May 17, 2011
Chevron's Disclosures to Investors on Risks Associated with Ecuador are Questioned
by Robert Kropp
As shareowners file resolutions addressing environmental and human rights risks, a new report finds
discrepancies between Chevron's court statements and disclosures in its annual report.
In 2001, when Chevron acquired Texaco, the company inherited an environmental and human rights
disaster in Ecuador. According to a lawsuit originally filed in 1993, Texaco dumped billions of
gallons of waste byproduct from oil drilling in the rainforest, and burned hundreds of millions of
cubic feet of gas and waste oil into the atmosphere.
As Simon Billenness,
co-author with Sanford Lewis of a
recently published report entitled An
Analysis of the Financial and Operational Risks to Chevron Corporation from Aguinda v.
ChevronTexaco, told SocialFunds.com, "When the Board of Directors of Chevron signed off on the
acquisition of Texaco in 2001, they were signing off on acquiring a company that had embedded
within it this huge environmental liability."
The lawsuit, Aguinda v. ChevronTexaco, made
its way through the court systems of both the United States and Ecuador; in fact, in 2003, the case
was moved from the US to Ecuador at the request of ChevronTexaco. The company's request was
granted, according to the report by Billenness and Lewis, "on the condition that the company submit
to Ecuadorian jurisdiction."
In February of this year, the Ecuadorian court found in favor
of the plaintiffs, and awarded them damages totaling $18 billion, "one of the largest court
judgments for environmental damage in history," according to the report. "This judgment is
comparable in size only to BP's promised $20 billion fund to compensate victims of the 2010 Gulf of
Mexico oil spill."
Rather than accept the judgment of a court whose jurisdiction it had
requested, Chevron returned to the US Second District Court, where it obtained a preliminary
injunction preventing the plaintiffs from seeking enforcement of the Ecuadorian judgment. The
plaintiffs have appealed, and in a memo code-named Invictus, their lawyers described
a plan to attach Chevron's assets by filing lawsuits in more than 100 countries.
even though the Second District Court found in Chevron's favor, it wrote, "There is no indication
in the record before us that shortening its name had any effect on ChevronTexaco's legal
obligations…Chevron Corporation therefore remains accountable for the promises upon which we and
the district court relied in dismissing Plaintiffs' action."
The report by Billenness and
Lewis focuses on the risk management practices of Chevron as they relate to potential damages to
the company from the lawsuit. On the one hand, in a statement to
the Second District Court, Chevron Deputy Comptroller Rex Mitchell asserted that the asset seizures
outlined in the Invictus memo "would disrupt Chevron's supply chain and operations," and "damage
Chevron's business reputation as a reliable supplier."
"Defendants' campaign to seek
seizures anywhere around the world and generate the maximum publicity for such acts would cause
significant, irreparable damage to Chevron," Mitchell continued.
On the other hand, as the
report points out, "Chevron has chosen to downplay the risk associated with the Ecuador litigation
in its public filings and statements to shareholders. The company has made one-sided public
statements of about the legal particulars of the case that could be misleading to some investors
without additional clarification. These choices may lead investors to question the accuracy of the
company's public assessments of the financial and operational risk it faces."
"Shareholders reading the annual report disclosure could reasonably want to know the Deputy
Comptroller's assessment of the potential for irreparable harm to reputation and relationships that
would not even be remedied by monetary damages," the report continued. "In analyzing whether these
omissions in the company's disclosures are material within the meaning of the securities laws the
courts would consider several factors, including the importance of the information to investor
SocialFunds.com's attempts to receive clarification of the apparent
discrepancy from Chevron representatives via email were not answered.
expressed concerns over Chevron's liability in the Ecuador case since 2003, when Trillium Asset Management co-filed a resolution addressing
human rights at the company. The resolution, now filed by members of the Interfaith Center on Corporate Responsibility (ICCR), remains on the
company's proxy ballot, and requests that Chevron form a separate Board Committee on Human Rights,
"which would elevate board level oversight and governance regarding human rights issues raised by
the company's activities and policies."
"ICCR has taken the lead on that resolution for
years, and got to the point where they even withdrew it one year, because they thought Chevron was
going to give them a detailed policy on human rights," Shelley Alpern, Vice President and Director
of Environmental, Social and Governance (ESG) Research & Shareholder Advocacy at Trillium, told
SocialFunds.com. "But they didn't."
This year, Trillium has co-filed a resolution
requesting that Chevron recommend an independent candidate for its Board of Directors who has a
high level of expertise and experience in environmental matters. The same resolution won 26.8% of
the shareowner vote in 2010.
"Last year, Chevron assured a co-filer of our resolution that
their board criteria adequately include environmental qualifications," Alpern said. In recommending
a vote against this year's resolution, Chevron stated, "In September 2010, your Board revised the
'Board Membership Criteria' section to include environmental expertise or experience in the list of
skills that are desirable when identifying candidates for the Board."
However, the company
continued, "Your Board believes that having a special purpose director is not a good corporate
Trillium and its co-filers are preparing an Investor Statement, in
which the company's failure to negotiate a settlement in the lawsuit raises questions about its
ability to manage risks associated with environmental and human rights issues. Echoing the findings
of Billenness and Lewis, it calls on the company to provide full disclosure of the risks associated
with enforcement of the judgment in Ecuador.
Also, a letter will go out to shareowners in
advance of the company's May 25th annual meeting, recommending support for the resolution. Citing
the company's potential liability for $18 billion in compensatory and punitive damages, the letter
questions the company's history of environmental risk management. It further notes that former US
Senator Sam Nunn, the chair of Chevron's Public Policy Committee, refused an invitation to meet
with a group of institutional investors to discuss concerns over environmental and legal risks.
As Billenness and Lewis conclude, "Whether the board and management are fulfilling their
fiduciary duties to properly manage this significant risk to the company's business and value" is
increasingly being questioned by investors.