The GMI Blog

Two Thumbs Down for Netflix’s Governance

By Paul Hodgson - CCO and Senior Research Associate

Full disclosure first, I’m a subscriber. Just don’t tell my struggling local, independent DVD rental store.

Initial reservations aside, the news that on January 13, this year, a lawsuit was filed in U.S. District Court, Northern District of California, alleging that Netflix, Inc. and certain of its officers and directors issued false and misleading statements regarding the Company's business practices and its contracts with content providers, causing the Company's stock to trade at artificially inflated prices, was not news to GMI.

During the past four rated Quarters, the GMI Ratings Accounting Risk Score for the company has fallen precipitously from 60, on a scale of 100, to 5.  The company's GMI Ratings Litigation Risk score has also been cascading downwards and is currently in the 1^st percentile, that’s as bad as it can get, with a 25.5 percent probability of being sued by its shareholders. It is also rated in the 2^nd percentile, that’s almost as bad as it can get, for Equity Performance, indicating that its shares are very likely to substantially underperform the market.

So, here’s the details on the complaint. It alleges that the defendants knew, but concealed, the facts that increased licensing fees demanded by content providers would necessitate an increase in the pricing for its products, and that there was no way the earnings forecasts for 2011 would be met.  

In fact, prior to updating its third quarter guidance last year, company insiders sold 388,661 shares of their own stock at prices as high as $298.73 per share.  After the announcement that nearly a million subscribers had been lost because of recent price hikes, the stock price fell from $208.71 to $169.25. 

It fell again when it was disclosed that the company would begin charging separately for its online and DVD rental services and had raised prices. In October last year, it reported that it had lost 5.5 million subscribers. Finally, when it filed its quarterly report with the SEC, the company disclosed it had incurred obligations for content totaling $3.5 billion, debt in other words, causing another 35 percent drop in the share price, from $118.84 to $77.37.

But that’s not all. As if it ever is.

It’s not just specifically the misleading statements that indicate poor corporate responsibility, Netflix scores poorly (15^th percentile) in all governance areas: environmental, social, governance, and compensation issues. In fact, GMI Ratings gives them a D. Here are a few issues:

• It makes monthly stock option grants, lots of them in each grant, as well as annual ones. In fact the company is hemorrhaging stock options. In fact, over a quarter of its outstanding stock is taken up with stock options. A quarter! The tables about stock options in its 2011 proxy statement take up over seven pages.
• The board is classified, meaning that even if shareholders wanted to get rid of them it would take three years to do it and they can’t anyway because they’ll be elected even if they just get a single vote – it’s corporate America’s special version of democracy, and it’s going out of fashion at other companies where real democracy (ie you don’t get elected without a majority of votes) is coming into fashion.

On the twelfth day of Enron my comp committee gave to me: ’12, the year shareholders see compensation figures that are fair and truly represent performance

By Scott Patterson - Compensation Analyst Team Leader

Well there you have it: gifts of compensation that may reflect the corporate world of the post-Enron era.  We all know that in the 10 years that have passed since Enron’s collapse we have seen some improvements in corporate governance (Sarbanes-Oxley, public consciousness, and GMI).  However, it has been clear that there is a long way to go in the advancement of shareholder and stakeholder rights.

Excessive compensation has not been the only abuse.  The sub-prime mortgage crisis, financial meltdown, oil spills, employee deaths and phone hacking have all been evident over the years, wreaking havoc with shareholder values and the livelihoods of millions. The question we may now ask is: is enough being done to prevent them from recurring again.  Will 2012 be the year we solve our corporate ills or will more wrongdoings be called for to get us moving toward a more just corporate system?

