
WHEREAS, as shareholders, we believe there is a need to study and report on the impact of decisions to do business in sensitive areas or areas of high conservation value (ecologically sensitive, biologically rich, or environmentally sensitive cultural areas);
WHEREAS, preserving sensitive ecosystems will enhance our company's image and reputation with consumers, elected officials, current and potential employees, and investors;
WHEREAS, some of our major competitors have already enacted such a policy and are members of the Energy Biodiversity Initiative;
RESOLVED, shareholders request that the independent directors of the Board of ExxonMobil prepare a report, at reasonable cost and omitting proprietary information, on the potential environmental damage that would result from the company drilling for oil and gas in protected areas such as IUCN Management Categories I-IV and Marine Management Categories I-V, national parks, monuments, and wildlife refuges (such as the Arctic National Wildlife Refuge), and World Heritage Sites. The report should consider the implications of a policy of refraining from drilling in such areas and should be available to investors by the 2007 annual meeting.
We agree with the company when it states 'ExxonMobil recognizes the protection of biodiversity the variety and complexity of life as an important conservation issue that presents broad challenges to society.'
We welcome this interest in biodiversity, and as shareholders we strongly believe, in addition to recognizing the issue, there is a need to study and disclose the impact of decisions to do business in protected and sensitive areas. This would allow shareholders to assess the risks created by the company's activity in these areas as well as the company's strategy for managing these risks.
Vote YES for this proposal, which will improve our company's reputation and make ExxonMobil a leader in promoting biodiversity."
The Board recommends you vote AGAINST this proposal for the following reasons:
ExxonMobil recognizes and agrees that the conservation of biodiversity the variety and complexity of life is an important conservation issue that presents broad challenges to society. ExxonMobil will continue to communicate with shareholders and the public about environmental conservation work and
assessments through the Corporate Citizenship Report and on the Company's Web site. The Board believes the generalized report requested by this proposal would be duplicative.
Biodiversity conservation remains a focus area for the Corporation. The Company continues to utilize a cross-functional Biodiversity Team, representing Upstream, Downstream, and Chemical operations, to assess and strengthen biodiversity systems and their implementation. This approach is closely aligned with the 12 recommendations highlighted in the "Energy and Biodiversity Initiative." ExxonMobil remains an active participant in the Biodiversity Working Group sponsored jointly by the International Petroleum Industry Environmental Conservation Association (IPIECA) and the International Association of Oil and Gas Producers.
ITEM 15 COMMUNITY ENVIRONMENTAL IMPACT
proposal was submitted by the Episcopal Church, 815 Second Avenue,
"Resolved, that the shareholders request the Board of Directors to report to shareholders, at reasonable cost and omitting proprietary information, on how the corporation ensures that it is accountable for its environmental impacts in all of the communities where it operates. The report should contain the following information:
We believe that corporations have a moral responsibility to be accountable for their environmental impacts not just effects on the entire ecosystem, but also direct effects on the communities that host their facilities. No corporation can operate without the resources that local communities provide, but it is often these communities that bear the brunt of corporate activities.
Communities are often the forgotten stakeholders in terms of corporate activities and impact. Many corporations, for example, have improved their social performance with regard to employees. We believe that corporations can and should do better with regard to treating local-community stakeholders more fairly.
There is increasing interest in better measuring and understanding corporate effects on local communities, including how corporations can use reporting to hold themselves accountable to local communities. Corporations are already required to collect environmental data, like the federal government's Toxic Release Inventory. But this data is not always available to communities in a timely, easy-to-understand format. Groups like CERES (Coalition for Environmentally Responsible Economies) are developing facility-level reporting regimes that we believe represent an evolution in terms of how corporations are responsible and responsive to community stakeholders. We also believe that integration of community accountability into corporate practices including codes of conduct is consistent with good environmental management.
There is also more and more attention being given to the adequacy of environmental impacts on corporate financial statements, in large part driven by the demands of the Sarbanes-Oxley Act of 2002. We think that the kind of report requested in this resolution can not only help corporations better respond to the demands of Sarbanes-Oxley, but also reduce the likelihood that current corporate behavior will have negative financial consequences in the future that will have to be reported to shareholders. Simply put, good community relations especially with regard to the environment make financial sense.
Finally, the proponents of this resolution are particularly concerned about the effects of corporate activities on poor communities and communities of color. The report requested in this resolution would do much to assure shareholders and other stakeholders that the corporation takes seriously its ethical responsibilities to all of the communities that host its facilities."
The Board recommends you vote AGAINST this proposal for the following reasons:
ExxonMobil is committed to operating in an environmentally responsible manner in every place it does business. The Company will continue to communicate with shareholders and the public about its environmental performance through the Corporate Citizenship Report (CCR) and the national reporting systems in place. The Board believes the additional report requested by this proposal would be duplicative to the information already available to the public.
Operating in an environmentally responsible manner has long been and continues to be a primary focus for ExxonMobil. This includes implementation of systems to continuously improve existing operations and assess and mitigate impacts of new projects, regular dialogue with local communities, and research to understand the impacts of air quality on health. For example, ExxonMobil provides support for the Mickey Leland National Air Toxics Research Center and The National Environmental Respiratory Center. In addition, research is supported to understand disparities in health outcomes among different populations through the Center for Research on Minority Health at M.D. Anderson Cancer Center in Houston. The results of this important research are published in peer-reviewed scientific journals and reported broadly. Additionally, ExxonMobil supports numerous health initiatives within its workforce and in the communities in which the Company operates, including efforts to improve prevention and treatment of AIDS and malaria in countries prone to these diseases.
