ExxonMobil Corporation (Exxon) is the world's largest corporation in terms of revenue and one of the largest in market capitalization. It had sales of $486 billion in 2011, giving it the number one position on the Fortune 500 list in that category.

In recent years, Exxon has expanded its operations into hydraulic fracking. By pumping water, sand, and chemicals into a well at high pressure, cracks develop in the stone where gas is trapped, and the process allows it to flow out. There were more than 493,000 active natural-gas wells across 31 states in the United States in 2009, almost double the number in 1990. Around 90 percent have used fracking to get more gas flowing, according to the drilling industry.

By 2015, the United States will produce more oil from unconventional methods like fracking than conventional means, according to a 2012 report from the economic forecasting firm IHS Global Insight. Nationwide, residents living near fracked gas wells have filed over 1,000 complaints regarding tainted water, severe illnesses, livestock deaths, and fish kills. Fracking is controversial because the chemicals, mixed with water, may find their way into aquifers that supply drinking water. Oil companies say that fracking is safe and poses no threat to drinking water.

Right now, few groups are calling for an outright ban on fracking. However, shareholders want companies to issue full disclosure about individual fracking operations and the chemicals used during the process. Some companies counter that they already abide by environmental laws and regulations and that further disclosure is not necessary. On June 24, 2010, Exxon completed a $41 billion merger with XTO Energy, in large part to buy the company's hydraulicfracking expertise and gain access to its 45 trillion cubic feet of gas.

The terms of the merger called for Exxon to issue 0.7098 common shares for each common share of XTO. The merger augments Exxon's total production of energy resources by increasing natural gas production to 50 percent of the total, and its reserves will go up 50 percent as well. December 14, 2009, over alleged breach of fiduciary duty by the board of directors of XTO Energy. The plaintiff alleged breaches of fiduciary duty by the board of directors of XTO Energy arising out of the company's attempt to sell XTO Energy to ExxonMobil. In addition, the plaintiff claims that the XTO management and directors agreed to sell the company through "an unfair process," and that XTO Energy is worth more because of likely future global warming regulations that could curtail carbon emissions. Previous investigations by law firms examined the following:

(1) whether the XTO Energy board of directors breached their fiduciary duties to XTO shareholders by agreeing to sell XTO at an unfair price, thereby harming the company and its shareholders;

(2) whether the directors of XTO may have breached their fiduciary duties by not acting in XTO shareholders' best interests; and

(3) whether the company may not have adequately shopped itself around before entering into this transaction and, pursuant to this proposed transaction, ExxonMobil may be underpaying for XTO, thereby unlawfully harming XTO shareholders.

After the announcement, Exxon's shares fell 4.3 percent, to $69.69, while XTO shares jumped more than 15 percent, to $47.86 on the NYSE. Payments Made to Officers and Members of the Board of Directors of XTO An important part of the merger agreement was payments made to officers and members of the board of directors at XTO.

Given the distaste for large payout packages to corporate insiders during the period of the financial crisis in 2007-2008, there was some concern whether Congress would approve the merger. The issue was the arrangements detailed in Exhibit 1. At the end of its investigation, Congress approved the merger, although it raised concerns about disclosures to shareholders. SEC Financial Disclosures Rule In 2011, shareholders of Exxon voted not to require company officials to disclose more information about fracking, although 30 percent of the shareholders voted to increase disclosures, indicating some concern whether investors receive sufficient information for their decision-making needs.

The SEC requires that publicly traded companies release and provide for the free exchange of all material facts that are relevant to their ongoing business operations. From an ethical perspective, the general need in business transactions is for both parties to tell the whole truth about any material issue pertaining to the transaction. The SEC requires full disclosure from public companies that wish to be publicly traded on the major U.S. exchanges. By enforcing this rule, the SEC attempts to instill confidence in investors that the financial marketplace is efficient and

Questions
1. The lawsuit filed by the Shareholders Foundation alleged that the board of directors of XTO breached its fiduciary duties. What are the fiduciary duties of the board? Identify the duties allegedly violated in the XTO case. Do you think the board acted in accordance with a shareholder or stewardship perspective?

2. Much has been said during the recent financial crisis about top executive salaries being way too large, especially in those companies receiving a government bailout. The Obama administration sought to rein them in through threats of taxation or other forms of moral suasion. Do you believe that the government has an ethical right to intervene in a company's executive compensation program? Support your answer with reference to ethical reasoning. Review Exhibit 1. Do you believe that the agreement in the Form 8-K about payments to officers and board members raises any ethical issues? What is the role of the business judgment rule in such decisions?

3. One aspect of being an ethical corporation is to operate in a socially responsible way. The Corporate Social Responsibility Initiative at Harvard University 2 defines corporate social responsibility strategically: "Corporate social responsibility encompasses not only what companies do with their profits, but also how they make them. It goes beyond philanthropy and compliance and addresses how companies manage their economic, social, and environmental impacts, as well as their relationships in all key spheres of influence: the workplace, the marketplace, the supply chain, the community, and the public policy realm." The ethics of fracking is an issue raised in a number of articles and in the blog of one of the authors of this book. According to Mintz, 3 "From an ethical perspective, we might look at the harms and benefits of fracking. In other words, do the potential dangers of fracking, including contamination of water supplies, outweigh the potential benefits of producing badly needed oil and gas resources at a time when our national security may be in jeopardy because of our continued reliance on unreliable sources of energy? Is U.S. energy independence more important than the potential for harm to those affected by fracking procedures? Do jobs and economic growth trump health and safety concerns?"

4. Evaluate the ethics of fracking from a moral reasoning perspective using the methods discussed in Chapter 1. Going forward, do you believe that fracking should continue without regulation? Why or why not?