A review of the previous eleven days:

• 11 CEOs earning over $73 million in actual compensation during FY2007.
• 10 year tenure with a $120 million earned in the final full year.
• 9 energy company CEOs earning more than $64 million in actual compensation in FY2008.
• $8 million salary.  (Actually it is really $8.1 million, but that makes it harder to sing.)
• 7 million options granted each year since 2007.
• 6 million (times 17.75) in pension and deferred compensation earnings.  (That calculates to $106.5 million)
• 5 equity awards with a grant date value over $70 million.
• 4 straight years of $30 million or more in discretionary bonus.
• 3 years of over $100 million in actual compensation.
• 2 awards for a total of $109,688,700.
• 1 $4.7 Billion Grant (That’s right, billion)

Small Print

By Paul Hodgson - CCO and Senior Research Associate

Corporate governance checkmate - Queen Takes Knight

Events Team Leader Mark Magee had already spotted this when I found it in the FT, but we’re doing it again because he came up with a great headline and for no other reason.

This is about the former CEO of RBS being stripped of his knighthood.

What else do you need to say?

Strictly a need to know basis and... you don't need to know

Events Analyst Dovid Muyderman called this blockage out from a January 31^st 8-K from Polypore International.

Polypore International, Inc. (NYSE: PPO) issued the following statement from Robert B. Toth, President and Chief Executive Officer:

“Typically, the company does not comment on industry news. Polypore has no new news to report. We remain confident in the premises used to justify the lithium battery separator capacity expansions associated with accelerating industry demand for electric drive vehicles.”

Does anyone even know what that means?

Executive Title of the Week Award

Compensation Analyst Ashley Kotzur found this in Maximus’ 2011 proxy statement.

Chief of Human Capital and President Tax and Employer Services -- Mark S. Andrekovich

“What do you do, again?”

“I’m Chief of Human Capital and President Tax and Employer Services at Maximus.”

“And what was it you did, again?”

Slime and Salmonella

As Mark says, to more reasons to avoid fast food entirely.

Pink slime removed from McDonald’s burgers — but other food additives remain. On Wednesday, McDonald’s announced the product was no longer used in their burgers, Time reports. “This decision was a result of our efforts to align our global standards for how we source beef around the world,” Todd Bacon, senior director of quality systems for McDonald's, said in a statement.

Wow, discarded beef treated with ammonium hydroxide is called pink slime and they used – until very recently – to put it in McDonald’s hamburgers. How gross is that. My wife, who’s American, used to sing this song about the ingredients in McDonald’s with her buddies. They all seemed to know it. Something about blah blah blah in a sesame seed bun. Clearly they were unaware of the actual ingredients. Or was this some McDonald’s advertisement song? I neither know, nor care.

Yum Brand Inc's Taco Bell chain has been linked to a salmonella outbreak that sickened 68 people in 10 states late last year.

To be fair to Taco Bell, some people got salmonella from LETTUCE in 2011, never mind tacos. But, still.

Death Has Many Names

And Dovid found this in a January 31^st 8-K from PartnerRe.

PartnerRe Ltd. (NYSE, Euronext: PRE) today announced that during the January 1, 2012 treaty renewal season it expects to write and bind approximately $1.9 billion of Non-Life treaty premium. On a constant foreign exchange basis, this represents an increase of 2% from the renewable premium base.

Non-life, I ask you. And shouldn’t that be premia? Don’t these people know Latin?

Facebook, I want your money, I don’t want your interference

By Paul Hodgson - CCO and Senior Research Associate

Probably not since Google’s IPO, with its similarly disappointing showing in corporate governance, has there been so much interest generated in an internet IPO as that of Facebook.

But, although it is hoped to raise an enormous amount of investment, Facebook’s attitude towards governance is far more slapdash than anything demonstrated by Google.

There are similar issues with dual classes of share, A – one vote, B – 10 votes. Facebook is also a controlled company, with founder Mark Zuckerberg holding (pre-IPO) almost 57 percent of the voting power of the stock through ownership and voting power over other shareholders’ stock via what is known as an irrevocable proxy. You all know what irrevocable means.