We are not currently aware of any other business to be acted on at the meeting. Under the laws of New Jersey, where ExxonMobil is incorporated, no business other than procedural matters may be raised at the meeting unless proper notice has been given to the shareholders. If other business is properly raised, your proxies have authority to vote as they think best, including to adjourn the meeting.
People with Disabilities
We can provide reasonable assistance to help you participate in the meeting if you tell us about your disability and your plans to attend. Please call or write the Secretary at least two weeks before the meeting at the telephone number or address listed under "Contact Information" on page 3.
On February 28, 2006, there were 6,091,188,801 shares of common stock outstanding. Each common share has one vote.
How We Solicit Proxies
In addition to this mailing, ExxonMobil officers and employees may solicit proxies personally, electronically, by telephone, or with additional mailings. ExxonMobil pays the costs of soliciting this proxy. We are paying D.F. King & Co. a fee of $27,500 plus expenses to help with the solicitation. We also reimburse brokers and other nominees for their expenses in sending these materials to you and getting your voting instructions.
Shareholder Proposals for Next Year
Any shareholder proposal for the annual meeting in 2007 must be sent to the Secretary at the address of ExxonMobil's principal executive office listed under "Contact Information" on page 3. The deadline for receipt of a proposal to be considered for inclusion in the proxy statement is 5:00 p.m., Central Time, on December 13, 2006. The deadline for notice of a proposal for which a shareholder will conduct his or her own solicitation is February 26, 2007. On request, the Secretary will provide instructions for submitting proposals.
Duplicate Annual Reports
Registered shareholders with multiple accounts may authorize ExxonMobil to discontinue mailing extra annual reports by marking the "discontinue annual report mailing for this account" box on the proxy card. If you vote via the Internet or by telephone, you will also have the opportunity to indicate that you wish to discontinue receiving extra annual reports. At least one account must continue to receive an annual report. Eliminating these duplicate mailings will not affect receipt of future proxy statements and proxy cards.
Also, you may call ExxonMobil Shareholder Services at the toll-free telephone number listed under "Contact Information" on page 3 at any time during the year to discontinue duplicate mailings.
Shareholders with the Same Address
If you share an address with one or more ExxonMobil shareholders, you may elect to "household" your proxy mailing. This means you will receive only one annual report and proxy statement at that address unless one or more shareholders at that address specifically elect to receive separate mailings. Shareholders who participate in householding will continue to receive separate proxy cards. Also, householding will not affect dividend check mailings. We will promptly send a separate annual report and proxy statement to a shareholder at a shared address on request. Shareholders with a shared address may also request us to send separate annual reports and proxy statements in the future, or to send a single copy in the future if we are currently sending multiple copies to the same address.
Requests related to householding should be made by calling ExxonMobil Shareholder Services at the telephone number listed under "Contact Information" on page 3. Beneficial shareholders can request information about householding from their banks, brokers, or other holders of record.
Electronic Delivery of Proxy Statement and Annual Report
The 2006 Proxy Statement and the 2005 Summary Annual Report (the proxy materials) are available on our Web site at exxonmobil.com. Instead of receiving future copies of these documents by mail, shareholders can elect to receive an e-mail that will provide electronic links to them. Opting to receive your proxy materials online will save the Company the cost of producing and mailing documents to your home or business, and also will give you an electronic link to the proxy voting site.
The year 2005 consolidated financial statements and auditor's report, management's discussion and analysis of financial condition and results of operations, information concerning the quarterly financial data for the past two fiscal years, and other information are provided in Appendix A.
SEC Form 10-K
Shareholders may obtain without charge a copy of the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission by writing to the Secretary at the address listed under "Contact Information" on page 3, or by visiting ExxonMobil's Web site at exxonmobil.com.
TABLE OF CONTENTS
See Frequently Used Terms on pages A4 and A5 for a definition and calculation of capital employed and return on average capital employed.
Listed below are definitions of several of ExxonMobil's key business and financial performance measures. These definitions are provided to facilitate understanding of the terms and their calculation.
CASH FLOW FROM OPERATIONS AND ASSET SALES
RETURN ON AVERAGE CAPITAL EMPLOYED
The price range of ExxonMobil common stock is as reported on the composite tape of the several U.S. exchanges where ExxonMobil common stock is traded. The principal market where ExxonMobil common stock (XOM) is traded is the New York Stock Exchange, although the stock is traded on other exchanges in and outside the United States.
There were 616,344 registered shareholders of ExxonMobil common stock at December 31, 2005. At January 31, 2006, the registered shareholders of ExxonMobil common stock numbered 614,599.
On January 25, 2006, the Corporation declared a $0.32 dividend per common share, payable March 10, 2006.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ExxonMobil, with its resource base, financial strength, disciplined investment approach and technology portfolio, is well-positioned to participate in substantial investments to develop new energy supplies. While commodity prices remain volatile on a short-term basis depending on supply and demand, ExxonMobil's investment decisions are based on our long-term outlook, using a disciplined approach in selecting and pursuing the most attractive investment opportunities. The corporate plan is a fundamental annual management process that is the basis for setting risk-assessed near-term operating and capital objectives in addition to providing the longer-term economic assumptions used for investment evaluation purposes. Volumes are based on individual field production profiles, which are also updated annually. Prices for crude oil, natural gas and refined products are based on corporate plan assumptions developed annually by major region and used for investment evaluation purposes. Potential investment opportunities are tested over a wide range of economic scenarios to establish the resiliency of each opportunity. Once investments are made, a reappraisal process is completed to ensure relevant lessons are learned and improvements are incorporated into future projects. ExxonMobil views return on capital employed as the best measure of historical capital productivity.
