Chevron Corporation

1. Chevron Corporation (Chevron) wanted to implement environmental policies more systematically which lead to Chevron’s Environment & Safety (E&S) Risk Management Process.  This process worked in four phrases: identification of events, risk assessment, identification of alternatives, and decision-making.  Managers identified potential adverse events which lead to a qualitative risk assessment, thinking about the consequences of each potential event and the expected likelihood of occurrence.  This risk assessment procedure required managers to determine a risk value for four issues: health and safety, environmental, public concern, and financial effects.

Chevron Research and Technology Company (CRTC) supplemented the E&S guidelines by developing DEMA (Decision Making).  DEMA is a quantitative prioritization tool that could help any manager determine, on a cost-benefit analytical basis, which projects should be carried out before others.  DEMA has made it easier to quantify the costs associated with risk management proposals than the benefits.  Chevron tries to quantify benefits by estimating the total potential dollar impact of an unfavorable incident and subtracting the costs incurred.

A match between Chevron’s strategic goals and its ERM strategy is exemplified by the successfully application of DEMA at Chevron’s Richmond refinery.  Both the operating company and CRTC have expressed their satisfaction at the way DEMA has facilitated a systematic cost-benefit analysis of risk management investments.

Chevron has spent heavily to improve its environmental performance. It has also played an important role in industry wide efforts to develop speedy response mechanisms for handling oil spills.  Chevron maintains its own crew for this purpose and its engineers and technicians hold drills regularly along with training exercises and can reach any site within 24 hours.  Chevron’s competitive advantage lies in its desire to project itself as a company that is committed to environmental protection.  It accomplishes this publicly, through advertising and internally through a document called “The Chevron Way”.  

Chevron’s positioning as a responsible company made it very important to make ERM quantifiable and analytical to increase its authenticity, therefore giving it a competitive advantage.  The huge spending had to be justified and Chevron’s benefits explained to shareholders who are interested only in numbers.

1. Chevron focused its risk-management efforts on personal judgement rather than on complex analytical models.  It believed that a certain degree of simplicity was necessary to keep employees motivated to deliver meaningful information to the company’s ERM system.  Onerous requirements would only lead to superficial compliance and/or bad data.  An Incentive compensation and profit sharing had also been introduced at Chevron, however formal incentive mechanisms played a minor part in ERM. The incentive offered employees, the Success Sharing plan, which was largely based on the profitability of the corporation.  It had only a small part linked to the attainment of safety or environmental objectives.  

However, senior executives wanted managers at the business level to set aggressive safety and environmental goals, rather than aiming low to guarantee to guarantee bonuses.  Second, they were aware of the short-term tension between financial targets and goals for environment and safety, and were unsure that the incentive system was the best place to resolve this tension. Third, the inability to measure, in monetary terms, the net present value of an environmental benefit made it difficult to incorporate such benefits into a system.