So this is what GMI wrote about Google:

Regarding takeover defenses, the company has a dual voting structure where each share of Class A common stock is entitled to one vote and each share of Class B common stock is entitled to 10 votes. As a result, Mr. Schmidt, Page, and Brin beneficially own more than 67% of the company’s voting power. This raises concerns that the interests of public shareholders may be subordinated to those of the Chairman and co-founders.

Substitute a few names and we’ll be writing this about Facebook too.

But Google has an independent board, just, with six outside directors, three insiders (the founders) and one investor director; what we call at GMI an outside-related director. Facebook doesn’t even manage that.

The board consists of Marc L. Andreessen, Erskine B. Bowles, James W. Breyer, Donald E. Graham, Reed Hastings, Peter A. Thiel.  And of course, Mr. Zuckerberg. Messrs. Andreessen, Graham, and Hastings were elected as designees of Mr. Zuckerberg. Messrs Breyer and Thiel were elected by stockholders of, respectively, the holders of a majority of the shares of Series B preferred stock and Series A preferred stock. They are investor directors. Not necessarily a bad thing to have on a board at this stage of a company’s development. Of course, Messrs. Breyer and Thiel have also entered into irrevocable proxy agreements with Mr. Zuckerberg, so it is unlikely that they will act independently of the CEO and chairman even should they wish to.

But that’s not all. Two other directors, Messrs. Graham and Hastings also have relationships with the company that go beyond the boardroom.

This is what the S-1 registration document says:

During 2009, 2010, and 2011, Netflix purchased $1.9 million, $1.6 million, and $3.8 million, respectively, of advertisements on our website. Mr. Hastings, a member of our board of directors, is the Chief Executive Officer of Netflix.

And isn’t Netflix being sued…? So a reputational risk there, also.

And Mr. Graham has not one, not two, but three relationships beyond the boardroom. Again from the S-1:

During 2009, 2010, and 2011, The Washington Post Company and its related companies purchased $0.6 million, $4.8 million, and $4.2 million, respectively, of advertisements on our website. Mr. Graham, a member of our board of directors, is the Chief Executive Officer of The Washington Post Company. In addition, The Washington Post Company is affiliated with an advertising agency, Social Code LLC, that has advertising clients that do business with us.

Molly Graham, the daughter of Donald E. Graham, a member of our board of directors, is employed by us. During 2009, 2010, and 2011, Ms. Graham had total cash compensation, including base salary, bonus and other compensation, of $98,058, $133,620, and $189,168.

AND DONALD GRAHAM IS DESIGNATED THE LEAD INDEPENDENT DIRECTOR?

So that leaves Marc L. Andreessen and Erskine B. Bowles who of course were nominated by Mr. Zuckerberg.

All in all, not the most independent board we’ve ever seen at GMI, just independent under NASDAQ listing rules, the exchange Facebook has elected to be listed on.

Not only that, but since the company is a controlled company, it doesn’t actually have to have an independent board, or a nominating or a compensation committee. The fact that it has any of these things – which is doubtful – is a sop thrown to shareholders. In fact, its nominating committee consists of the entire board, with the chairman being… Mr. Zuckerberg.

That all adds up to “we want your money, not your interference.”

Dammed if You Do: Hydro-Electric Project in Chile Generates Controversy

By Nathaniel Flannery, Research Analyst

In June, 2011 in Santiago 4,000 people attended a march to protest a proposed dam in southern Chile. People waved flags and chanted “Patagonia without dams!” By the end of the year, the protesters expanded their agenda and attracted the attention from observers across the globe. The conflict has pitted clean energy advocates against other groups of environmental advocates, and presents a conflict for socially responsible investors, especially since Endesa Chile, the main company behind the dam, has implemented strong environmental policies.

Opponents of the dam say the project would not come without costs. The Hidroaysen dam would flood almost 15,000 acres of pristine Patagonian landscape, a part of the country that is treasured by local indigenous groups and environmentalists and outdoors enthusiasts from across the globe.