BUSINESS ENVIRONMENT AND RISK ASSESSMENT
As demand rises, energy efficiency will become increasingly important, with the pace of improvement likely to accelerate. This accelerated pace is the outcome of expected improvements in personal transportation and power generation driven by the introduction of new technologies, as well as a myriad of other improvements which span the residential, commercial and industrial sectors.
Fossil fuels, including coal, are expected to remain the predominant energy sources with approximately 80 percent share of total energy. Oil and gas alone are expected to be about 60 percent. These well-established fuel sources are the only ones with the versatility and scale to meet the majority of the world's growing energy needs. Nuclear power will likely be a growing option to meet electricity needs. Alternative fuels, such as solar and wind power, will grow rapidly, underpinned by government subsidies and mandates. But even with assumptions of robust 10 percent per year growth, solar and wind are expected to represent just 1 percent of the total energy portfolio by 2030.
Oil demand should grow at 1.4 percent per year, primarily due to the increasing number of light duty vehicles in the transportation sector, partly offset by improvements in fuel efficiency. Natural gas and coal are both expected to grow at 1.8 percent annually driven primarily by increased need for electric power generation. The Corporation expects the liquefied natural gas (LNG) market to quintuple by 2030, helping to meet rising import dependency in Europe, North America and Asia. With equity positions in many of the largest remote gas accumulations in the world, the Corporation is positioned to benefit from its technology advances in gas liquefaction, transportation and regasification that enable distant gas supplies to reach markets economically.
The Corporation expects the world's reserve base to grow not only from new discoveries, but also from increases to known reserves. Technology will underpin these increases. The cost to develop these reserves is also large. According to the International Energy Agency, the investment required to meet total oil and gas energy needs worldwide through 2030 will be about $200 billion per year, or $5 trillion in total.
In addition to a changing geographic mix, there will also be a change in the type of opportunities from which volumes are produced. Production using arctic technology, deepwater drilling and production systems, heavy oil recovery processes and LNG is expected to grow from 25 percent to 35 percent of the Corporation's output between now and 2010. The Corporation's overall volume capacity outlook, based on projects coming on stream as anticipated, is for production capacity to grow over the period 2006-2010. However, actual volumes will vary from year to year due to timing of individual project start-ups, operational outages, reservoir performance, regulatory changes, asset sales, severe weather events, price effects under production sharing contracts and other factors described in Item 1A of ExxonMobil's 2005 Form 10-K.
Refining margins are a function of the difference between what a refinery pays for its raw materials (primarily crude oil) and the market prices for the range of products produced (primarily gasoline, heating oil, jet fuel and fuel oil). Crude oil and many products are widely traded with published prices, including those quoted on multiple exchanges around the world (e.g., New York Mercantile Exchange and International Petroleum Exchange). Prices for these commodities (crude and various products) are determined by the global marketplace and are impacted by many factors, including global and regional supply/demand balances, inventory levels, refinery operations, import/export balances, seasonality and weather and political climate. This global market and trade flow was particularly evident following the 2005 supply disruptions in the United States caused by hurricanes Katrina and Rita. Fuel prices increased when 25 percent of U.S. refining capacity was shut down. Consumers reduced demand, and additional product imports flowed into the United States. Supply and demand came back into balance quickly, with an associated decline in prices.
The objectives of ExxonMobil's Downstream strategies are to position the Corporation to be the industry leader under a variety of market conditions. These strategies include maintaining best-in-class operations in all aspects of the business, maximizing value from leading-edge technology, capitalizing on integration with other ExxonMobil businesses, and providing high quality, valued products and services to the Corporation's customers. ExxonMobil has an ownership interest in 45 refineries, located in 25 countries, with distillation capacity of 6.4 million barrels per day and lubricant basestock manufacturing capacity of about 150 thousand barrels per day. ExxonMobil's fuels and lubes marketing business portfolios include operations in over 150 countries on six continents, serving a globally diverse customer base. World class scale and integration, industry-leading efficiency, leading-edge technology and globally respected brands enable ExxonMobil to take advantage of attractive emerging-growth opportunities around the globe.
REVIEW OF 2005 AND 2004 RESULTS
Total assets at December 31, 2005, of $208 billion increased by approximately $13 billion from 2004, reflecting strong earnings and the Corporation's active investment program, particularly in the Upstream.
Total assets at December 31, 2004, of $195 billion increased by approximately $21 billion from 2003, reflecting strong earnings and the Corporation's active investment program, particularly in the Upstream.
the Downstream business. Carbon black oil and sulfur volumes are excluded. U.S. Chemical earnings of $1,186 million increased by $166 million. Non-U.S. Chemical earnings increased by $349 million to $2,757 million, including the impact of the gain from the resolution of the joint venture litigation of $390 million and a gain of $150 million on the Sinopec share sale.
All Other Segments
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
Cash and cash equivalents were $28,671 million at the end of 2005, an increase of $10,140 million, including $(787) million of foreign exchange rate effects from the general strengthening of the U.S. dollar in 2005. Including restricted cash and cash equivalents of $4,604 million (see note 3 on page A34 and note 14 on page A44), total cash and cash equivalents were $33,275 million at the end of 2005. Cash and cash equivalents were $18,531 million at the end of 2004, an increase of $7,905 million, including $532 million of foreign exchange rate effects from the generally weaker U.S. dollar in 2004. Including restricted cash and cash equivalents of $4,604 million, total cash and cash equivalents of $23,135 million at the end of 2004 increased $12,509 million during the year. Cash flows from operating, investing and financing activities are discussed below. For additional details, see the Consolidated Statement of Cash Flows on page A27.
