Chevron commits huge resources to tackle environmental risks; this report studies the viability of doing so. We find that (1) it is using a right combination of internal and external tools to increase workersâ€™ awareness, diversify environmental risks and mitigate moral hazard at the same time; and (2) the Decision Making (â€œDEMAâ€) system is valuable to the company in providing a systematic framework to quantify environmental risks.
Chevron operates in the business of petroleum and natural gas exploration, production, refining and marketing, and as such faces huge environmental risks such as oil spills and exhaust emissions. Throughout the years ...view middle of the document...
2. Employee training and education programs
Chevron believes skills and attitudes of employees are directly related to losses due to â€œhumanâ€ incidents. Hence it has invested heavily on training in order to reduce the probability andÂ severity of environmental damage.
3. Set up corporate-wide response groups
Response groups can be deployed within 24-hour to effectively deal with potential losses. Unexpected losses due to delay of deployment could be reduced amid emergency events.
4. External insurance against environmental risk above certain level
Chevron buys an umbrella protection for series of liabilities. This protection includes traditional insurance used to hedge against any losses above certain retention level. Chevron keeps any loss below the retention; this affects positively on incentive structure and reduces the problem of moral hazard.
5. Environmental performance related to promotion
Chevron considers environmental performance a criterion in evaluating promotion. This encourages employees to attain safety and environmental objectives and promotes environmental protection culture throughout the corporation.
Also, in contrast to corporate norm, Chevron does not use environmental performance to determine managersâ€™ bonuses or penalty, which arguably could promote imprudent behaviours.
Are the tools right for managing business risk?
Tool 1 and 2 are regarded as core value of Chevron Corporation. Internal policy that emphasises people and environment protection is always good in improving public image. Incorporating environmental protection concepts into employeesâ€™ training sessions does not require extra large expenses, as only teaching materials need to be amended. Furthermore, attitude and culture are better implemented at the earliest stage of employment and public should always appreciate what Chevron has done extra to care the society.
Tool 3 mitigates losses engendered by emergency environmental accidents, as well as lowers the extent of unfavourable consequences. For the sake of public image, it was politically correct to have a stand-by rescue team although the efficiency of this measure is doubtful.
Tool 4 seeks protection from third party to lower the potential losses incurred to Chevron. Diversifying risk is sensible for such a risky business, but the amount of deductible and insurance needs to be evaluated explicitly. Trade-off between moral hazard (lower premium) and insufficient protection (lower insurance) would lead to Armageddon if extremely rare event happens. Hence this tool should be complemented by actuarial model to determine the appropriate amount of protection.
Tool 5 is a creative tool that achieves the firmâ€™s objective without costing extra. However, employees may strive for promotion and spend too many resources on environment protection; on the other hand they may refuse to take risky projects that may cause severe ecological problems. There...