The challenge for Endesa Chile, the main company behind the controversial dam, is that it is taking real steps to promote itself as a socially responsible enterprise and is dedicating substantial resources to renewable energy projects, a key area of interest for Environmental, Social, Governance (ESG) –minded investors.

According to a recent report from GMI, “In 2011, for the 11th consecutive year Endesa Chile was included in the Dow Jones Sustainability Index.”

In a recent article on Forbes.com, I explained that "Endesa also publishes a 190 page long sustainability report that includes information on greenhouse gas (GHG) emissions and outlines the steps the company is taking to create and market carbon offsets." The company reports that over half of its facilities have achieved environmental certification. When it comes to environmental disclosure, Endesa Chile’s coverage goes above and beyond industry norms.

Endesa, in other words, has built the type of institutional “infrastructure” that is expected by socially responsible investors, but it is still being targeted by environmental activists.

The problem is, Chile is dealing with an energy shortage. When the protests against the dam first erupted, Sebastian Piñera, the country’s current president said, “if we don’t make decisions today we are condemning our country to a blackout near the end of this decade.”

Chile is finding itself caught between the demands of clean energy advocates and conservationists who don't want to see parkland in Patagonia destroyed. It's a catch 22: they're dammed if they do, damned if they don't.

Banker Stripped of Knighthood

By Paul Hodgson - CCO and Senior Research Associate

In an article in the FT today, news spread that Fred Goodwin, the banker formerly known as Sir Fred Goodwin and the CEO of RBS, was to be stripped of his knighthood. It appears that the British government’s huge stake in the company wasn’t enough to strip Mr. (not Sir) Goodwin of his GBP16.9 million pension (he only gave up a third of that) but it was enough to strip him of his knighthood. Of course the decision was not taken by Mr. Cameron, the UK’s Prime Minister but by the Forfeiture Committee made up of Britain’s most senior civil servants. According to the FT:

Normally honours are only removed in the event of serious criminal activity or if the holder is struck off by the relevant regulatory authority. Neither of these applied to Mr Goodwin, but the committee said “the scale and severity of the impact of his actions as CEO of RBS made this an exceptional case”.

This action created the extraordinary picture of Alistair Darling, the former Labour Chancellor, defending Sir… oops, I keep forgetting… Mr. Goodwin as being used as a scapegoat.

Elsewhere, also in the FT, came the news that because the current RBS CEO, Stephen Hester, had been forced to give up his GBP 1 million bonus amid political, public and press pressure, the bank was struggling to redesign its bonus plans so that it did not have to suffer this embarrassment again.

Bankers designing bonuses that DON’T pay out? What next? Bankers falling on their swords? Bankers admitting they were to blame?

“Oh, how very British,” commented a colleague, when I told him the news. It is, isn’t it? But, frankly, that’s for me to say! I’m the Brit here!

On the eleventh day of Enron my comp committee gave to me: 11 CEOs earning over $73 million in realized compensation during fiscal year 2007

By Scott Patterson - Compensation Analyst Manager

While fiscal year 2008 was the year of energy CEOs (see the On the Ninth Day of Enron), top fiscal year 2007 realized pay was slightly more diverse with six of the 11 top earners tied to the financial sector. Earlier we discussed Angelo Mozilo (seeOn the Third Day of Enron) leading the mortgage giant Countrywide Financial to its demise, who took home $126.8 million for fiscal year 2007. However, it was information services giant IAC/InterActiveCorp’s Barry Diller with $184+ million in realized compensation who beat Mr.  Mozilo for the top spot in fiscal year 2007 thanks to over $183 million in options realized.

The insurance industry had two representatives in the top 11. Insurance holding company W.R. Berkley provided their founder/CEO William Berkley with $95.87 million thanks in part by a $13.5 million cash bonus and over $8 million in change in pension/NQDC, and in large part to $72.5 million in options realized. And Aflac’s Daniel Amos had something to quack about, taking in $77.2 million.