Although the Corporation issues long-term debt from time to time and maintains a revolving commercial paper program, internally generated funds cover the majority of its financial requirements. The management of cash that may be temporarily available as surplus to the Corporation's immediate needs is carefully controlled, both to optimize returns on cash balances, and to ensure that it is secure and readily available to meet the Corporation's cash requirements as they arise.
The Corporation will need to continually find and develop new fields, and continue to develop and apply new technologies and recovery processes to existing fields, in order to maintain or increase production and resulting cash flows in future periods. After a period of production at plateau rates, it is the nature of oil and gas fields eventually to produce at declining rates for the remainder of their economic life. Averaged over all our existing oil and gas fields and without new projects, ExxonMobil's entitlement production is expected to decline at approximately six percent per year through the end of the decade, consistent with recent historical performance. Decline rates can vary widely by individual field due to a number of factors, including, but not limited to, the type of reservoir, fluid properties, recovery mechanisms, and age of the field. Furthermore, the Corporation's production entitlements for individual fields can vary with price and contractual terms.
The Corporation has long been successful at offsetting the effects of natural field decline through disciplined investments and anticipates similar results in the future. Projects are in progress or planned to increase production capacity. However, these volume increases are subject to a variety of risks including project start-up timing, operational outages, reservoir performance, crude oil and natural gas prices, severe weather events, and regulatory changes. The Corporation's cash flows are also highly dependent on crude oil and natural gas prices.
The Corporation's financial strength as evidenced by its AAA/Aaa debt rating, enables it to make large, long-term capital expenditures. Capital and exploration expenditures in 2005 were $17.7 billion, reflecting the Corporation's continued active investment program. The Corporation expects spending to continue in this range for the next several years, although actual spending could vary depending on progress of individual projects. The Corporation has a large and diverse portfolio of development projects and exploration opportunities, which helps mitigate the overall political and technical risks of the Corporation's Upstream segment and associated cash flow. Further, due to its financial strength, debt capacity and diverse portfolio of opportunities, the risk associated with failure or delay of any single project would not have a significant impact
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
on the Corporation's liquidity or ability to generate sufficient cash flows for operations and its fixed commitments. The purchase and sale of oil and gas properties have not had a significant impact on the amount or timing of cash flows from operating activities.
Cash Flow from Operating Activities
Cash Flow from Investing Activities
Cash Flow from Financing Activities
During 2005, Exxon Mobil Corporation purchased 311 million shares of its common stock for the treasury at a gross cost of $18.2 billion. These purchases were to offset shares issued in conjunction with company benefit plans and programs and to reduce the number of shares outstanding. Shares outstanding were reduced 4.2 percent from 6,401 million at the end of 2004 to 6,133 million at the end of 2005. Purchases were made in both the open market and through negotiated transactions. Purchases may be increased, decreased or discontinued at any time without prior notice.
During 2004, Exxon Mobil Corporation purchased 218 million shares of its common stock for the treasury at a gross cost of $10.0 billion. These purchases were to offset shares issued in conjunction with company benefit plans and programs and to reduce the number of shares outstanding. Shares outstanding were reduced 2.5 percent from 6,568 million at the end of 2003 to 6,401 million at the end of 2004. Purchases were made in both the open market and through negotiated transactions.
This table excludes commodity purchase obligations (volumetric commitments but no fixed or minimum price) which are resold shortly after purchase, either in an active, highly liquid market or under long-term, unconditional sales contracts with similar pricing terms. Examples include long-term, noncancelable LNG and natural gas purchase commitments and commitments to purchase refinery products at market prices. Inclusion of such commitments would not be meaningful in assessing liquidity and cash flow, because these purchases will be offset in the same periods by cash received from the related sales transactions.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The table below shows the Corporation's fixed-charge coverage and consolidated debt-to-capital ratios. The data demonstrate the Corporation's creditworthiness. Throughout this period, the Corporation's long-term debt securities maintained the top credit rating from both Standard and Poor's (AAA) and Moody's (Aaa), a rating it has sustained for 87 years.
Management views the Corporation's financial strength, as evidenced by the above financial ratios and other similar measures, to be a competitive advantage of strategic importance. The Corporation's sound financial position gives it the opportunity to access the world's capital markets in the full range of market conditions, and enables the Corporation to take on large, long-term capital commitments in the pursuit of maximizing shareholder value.
The Corporation makes limited use of derivative instruments, which are discussed in Risk Management on page A17 and note 11 on page A38.
Litigation and Other Contingencies
In December 2000, a jury in the 15th Judicial Circuit Court of Montgomery County, Alabama, returned a verdict against the Corporation in a dispute over royalties in the amount of $88 million in compensatory damages and $3.4 billion in punitive damages in the case of Exxon Corporation v. State of Alabama, et al. The verdict was upheld by the trial court in May 2001. In December 2002, the Alabama Supreme Court vacated the $3.5 billion jury verdict. The case was retried and in November 2003, a state district court jury in Montgomery, Alabama, returned a verdict against Exxon Mobil Corporation. The verdict included $63.5 million in compensatory damages and $11.8 billion in punitive damages. In March 2004, the district court judge reduced the amount of punitive damages to $3.5 billion. ExxonMobil believes the judgment is not justified by the evidence, that any punitive damage award is not justified by either the facts or the law, and that the amount of the award is grossly excessive and unconstitutional. ExxonMobil has appealed the decision to the Alabama Supreme Court. Management believes that the likelihood of the judgment being upheld is remote. While it is reasonably possible that a liability may have been incurred by ExxonMobil from this dispute over royalties, it is not possible to predict the ultimate outcome or to reasonably estimate any such potential liability. In May 2004, the Corporation posted a $4.5 billion supersedeas bond as required by Alabama law to stay execution of the judgment pending appeal. The Corporation has pledged to the issuer of the bond collateral consisting of cash and short-term, high-quality securities with an aggregate value of approximately $4.6 billion. This collateral is reported as restricted cash and cash equivalents on the Consolidated Balance Sheet. Under the terms of the pledge agreement, the Corporation is entitled to receive the income generated from the cash and securities and to make investment decisions, but is restricted from using the pledged cash and securities for any other purpose until such time the bond is canceled.
