An Analysis of the Financial and Operational Risks to Chevron Corporation from Aguinda V. ChevronTexaco (May 2012)

From the Executive Summary of this report:

  • Chevron is facing significant financial and operational risks stemming from enforcement of an $18 billion adverse judgment in Ecuador.   On March 12, 2012, an Ecuadorian appellate court declared the $18 billion judgment for the company’s contamination of soil and water final and enforceable, giving the plaintiffs the right for the first time to collect on the judgment.  Chevron itself has admitted in a sworn legal statement that the company is at risk of “irreparable injury to [its] business reputation and business relationships” that “would not be remediable by money damages” from potential enforcement of the Ecuadorian court judgment.
  • The enormous breadth of Chevron’s global business operations makes the company particularly vulnerable to enforcement.  There are many jurisdictions around the world in which the plaintiffs could seek court recognition and enforcement of the judgment, including many where Chevron has substantial reserves and that are strategic importance.
  • Chevron’s defenses to enforcement actions have greatly narrowed. The U.S. Second Circuit vacated in its entirety a preliminary injunction from a U.S. District Court that purported to bar the Ecuadorian plaintiffs from enforcing the judgment against Chevron’s assets anywhere in the world.  The Ecuadorian courts have rejected awards by an arbitral panel seeking a halt to enforcement of the $18 billion judgment against Chevron.
  • Shareholders of Chevron are increasingly demanding more transparency of the risks and an alternative to the company’s litigation strategy.  In May, 2011, shareholders of Chevron – representing $156 billion of assets under management – called upon Chevron “to fully disclose to shareholders the risks to its operations and business from the potential enforcement of the Aguinda verdict” and “reevaluate whether endless litigation in the Aguinda case is the best strategy for the Company and its shareholders…”  Separately, Trillium Asset Management formally requested the Securities and Exchange Commission “to review whether Chevron has appropriately disclosed to shareholders the scope and magnitude of the financial and operational risk” from the judgment.
  • Chevron shareholders are demanding better corporate governance. Citing management’s handling of the case in Ecuador, shareholders are questioning Chevron’s generous executive compensation packages and have proposed overhauls of the company’s corporate governance.  Despite losing the landmark $18 billion judgment in Ecuador, Chevron awarded its General Counsel R. Hewitt Pate a 75% raise in 2012 to a staggering $7.8 million salary and even went so far as to praise “his outstanding management of Ecuador” ahead of the company’s annual “say on pay” vote.    In 2010 and 2011, a significantly large percentage of Chevron’s shareholders supported a resolution calling for the appointment of a director with expertise in environmental liabilities.  In addition to re-filing this resolution, shareholders have filed two additional new resolutions for Chevron’s 2012 annual meeting calling for corporate governance reforms, one asking that Chevron separate the positions of Chief Executive Officer and Chair of the Board and the other asking that Chevron lower the thresholds for calling a special meeting of shareholders.

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Shareholders Push New Chevron CEO For Answers on Ecuador

Chevron’s shareholders have never been reluctant to question the company’s management of its liability for its oil pollution in Ecuador. And they do so in significant numbers.

Chevron management often tries to deny this. But the evidence of shareholder dissent is clear. At the May 2017 annual shareholder meeting, then CEO John Watson stated that shareholders had “almost universally supported Chevron management in the Ecuador case.”

Wason’s statement could not have been more untrue. In fact, Watson stated that even as he knew that 39% of Chevron shareholders had voted in favor of a resolution effectively calling on him to be fired as board chair.

Shareholders were crystal clear that Watson had mismanaged Chevron’s liability for its oil pollution in Ecuador. The resolution, supported by 39% of Chevron shareholders, stated:

We believe that inadequate board oversight has led management to mishandle a number of issues in ways that significantly increase both risk and costs to shareholders.  The most pressing of these issues is the ongoing legal effort by communities in Ecuador to enforce a $9.5 billion judgment against Chevron for oil pollution.

Instead of negotiating an expedient, fair, and comprehensive settlement with the affected communities in Ecuador, management has pursued a costly legal strategy that has led to significant missteps, including moving the case from New York to Ecuador.  In a move without precedent, management has harassed and subpoenaed shareholders who have questioned the Company’s legal strategy.

It is now 2018 and Chevron’s dissident shareholders are back and in even stronger force.

Led by Zevin Asset Management, shareholders have re-filed the resolution asking Chevron to separate the positions of CEO and Board Chair. This is simply good corporate governance. The CEO reports to the board. When a CEO is also board chair, he is in effect his own boss.

In another resolution designed to increase shareholder oversight of wayward managment, Newground Social Investment has re-filed its resolution calling for lowering the percentage of shareholders required to call a special meeting.

This resolution won the support of nearly one-third of Chevron shareholders in 2017. The resolution’s language is also highly critical of Chevron management stating:

Chevron has acknowledged the serious risk from enforcement of the $9.5 billion judgment.  Deputy Controller, Rex Mitchell, testified that such seizures of Company assets “would cause significant, irreparable damage to Chevron’s business reputation and business relationships.”

However, Chevron has yet to fully report these risks in either public filings or statements to shareholders.  As a result, investors have requested that the U.S. Securities and Exchange Commission investigate whether Chevron violated securities laws by misrepresenting or materially omitting information in regard to the multi-billion Ecuadoran judgment.

Finally, New York State Common Retirement Fund and Amnesty International USA have re-filed their resolution calling on Chevron’s board to add a member with environmental expertise.

Mindful of Chevron’s enormous liability for its oil pollution in Ecuador, the resolution states:

… appointing an environmental specialist to the board, [an] authoritative figure with acknowledged expertise and standing could perform a valuable role by enabling Chevron to more effectively address the environmental issues inherent in its business. It would also help ensure that the highest levels of attention focus on the development of environmental standards for new projects.

Answering these shareholders will lie with Chevron’s new CEO Michael Wirth who assumes the position in February. It is hoped that, unlike his predecessor John Watson, Wirth will actually ackowledge not only these shareholders concerns but also the existence of this large bloc of shareholders itself.

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