Diversified financial titans Goldman Sachs and Capital One Financial both edged over the $73 million mark. A bonus of nearly $27 million under the Discount Stock Program and $45.75 million in stock vesting provided Lloyd Blankfein with $73.725 million only to watch the stock price fall more than 50 percent from the end of 2007 to today. Despite zeroes for salary, bonus and NEIC, Richard Fairbank of Capital One realized nearly $55 million in options and $18.25 in stock vesting to total $73.18 million in realized compensation. Jeffrey Sprecher of IntercontinentalExchange, Inc. earned just shy of $75 million in fiscal 2007 to round out the financial contenders. As a comparison, Blackstone Group and LPL Investment were the only financial sector companies to pay over $70 million in realized compensation for fiscal year 2010.

The rest of the field in the top eleven included Meg Whitman of eBay (see On the Tenth Day of Enron) with over $120 million, Target Corporation’s Robert Ulrich earned nearly $117 million, MEMC Electronic Materials’ Nabeel Gareeb who earned $79.56 million and George David of Aerospace & Defense giant United Technologies netted just over $73 million. With the recession officially starting at the end of 2007 the 11 CEOs mentioned above appeared to have benefited just in time.

African-American CEOs

By Paul Hodgson - CCO and Senior Research Associate

Businessinsurance.org has recently released a list of the 10 Most Successful African American CEOs of all Time. The list includes names such as Kenneth Chenault, CEO of American Express, Aliko Dangote, CEO of Nigerian conglomerate Dangote Group, Oprah (no explanation needed), and Sean “Puff Daddy” “Puffy” “P. Diddy” “Diddy” Combs, CEO of Bad Boy Entertainment among other companies.

The list does NOT include Stanley O’Neal, former CEO of Merrill Lynch, or Richard Parsons, former CEO of Time Warner, or Franklin Raines, former CEO of Fannie Mae… for fairly obvious reasons.

First Nay on Pay for 2012

By Paul Hodgson - CCO and Senior Research Associate

Thanks to Broc Romanek’s blog on TheCorporateCounsel.net for spotting the first failed Say on Pay vote this year. Actuant's Form 8-K reports that shareholders did not approve the vote, with 54 percent voting against it. The negative 20.44 percent TSR over the last five years cannot have sat well with the $3.3 million in option profits made by the CEO and the $1.7 million cash bonus probably didn’t sit well with the one-year TSR of negative 13.81 percent. Rather a lot of withhold votes for the directors also. When will these people learn?

Small Print

By Paul Hodgson - CCO and Senior Research Associate

Trouble Designing an Effective CEO Pay Plan? There’s an App for That

Thanks to Research Associate Michelle Lamb for this little dream of an app and for the headline. Meridian Compensation Partners have come up with a new iPad app for compensation committee members. I guess it was only a matter of time, but congratulations to Meridian for being the first there. It gets our award as iConsultant.

The one-of-a-kind application, which can be downloaded for free at the iTunes Store(R) or from Meridian's website ( www.meridiancp.com/app), features: a library of executive compensation primers on plan design, benchmarking, governance, disclosure, taxes and accounting treatment; direct access to proxies and relevant 8K disclosures for public companies; alerts to the latest regulatory and legislative news; and the ability to ask questions of Meridian's consulting experts. Users can follow up to ten of their favorite companies through a personalized app feature that provides them with a quick link to important disclosure data for those companies.

Actually… that does sound quite useful.

CEO Quotation of the Week

Events Team Leader Mark Magee nailed down this one. James Gorman, CEO of Morgan Stanley, is
the clear winner of this week’s CEO Quotation of the Week.

Morgan Stanley Chairman and Chief Executive Officer James Gorman said employees understand why the investment bank had to cut pay, and those who don’t grasp the reasoning need to adjust their attitude.

“You’re naive, read the newspaper, No. 1,” Gorman said he would tell miffed employees, speaking in an interview on Bloomberg Television. “No. 2, if you put your compensation in a one-year context to define your overall level of happiness, you have a problem which is much bigger than the job. And No. 3, if you’re really unhappy, just leave. I mean, life’s too short.”