In 2001, a Louisiana state court jury awarded compensatory damages of $56 million and punitive damages of $1 billion to a landowner for damage caused by a third party that leased the property from the landowner. The third party provided pipe cleaning and storage services for the Corporation and other entities. The Louisiana Fourth Circuit Court of Appeals reduced the punitive damage award to $112 million in 2005. The Corporation appealed this decision to the Louisiana Supreme Court as it continues to believe that these judgments should be substantially reduced on legal and constitutional grounds. While it is reasonably possible that a liability may have been incurred, it is not possible to predict the ultimate outcome or to reasonably estimate any such potential liability.
In Allapattah v. Exxon, a jury in the United States District Court for the Southern District of Florida determined in 2001 that a class of Exxon dealers between March 1983 and August 1994 had been overcharged for gasoline. In June 2003, the Eleventh Circuit Court of Appeals affirmed the judgment and in March 2004, denied a petition for Rehearing En Banc. In October 2004, the U.S. Supreme Court granted review as to whether the class in the District Court judgment should include members that individually do not satisfy the $50,000 minimum amount-in-controversy requirement in federal court. In light of the Supreme Court's decision to grant review of only part of ExxonMobil's appeal, the Corporation took an after-tax charge of $550 million in the third quarter of 2004 reflecting the estimated liability, after considering potential set-offs and defenses for the claims under review by the Supreme Court. In June 2005, the Supreme Court granted the District Court the right to hear the claims of all class members and the Corporation took an after-tax charge of $200 million. Class counsel and ExxonMobil are seeking court approval of a settlement of $1,075 million, pre-tax that would essentially finalize the Corporation's financial obligation in the case; this obligation has been fully accrued. The trial court has preliminarily approved the settlement. Notice has been issued to the class and the final approval hearing will occur in April 2006.
Tax issues for 1986 to 1993 remain pending before the U.S. Tax Court. The ultimate resolution of these issues is not expected to have a materially adverse effect upon the Corporation's operations or financial condition.
Based on a consideration of all relevant facts and circumstances, the Corporation does not believe the ultimate outcome of any currently pending lawsuit against ExxonMobil will have a materially adverse effect upon the Corporation's operations or financial condition. There are no events or uncertainties known to management beyond those already included in reported financial information that would indicate a material change in future operating results or financial condition.
CAPITAL AND EXPLORATION EXPENDITURES
Capital and exploration expenditures in 2005 were $17.7 billion, reflecting the Corporation's continued active investment program. The Corporation expects spending to continue in this range for the next several years. Actual spending could vary depending on progress of individual projects.
Upstream spending was up 24 percent to $14.5 billion in 2005, from $11.7 billion in 2004, as a result of higher spending in growth areas such as Russia, the Caspian, Qatar and West Africa. In addition, spending in the U.S., Australia and the North Sea was also higher. During the past three years, Upstream capital and exploration expenditures averaged $12.7 billion. The majority of these expenditures are on major development projects, which typically take two to four years from the time of recording proved undeveloped reserves to the start of production from those reserves. The percentage of proved developed reserves has remained relatively stable over the past five years at over 60 percent of total proved reserves, indicating that proved reserves are consistently moved from undeveloped to developed status. Capital and exploration expenditures are not tracked by the undeveloped and developed proved reserve categories. Capital investments in the Downstream totaled $2.5 billion in 2005, up $0.1 billion from 2004. Chemical capital expenditures were essentially unchanged from 2004.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ASSET RETIREMENT OBLIGATIONS AND ENVIRONMENTAL COSTS
Asset Retirement Obligations
Throughout ExxonMobil's businesses, new and ongoing measures are taken to prevent and minimize the impact of our operations on the air, water and ground. This includes a significant investment in refining technology to manufacture low-sulfur fuels as well as projects to reduce nitrogen oxide and sulfur oxide emissions. ExxonMobil's 2005 worldwide environmental costs for all such preventative and remediation steps were about $3.3 billion, of which $1.2 billion were capital expenditures and $2.1 billion were included in expenses. The total cost for such activities is expected to remain in this range in 2006 and 2007 (with capital expenditures approximately 35 percent of the total).
The Corporation accrues liabilities for environmental liabilities when it is probable that obligations have been incurred and the amounts can be reasonably estimated. This policy applies to assets or businesses currently owned or previously disposed. ExxonMobil has accrued liabilities for probable environmental remediation obligations at various sites, including multiparty sites where the U.S. Environmental Protection Agency has identified ExxonMobil as one of the potentially responsible parties. The involvement of other financially responsible companies at these multiparty sites mitigates ExxonMobil's actual joint and several liability exposure. At present, no individual site is expected to have losses material to ExxonMobil's operations or financial condition. Provisions made in 2005 for environmental liabilities were $487 million ($340 million in 2004), included in the $2.1 billion of 2005 expenses noted above, and the balance sheet reflects accumulated liabilities of $849 million as of December 31, 2005, and $643 million as of December 31, 2004.
