From Assets to Liabilities
Are CVX shareholders ready for global cat and mouse?
October 4, 2012 | Kevin Koenig
Earlier this week, we reported on the extraordinarily vulnerable position that Chevron is in due to CEO Watson's poor oversight and mismanagement of multiple crises threatening the company's shareholder value. The Richmond refinery debacle. Millions in fines and suspended operations in Brazil. And a $19 billion damage award in Ecuador that has made Chevron a global fugitive, running from the law while its assets are hiding in plain sight.
Watson's bungling of these issues has caused major ripples among his own shareholders. At this year's Annual General Meeting, Watson faced a shareholder revolt spurred by the $19 billion guilty verdict and asset seizure efforts now underway by the Ecuadorian indigenous and farmer communities.
And understandably so. A report on the Ecuador litigation by prominent corporate accountability strategists details an eyebrow-raising web of financial and operational risks posed by the lawsuit – which seem to be either highlighted or downplayed depending on the company's audience.
In court filings in New York, representatives of Chevron gave sworn testimony that the case presented "irreparable injury to [its] business reputation and business relationship" and was a major threat to the company. However, its 10-K statements filed with the Security Exchange Committee (SEC) continue to downplay it. So which is it Watson? The company's doublespeak is misleading either the New York judiciary or its stockholders. Either way, executives are flirting with felonies or perjury charges, and an SEC investigation seems right around the corner. In fact, both shareholders and Congresswoman Jan Schakowsky (D-IL.) recently sent letters to the SEC asking the institution to determine whether Chevron is violating securities laws related to the court finding that it deliberately dumped billions of gallons of toxic waste into the Amazon rainforest. None of the above is good for business.
Another report documents Chevron's deceit of its own shareholders and outlines the misrepresentations that the company has made in its public findings.
At the company's annual stockholders meeting last May, shareholder resolutions requesting a separation between CEO and Chairman of the Board received 38%, and New York State Comptroller Thomas P. DiNapoli joined with 39 other investors, with a combined total of $580 billion in assets under management, in calling on Chevron to settle its two-decade-long legal battle in Ecuador.
Who would expose its company and its shareholders to this kind of risk? Why is CVX so entrenched? While the board may be guilty of turning a blind eye, it's elementary what's really going on here. Watson's dug in not to protect his company or its investors, but to protect his legacy and cover up his ignorant and/or arrogant botch of the Ecuador issue. The Ecuador liability is all on Watson. And he could have made it go away years ago for a lot less, or at least done his due diligence and discounted it from the inflated price he paid for Texaco. But instead, Watson chose to cover it up, cover his trail, and try to convince everyone that he's the smartest guy in the room. Ken Ley and Bernie Madoff would be proud.
Here's the backstory. Texaco came with what was originally seen as roughly a $1 billion liability – legacy issues in the Ecuadorian Amazon where the company designed, built, and operated an oil extraction system for close to three decades that led to the systematic contamination of the region and decimated local indigenous peoples and farmers.
The lawsuit, Aguinda v. Texaco (now Aguinda v. Chevron), was first filed in New York courts within a year after the company's departure from Ecuador where the company's headquarters in White Plains, New York, where the company made the criminal decision to use sub standard, cheap technology that had been outlawed in the United States since the early 1940s.
But, Texaco, who by all means was seen as the industry scoundrel, balked. It argued that Ecuador was the more proper forum, its courts transparent and independent, and that Texaco – now Chevron – would be bound by any decision rendered in Ecuador.
Fast forward to a warm, spring day at the downtown Los Angeles Marriot in 2001. The Executive Director of Amazon Watch and I physically handed Watson, as head of M & A, two massive binders filled with documentation of over 500 toxic sites left by Texaco. We warned Watson and the company that they were buying a problem. It's now a $19 billion problem. Oops.
While repo men have yet to descend upon the company's headquarters and start hauling out the furniture, one has to ask: Is the company really ready for a global game of cat and mouse? Chevron has been able to abuse to Ecuadorian legal system and thumb its nose at verdict and jurisdiction because it has no assets here. But it's a different ball game when the plaintiffs, armed with a verdict from a court of Chevron's own choosing and based on much of the company's own evidence, head to countries where the bulk of Chevron upstream assets are – which account for the great majority of the company's revenue stream. What were once major assets in 120 countries around the world are now liabilities, hidden in plain sight. Offshore, onshore, well sites, bank accounts, refineries. And the plaintiffs only need to win once, while Chevron must bat a thousand.
And that doesn't even get at competitive advantages issues, where Chevron is risking losing out to other companies on new opportunities (back to Drucker's Five Business Sins) not only because of its reckless treatment of Ecuadorian indigenous people and farmers, but for its abusive litigation and dragging Ecuador – the host country – to arbitration hearings and trying to pass the $18 billion clean up price tag on to the state. This could be incredibly damaging for future Chevron prospects. As Watson's predecessor, former Texaco CEO Peter Bijur said, "If you're not drilling now, you're bankrupt in ten years."
Chevron investors should be hoping that the Wall Street scrutiny that has befallen Jaime Dimon and Bob Diamond spreads to San Ramon. Certainly, the thousands of farmers and indigenous people that continue drink poison water and live amidst one of the worlds worst oil disasters are hoping for the same. Chevron has stated that they will fight the case until hell freezes over, and then fight it out on the ice. Doesn't seem a very strategic attitude when Chevron assets and bank accounts are what are on the verge of being frozen. Watson seems to be more interested in protecting his own hide than shareholder value, feeding the liability and starving opportunities. If Watson can't let go, maybe it's time shareholders let Watson go.