Pretty blunt. Calling them naïve is one thing. Calling them a sad sack is totally something else. And then he tells them to get lost. Pay is going down by an average of 20 to 30 percent for senior bankers and traders, so his better be going down by more or he’ll have to adjust his own attitude.

Not exactly George C. Scott's opening speech in Patton...

New Yahoo CEO says company needs to "do better"? Mark also found this on January 25^th. And to be honest, this – had it been ruder – would have been in contention for the CEO Quotation of the Week
competition, but Gorman had it already. Close second though. I mean, listen to this:

"When it comes to making decisions, I make them quickly and then push to move fast, fast, fast," he said.

"We will get speed back into the equation and move aggressively. To me that's how we get to playing offense rather than defense."

Talk about mixing your metaphors. And not just fast, but fast fast fast. Is that like fast cubed?

Retail Cyber Bullying

Mark also found this from “Tarjay” on January 23^rd. Like, is everyone else on holiday or something?

Last week, in an urgent letter to vendors, the Minneapolis-based chain suggested that suppliers create special products that would set it apart from competitors and shield it from the price comparisons that have become so easy for shoppers to perform on their computers and smartphones. Where special products aren't possible, Target asked the suppliers to help it match rivals' prices. It also said it might create a subscription service that would give shoppers a discount on regularly purchased merchandise.

An “urgent” letter to vendors, no less. “Exclusive to Tarjay”, a new line. Wait, hold on, you can get those at bizrate, NexTag and Shopzilla for half that price….

Lowering the Bar

Compensation Analyst Manager Scott Patterson – yeah, s’OK, Mark’s not alone in the office found this in Applied Materials 2012 proxy statement. Brace yourself, this is compensationspeak.

The minimum threshold was reduced to the 40th percentile for fiscal 2011 from the 50th percentile for fiscal 2010, and corresponding downward adjustments were made to the other percentile levels for fiscal 2011. These changes were intended to: (i) motivate our NEOs to achieve excellent financial results in a dynamic, challenging economic environment, (ii) increase the retention value of equity awards for our NEOs and (iii) align our targets with the changes in Applied’s product mix related to EES that are intended to enhance the Company’s long-term growth opportunities. The Committee believed these revised requirements for vesting remained challenging and that the likelihood of achievement was generally consistent with the prior requirements.

As Scott comments: “A lowering of standards is the way to motivate your employees? If we could all be so lucky.” Yeah, right, pay for performance. You know, Allied Materials was one of about three companies that actually passed our test – in GMI’s Executive Pay Scorecard – that required that incentives only be paid out for ABOVE median performance. And now… they’re gonna FAIL.

"Oh, alright then, I'll take the job if you insist."

And this is from Events Analyst Dovid Muyderman – OK, OK, so they’re all there. A January 23^rd 8-K from Hillenbrand.

Effective January 30, 2012, Scott P. George, age 57, has agreed with Hillenbrand, Inc. (the “Company”)(NYSE:HI) to become the Senior Vice President, Corporate Development.

Those little turns of phrase that just make no sense. Don’t you love them? Another George Scott reference too. No, wait, this is Scott George.

"Type I subsequent event as defined in the Subsequent Events topic of the FASB Codification" say what?

And Dovid pulled this from a January 19^th 8-K from Stryker Corporation.

Stryker Corporation (NYSE:SYK) announced today that Stryker Biotech has reached a settlement with the U.S. Attorney’s Office for the District of Massachusetts. As part of the settlement, Stryker has agreed to plead to one misdemeanor charge and pay a non-tax deductible fine of $15 million. As a result of this resolution, the Department of Justice has agreed to dismiss all thirteen felony charges against Stryker Biotech contained in a 2009 federal grand jury indictment. Stryker had previously disclosed in March 2009 that its Biotech division was the target of a federal grand jury investigation being conducted by the U.S. Attorney's Office for the District of Massachusetts. With today’s announcement, Stryker believes it has realized its goal of obtaining an appropriate resolution of this matter.