MARKET RISKS, INFLATION AND OTHER UNCERTAINTIES
Crude oil, natural gas, petroleum product and chemical prices have fluctuated in response to changing market forces. The impacts of these price fluctuations on earnings from Upstream, Downstream and Chemical operations have varied. In the Upstream, based on the 2005 worldwide production levels, a $1 per barrel change in the weighted-average realized price of oil would have approximately a $400 million annual after-tax effect on Upstream consolidated plus equity company earnings. Similarly, a $0.10 per kcf change in the worldwide average gas realization would have approximately a $200 million annual after-tax effect on Upstream consolidated plus equity company earnings. For any given period, the extent of actual benefit or detriment will be dependent on the price movements of individual types of crude oil, taxes and other government take impacts, price adjustment lags in long-term gas contracts, and crude and gas production volumes. Accordingly, changes in benchmark prices for crude oil and natural gas only provide a broad indicator of changes in the earnings experienced in any particular period.
In the very competitive downstream and chemical environments, earnings are primarily determined by margin capture rather than absolute price levels of products sold. Refining margins are a function of the difference between what a refiner pays for its raw materials (primarily crude oil) and the market prices for the range of products produced. These prices in turn depend on global and regional supply/demand balances, inventory levels, refinery operations, import/export balances and weather.
The global energy markets can give rise to extended periods in which market conditions are adverse to one or more of the Corporation's businesses. Such conditions, along with the capital-intensive nature of the industry and very long lead times associated with many of our projects, underscore the importance of maintaining a strong financial position. Management views the Corporation's financial strength, including the AAA and Aaa ratings of its long-term debt securities by Standard and Poor's and Moody's, as a competitive advantage.
In general, segment results are not dependent on the ability to sell and/or purchase products to/from other segments. Instead, where such sales take place, they are the result of efficiencies and competitive advantages of integrated refinery/chemical complexes. Additionally, intersegment sales are market-related. The products bought and sold between segments can also be acquired in worldwide markets that have substantial liquidity, capacity and transportation capabilities. About 40 percent of the Corporation's intersegment sales are crude oil produced by the Upstream and sold to the Downstream. Other intersegment sales include those between refineries and chemical plants related to raw materials, feedstocks and finished products.
Although price levels of crude oil and natural gas may rise or fall significantly over the short to medium term due to political events, OPEC actions and other factors, industry economics over the long term will continue to be driven by market supply and demand. Accordingly, the Corporation tests the viability of all of its assets based on long-term price projections. The Corporation's assessment is that its operations will continue to be successful in a variety of market conditions. This is the outcome of disciplined investment and asset management programs. Investment opportunities are tested against a variety of market conditions, including low-price scenarios. As a result, investments that would succeed only in highly favorable price environments are screened out of the investment plan.
The Corporation has had an active asset management program in which underperforming assets are either improved to acceptable levels or considered for divestment. The asset management program involves a disciplined, regular review to ensure that all assets are contributing to the Corporation's strategic and financial objectives. The result has been the creation of a very efficient capital base and has meant that the Corporation has seldom been required to write down the carrying value of assets, even during periods of low commodity prices.
The Corporation is exposed to changes in interest rates, primarily as a result of its short-term debt and long-term debt carrying floating interest rates. The impact of a 100-basis-point change in interest rates affecting the Corporation's debt would not be material to earnings, cash flow or fair value. The Corporation's cash balances exceeded total debt at year-end 2005 and 2004.
The Corporation conducts business in many foreign currencies and is subject to exchange rate risk on cash flows related to sales, expenses, financing and investment transactions. The impacts of fluctuations in exchange rates on ExxonMobil's geographically and functionally diverse operations are varied and often offsetting in amount. The Corporation makes limited use of currency exchange contracts, commodity forwards, swaps and futures contracts to mitigate the impact of changes in currency values and commodity prices. Exposures related to the Corporation's limited use of the above contracts are not material.
Inflation and Other Uncertainties
RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
The cumulative compensation expense associated with share-based payments made in 2005, 2004 and 2003 has been recognized in the income statement using the "nominal vesting period approach." The full cost of awards given to employees who have retired before the end of the vesting period has been expensed. The use of a "non-substantive vesting period approach" based on the retirement eligibility age, would not be significantly different from the nominal vesting period approach. The non-substantive vesting period approach will be applicable to grants made after the adoption of FAS 123R on January 1, 2006.
Accounting for Purchases and Sales of Inventory with the Same Counterparty
The Corporation records in revenues certain crude oil, natural gas, petroleum product and chemical sales where the Corporation contemporaneously negotiated purchases with the same counterparty. The purchases are recorded in crude oil and product purchases. These transactions are commonly called "buy/sell transactions" and are used to ensure that the right crude oil is available to the Corporation's refineries at the right time and that appropriate products are available
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
to meet customer demand. The Corporation's accounting treatment for these buy/sell transactions is consistent with long standing industry practice. The EITF consensus will result in the Corporation's accounts "Sales and other operating revenue" and "Crude oil and product purchases" on the Consolidated Statement of Income being reduced by associated amounts with no impact on net income. All operating segments will be affected by this change, but the largest impacts are in the Downstream. The EITF consensus will become effective beginning no later than the second quarter of 2006.
The purchase/sale amounts included in revenue for 2005, 2004 and 2003 are shown in note 1 on page A28.
CRITICAL ACCOUNTING POLICIES
Oil and Gas Reserves
The estimation of proved reserves, which is based on the requirement of reasonable certainty, is an ongoing process based on rigorous technical evaluations, commercial and market assessment, and detailed analysis of well information such as flow rates and reservoir pressure declines. The estimation of proved reserves is controlled by the Corporation through long-standing approval guidelines. Reserve changes are made within a well-established, disciplined process driven by senior level geoscience and engineering professionals (assisted by a central reserves group with significant technical experience) culminating in reviews with and approval by senior management. Notably, no employee is compensated based on the level of proved reserve bookings.
