Chevron Shareholders Challenge Management Over Ecuador Pollution

For many years, a significant and growing number of Chevron’s shareholders have become increasingly critical of management’s mishandling of the company’s liabilities stemming from its extensive pollution in Ecuador’s Amazon rainforest.

Starting with Texaco in the 1990s, the oil company’s annual meeting of shareholders has been the focal point of members of the communities sickened by the pollution in their ancestral lands. Joining these indigenous and campesino community members have been their allies, socially responsible investors and environmental and human rights advocacy NGOs, such as Amazon Watch and Amnesty International USA.

Socially responsible investors were the first shareholders to ask Texaco – and later Chevron – to clean up its pollution in the Ecuadoran Amazon and to reach a fair and equitable settlement with the affected communities. These social investors argue that, to succeed and grow, Chevron needs to win a steady stream of new projects around the world. To accomplish this, Chevron must secure legal permission from a government and also establish a “social license to operate” from local communities. By walking away from its responsibility for clean-up of its oil pollution in Ecuador, social investors have argued that Chevron has harmed its reputation with governments and local communities and thus threatens the oil company’s ability to secure permission for new exploration. So taking the long-term view, it is in the interests of shareholders for Chevron to abandon its protracted, opaque, costly, and high-stakes legal strategy and reach a fair and equitable settlement with the communities affected by its pollution.

Numerous shareholders have also expressed concerns that Chevron’s management still has not adequately disclosed the risks from its high-stakes legal strategy. For instance, Chevron has acknowledged in legal filings the serious risk to shareholders from enforcement of the $9.5 billion judgment against the company’s assets. Chevron Deputy Controller, Rex Mitchell, testified that such seizures of Company assets “would cause significant, irreparable damage to Chevron’s business reputation and business relationships.” Moreover, Chevron has stated that this injury to the company “would not be remediable by money damages.”

However, Chevron has yet to fully report these risks in either public filings or statements to shareholders. As a result, investors have repeatedly 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.

In addition, Chevron still has yet to agree to a meaningful dialogue on the larger issue of whether management’s current legal strategy on Ecuador is in the best interests of shareholders. There needs to be a robust dialogue between shareholders and management regarding the risks and costs of management’s current high-stakes legal strategy as opposed to reaching a reasonable settlement of the case.

In 2012, investors with over one-half trillion dollars assets wrote Chevron asking for full disclosure of risks to shareholders and a discussion with management about seeking an alternative to management’s legal strategy. Chevron did not even give these investors the courtesy of a response. Later that year, Chevron even subpoenaed dissident shareholders who had questioned management’s handling of the Ecuador case.

Given Chevron management’s disdain for the views of its own shareholders, Zevin Asset Management, Newground Social Investment, and New York State Comptroller Thomas DiNapoli have all pushed for corporate governance reforms to rein in Chevron’s unresponsive and out-of-control top management team.

For several years, the New York State Common Retirement Fund has filed a resolution asking Chevron to add to its board of directors a member with environmental expertise. Last year, that resolution gained the support of 20% of shares voted, considered a strong rebuke of management.

Newground Social Investment has filed a resolution with Chevron to lower the threshold of the percentage of shareholders required to call a special shareholder meeting. Last year, this resolution won 32% of the vote, again a high level support for a resolution opposed by management.

Zevin Asset Management has filed a resolution with Chevron to separate the position of CEO and Chair. In previous years, Chevron CEO John Watson also held the position of Chair of the Board of Directors. Generally, shareholders have long been critical of CEOs also serving as Chair of the Board that oversees them. Such CEOs are in effect their own boss. Last year, this resolution won 39% of the vote in a very powerful repudiation by shareholders of Chevron’s management.

Zevin Asset Management’s resolution bears close watching this year. The resolution addresses Chevron management’s mishandling, not only of the Ecuador case, but also of the risks to shareholders stemming from climate change. Given that a resolution addressing climate change achieved over 60% of the votes of ExxonMobil’s shareholders last year, there is a real possibility that Zevin Asset Management’s resolution might win majority support at Chevron this year.

Chevron’s new CEO, Michael Wirth, has an opportunity to heed this ever-growing call from Chevron shareholders and to finally seek a reasonable settlement with the Ecuadoran communities to pay for their health care costs and the cleanup of the pollution that likely caused the cancers. For moral reasons if none else, Wirth should take a hard look at this option given the considerable evidence that the company dumped billions of gallons of oil waste and that cancer rates in the affected communities have increased significantly. Wirth also faces pressure from the fact that the $12 billion judgment against the company, rising at the rate of $300 million annually with statutory interest, poses the serious legal threat that the Ecuadoran plaintiffs will seize the company’s assets in Canada.

The Ecuadorans have made significant progress in the Canadian courts, where they are seeking to seize substantial Chevron assets to force it to satisfy the $12 billion judgment. Every appellate court in Canada to hear the case has ruled unanimously against Chevron since the enforcement action began. Moreover, the Ontario Court of Appeal has stated that the case against Chevron is “public interest litigation” and that “there can be no doubt that the environmental devastation to the appellants’ lands has severely hampered their ability to earn a livelihood. If we accept the findings that underlie the Ecuadorian judgment – findings that have not been undermined in our courts – Texaco has contributed to the appellants’ misfortune.”

This April, another court hearing will be held in Toronto where the Ecuadorians will argue that they should seize Chevron Canada’s assets to satisfy their $12 billion judgment against the company. In the courtroom will also be witnesses from the Assembly of First Nations of Canada, one of the leading indigenous federations in the world, which recently signed an unprecedented agreement to support their Ecuadorian indigenous brothers and sisters in their pursuit for justice. The impact of that hearing will be keenly felt at Chevron’s annual shareholder meeting in late May. It could well tip the balance in securing an historic majority vote of Chevron’s shareholders repudiating Chevron management’s handling of the Ecuador case.