From a financial standpoint, the settlement represents a Type I subsequent event as defined in the Subsequent Events topic of the FASB Codification and accordingly, the incremental charge to earnings of approximately $0.03 per diluted share will be recorded in the Company’s fourth quarter 2011 results. As a result of the settlement which was not factored into previously announced guidance, Stryker now expects to report 2011 adjusted diluted net earnings per share at the low end of its current range of $3.72 to $3.74, an increase of 12% over adjusted diluted net earnings per share of $3.33 in the prior year and at the high end of the adjusted diluted net earnings per share range stated at the start of 2011 of $3.65 to $3.73.

Look what is this about, earnings per share adjustments or the fact that this company appears to be crooked or, at the very least, dodgy. So one misdemeanor and a $15 million charge (that actually punishes sharholders rather than the guilty parties) is equivalent to thirteen, THIRTEEN, felony charges. How is that right?

Chevron, What Does "Notably Higher" Mean?

Adapted from the second post I wrote for the Chief Compliance and Ethics Officer Network:

Today executives on Chevron’s securities analyst call about its fourth quarter 2011 earnings are sure to get some questions on the meaning of the term “notably higher.”  The company’s recent press release noted cryptically that "The company’s general guidance for the quarterly net after-tax charges related to corporate and other activities is between $250 million and $350 million.  Total net charges for the fourth quarter are expected to be notably higher than the general guidance range [emphasis added]."  Analysts will want to know whether this vague reference reflects Chevron’s putting aside reserves to cover the Ecuador environmental litigation-related costs, such as the bond to appeal to the Ecuador Supreme Court or a possible settlement of the $18 billion judgment just upheld by the court, and if not, how that will be accounted for.

 

Aguinda v. ChevronTexaco is one of the most complicated and drawn-out global lawsuits in history, seeking damages for the environmental and health impacts of oil extraction in Ecuador dating back to the 1960s. It's the subject of a superb documentary called Crude from director Joe Berlinger and has been featured on 60 Minutes.  Chevron, the successor defendant following its purchase of Texaco, has filed a series of appeals but lost the latest round this month when an Ecuadorian court upheld the $18 billion judgment against the company. It was Chevron's decision to have the case litigated in Ecuador instead of the United States.  Both sides have accused the other of corruption. 

 

An independent report released last year criticized the financial, operational, and reputational risks of Chevron's response to the suit. It will be dismissed by some because it was commissioned by Amazon Watch and Rainforest Action Network, who are frank about their own point of view. (Their website is called ChevronToxico: The Campaign for Justice in Ecuador.)   But the company has not successfully refuted the findings by Simon Billenness and Sanford Lewis that Chevron’s admissions about its liability risks in court documents were inconsistent with its financial reports and that its legal and public relations strategy poses an unacceptably high risk.  This week’s call is another opportunity to push the company to provide better information about what the impact of the judgment will be. 

 

Three shareholder proposals filed by Chevron investors also reflect these concerns.  One calls for appointment of a director with environmental credentials.  Another calls for separating the chairman and CEO positions to provide independent oversight.  The third asks that shareholders be given the right to call a special meeting.  Sponsors of the proposals include the New York State pension fund, Amnesty International, and Zevin Asset Management.  

 

Investors understand that this is a reputational issue with direct financial consequences.  A Huffington Post piece by Kerry Kennedy about her visit to the Ecuador site prompted comments from readers like these: “And to think I've been buying gas at Chevron lately! I hate reading stuff like this, it makes me sick for the future of our children & grandkids.” “Chevron: typical fossil fuel business culture. Their management is every bit as slimy, toxic, and destructive as their product.”  Companies need to consider that for consumers and investors the way they address environmental liabilities is a critical indicator of credibility and operational sustainability.