Although the Corporation is reasonably certain that proved reserves will be produced, the timing and amount recovered can be affected by a number of factors including completion of development projects, reservoir performance, regulatory approvals and significant changes in long-term oil and gas price levels.
Proved reserves can be further subdivided into developed and undeveloped reserves. The percentage of proved developed reserves has remained relatively stable over the past five years at over 60 percent of total proved reserves (including both consolidated and equity company reserves), indicating that proved reserves are consistently moved from undeveloped to developed status. Over time, these undeveloped reserves will be reclassified to the developed category as new wells are drilled, existing wells are recompleted and/or facilities to collect and deliver the production from existing and future wells are installed. Major development projects typically take two to four years from the time of recording proved reserves to the start of production from these reserves.
Based on regulatory guidance, the Corporation has reported 2004 and 2005 reserves on the basis of December 31 prices and costs ("year-end prices").
The use of year-end prices for reserves estimation introduces short-term price volatility into the process since annual adjustments are required based on prices occurring on a single day. The Corporation believes that this approach is inconsistent with the long-term nature of the upstream business where production from individual projects often spans multiple decades. The use of prices from a single date is not relevant to the investment decisions made by the Corporation and annual variations in reserves based on such year-end prices are not of consequence to how the business is actually managed.
Revisions can include upward or downward changes in previously estimated volumes of proved reserves for existing fields due to the evaluation or re-evaluation of (1) already available geologic, reservoir or production data, or (2) new geologic, reservoir or production data, or (3) changes to underlying price assumptions used in the determination of reserves. This category can also include changes associated with the performance of improved recovery projects and significant changes in either development strategy or production equipment/facility capacity.
The Corporation uses the "successful efforts" method to account for its exploration and production activities. Under this method, costs are accumulated on a field-by-field basis with certain exploratory expenditures and exploratory dry holes being expensed as incurred. Costs of productive wells and development dry holes are capitalized and amortized on the unit-of-production method for each field. The Corporation uses this accounting policy instead of the "full cost" method because it provides a more timely accounting of the success or failure of the
Corporation's exploration and production activities. If the full cost method were used, all costs would be capitalized and depreciated on a country-by-country basis. The capitalized costs would be subject to an impairment test by country. The full cost method would tend to delay the expense recognition of unsuccessful projects.
Impact of Oil and Gas Reserves on Depreciation. The calculation of unit-of-production depreciation is a critical accounting estimate that measures the depreciation of upstream assets. It is the ratio of (1) actual volumes produced to (2) total proved developed reserves (those proved reserves recoverable through existing wells with existing equipment and operating methods) applied to the (3) asset cost. The volumes produced and asset cost are known and, while proved developed reserves have a high probability of recoverability, they are based on estimates that are subject to some variability. This variability has generally resulted in net upward revisions of proved reserves in existing fields, as more information becomes available through research and actual production levels. While the upward revisions the Corporation has made in the past are an indicator of variability, they have had a very small impact on the unit-of-production rates because they have been small compared to the large reserves base.
Impact of Oil and Gas Reserves and Prices on Testing for Impairment. Proved oil and gas properties held and used by the Corporation are reviewed for impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable. Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets.
The Corporation estimates the future undiscounted cash flows of the affected properties to judge the recoverability of carrying amounts. In general, analyses are based on proved reserves. Where probable reserves exist, an appropriately risk-adjusted amount of these reserves may be included in the impairment evaluation. An asset would be impaired if the undiscounted cash flows were less than its carrying value. Impairments are measured by the amount by which the carrying value exceeds its fair value.
The Corporation performs asset valuation analyses on an ongoing basis as a part of its asset management program. These analyses monitor the performance of assets against corporate objectives. They also assist the Corporation in assessing whether the carrying amounts of any of its assets may not be recoverable. In addition to estimating oil and gas reserve volumes in conducting these analyses, it is also necessary to estimate future oil and gas prices. Trigger events for impairment evaluation include a significant decrease in current and projected prices or reserve volumes, an accumulation of project costs significantly in excess of the amount originally expected, and historical and current operating losses.
In general, the Corporation does not view temporarily low oil prices as a trigger event for conducting the impairment tests. The markets for crude oil and natural gas have a history of significant price volatility. Although prices will occasionally drop precipitously, industry prices over the long term will continue to be driven by market supply and demand. On the supply side, industry production from mature fields is declining, but this is being offset by production from new discoveries and field developments. OPEC production policies also have an impact on world oil supplies. The demand side is largely a function of global economic growth. The relative growth/decline in supply versus demand will determine industry prices over the long term and these cannot be accurately predicted. Accordingly, any impairment tests that the Corporation performs make use of the Corporation's long-term price assumptions for the crude oil and natural gas markets, petroleum products and chemicals. These are the same price assumptions that are used in the Corporation's annual planning and budgeting processes and are also used for capital investment decisions. The corporate plan is a fundamental annual management process that is the basis for setting near-term risk-assessed operating and capital objectives in addition to providing the longer-term economic assumptions used for investment evaluation purposes. Volumes are based on individual field production profiles, which are also updated annually. Prices for natural gas and other products are based on corporate plan assumptions developed annually by major region and used for investment evaluation purposes. Cash flow estimates for impairment testing exclude the use of derivative instruments.
Supplemental information regarding oil and gas results of operations, capitalized costs and reserves can be found on pages A52 to A61. The standardized measure of discounted future cash flows on pages A60 and A61 is based on the year-end 2005 price applied for all future years, as required under Statement of Financial Accounting Standards No. 69 (FAS 69). Future prices used for any impairment tests will vary from the one used in the FAS 69 disclosure, and could be lower or higher for any given year.
Suspended Exploratory Well Costs
Majority ownership is normally the indicator of control that is the basis on which subsidiaries are consolidated. However, certain factors may indicate that a majority-owned investment is not controlled and therefore should be accounted for using the equity method of accounting. These factors occur where the minority shareholders are granted by law or by contract substantive participating rights. These include the right to approve operating policies, expense budgets, financing and investment plans and management compensation and succession plans.
The Corporation consolidates certain affiliates identified as variable-interest entities in which it has less than a majority ownership, because of guarantees or other arrangements that create majority economic interests in those affiliates that are greater than the Corporation's voting interests.
Additional disclosures of summary balance sheet and income information for those subsidiaries accounted for under the equity method of accounting can be found in note 6 on page A35. The Corporation believes this to be important information necessary to a full understanding of the Corporation's financial statements.
Investments in companies that are partially owned by the Corporation are integral to the Corporation's operations. In some cases they serve to balance worldwide risks and in others they provide the only available means of entry into a particular market or area of interest. The other parties who also have an equity interest in these companies are either independent third parties or host governments that share in the business results according to their percentage ownership. The Corporation does not invest in these companies in order to remove liabilities from its balance sheet. In fact, the Corporation has long been on record supporting an alternative accounting method that would require each investor to consolidate its percentage share of all assets and liabilities in these partially owned companies rather than only its percentage in the net equity. This method of accounting for investments in partially owned companies is not permitted by GAAP except where the investments are in the direct ownership of a share of upstream assets and liabilities. However, for purposes of calculating return on average capital employed, which is not covered by GAAP standards, the Corporation includes its share of debt of these partially owned companies in the determination of average capital employed.
Some of these plans (primarily non-U.S.) provide pension benefits that are paid directly by their sponsoring affiliates out of corporate cash flow rather than a separate pension fund. Book reserves are established for these plans because tax conventions and regulatory practices do not encourage advance funding. The portion of the pension cost attributable to employee service is expensed as services are rendered. The portion attributable to the increase in pension obligations due to the passage of time is expensed over the term of the obligations, which ends when all benefits are paid. The primary difference in pension expense for unfunded versus funded plans is that pension expense for funded plans also includes a credit for the expected long-term return on fund assets.
For funded plans, including many in the U.S., pension obligations are financed in advance through segregated assets or insurance arrangements. These plans are managed in compliance with the requirements of governmental authorities, and meet or exceed required funding levels as measured by relevant actuarial and government standards at the mandated measurement dates. In determining liabilities and required contributions, these standards often require approaches and assumptions that differ from those used for accounting purposes.
The Corporation will continue to make contributions to these funded plans as necessary. All defined-benefit pension obligations, regardless of the funding status of the underlying plans, are fully supported by the financial strength of the Corporation or the respective sponsoring affiliate.
Pension accounting requires explicit assumptions regarding, among others, the long-term expected earnings rate on fund assets, the discount rate for the benefit obligations, and the long-term rate for future salary increases. All the pension assumptions are reviewed annually by outside actuaries and senior management. These assumptions are adjusted only as appropriate to reflect changes in market rates and outlook. For example, the long-term expected earnings rate on U.S. pension plan assets in 2005 was 9.0 percent. This compares to an actual rate of return over the past decade of 11 percent. The Corporation establishes the long-term expected rate of return by developing a forward-looking, long-term return assumption for each pension fund asset class, taking into account factors such as the expected real return for the specific asset class and inflation. A single, long-term rate of return is then calculated as the weighted average of the target asset allocation and the long-term return assumption for each asset class. A worldwide reduction of 0.5 percent in the pension fund earnings rate would increase annual pension expense by approximately $95 million before tax.
Differences between actual returns on fund assets versus the long-term expected return are not recorded in the year that the difference occurs, but rather are amortized in pension expense, along with other actuarial gains and losses, over the expected remaining service life of employees.
Litigation and Other Contingencies
GAAP requires that liabilities for contingencies be recorded when it is probable that a liability has been incurred by the date of the balance sheet and that the amount can be reasonably estimated. These amounts are not reduced by amounts that may be recovered under insurance or claims against third parties, but undiscounted receivables from insurers or other third parties may be accrued separately. The Corporation revises such accruals in light of new information.
Significant management judgment is required related to contingent liabilities and the outcome of litigation because both are difficult to predict. However, the Corporation has been successful in defending litigation in the past. Payments have not had a materially adverse effect on operations or financial condition. In the Corporation's experience, large claims often do not result in large awards. Large awards are often reversed or substantially reduced as a result of appeal or settlement.
Foreign Currency Translation
Factors considered by management when determining the functional currency for a subsidiary include: the currency used for cash flows related to individual assets and liabilities; the responsiveness of sales prices to changes in exchange rates; whether sales are into local markets or exported; the currency used to acquire raw materials, labor, services and supplies; sources of financing; and significance of intercompany transactions.
Management, including the Corporation's chief executive officer, principal financial officer, and principal accounting officer, is responsible for establishing and maintaining adequate internal control over the Corporation's financial reporting. Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that Exxon Mobil Corporation's internal control over financial reporting was effective as of December 31, 2005.
Management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2005, was audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
To the Shareholders of Exxon Mobil Corporation:
We have completed integrated audits of Exxon Mobil Corporation's 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005, and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements
As discussed in note 8 to the consolidated financial statements, the Corporation changed its method of accounting for asset retirement obligations in 2003.
Internal control over financial reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The information on pages A28 through A51 is an integral part of these statements.
CONSOLIDATED BALANCE SHEET
The information on pages A28 through A51 is an integral part of these statements.
The information on pages A28 through A51 is an integral part of these statements.
CONSOLIDATED STATEMENT OF CASH FLOWS