Chipotle Mexican Grill founder and co-CEO Steve Ells
Photograph by Bloomberg via Getty Images
By Paul Hodgson
May 13, 2016

Is Chipotle’s ‘stale, pale, and [almost] male’ board the cause of the company’s problems? Shareholders appear to think so.

Al Baldocchi, a director since 1997, saw 21% of shareholders vote against him. Pat Flynn, director since 1998 and a 39-year McDonald’s veteran—so not really an independent director since McDonald’s was the largest investor during most of Chipotle’s growth period—saw almost 30% of shareholders vote against him. And Chipotle’s only female director (and a veteran of the board since 1995), Darlene Friedman, saw a protest vote of almost 10%.

These aren’t majorities, no. But bear in mind that, according to shareholder advisory group CtW Investment Group, barely 1% of large company directors received that level of opposition in 2015’s proxy season. Indeed, Chipotle’s board was re-elected with over 95% support just last year.

That was last year, however. Last year at Chipotle (cmg), shareholders were most upset about the more than $50 million in pay received by the two co-CEOs, Monty Moran and founder Steve Ells.

Attention this year, however, switched to the board. A letter sent by CtW to shareholders prior to the meeting said: “[A]verage director tenure is among the very highest at a median of 17 years, with 6 directors having served for over a decade. Moreover, 4 of 7 outside directors were first appointed to the board while the company was privately held [including the three above].” Furthermore, CtW noted, Baldocchi, Flynn, and Friedman have collectively chaired the board’s three committees for almost the entire time the company has been public.

Chipotle seems to have recognized that its board is not diverse enough, as it amended governing charters to incorporate diversity language in March last year. Still, the board’s actions contradicted its words, since at the same time that it added diversity language the board installed an eighth white, male director. As CtW commented this time around, “While Ms. Friedman herself brings a modicum of gender diversity to the board, her failure to address the board’s broader composition over her 21 year tenure suggests that the board will be better served by replacing her with a fresh and diverse nominee.”

CtW’s letter cited academic research that finds a positive relationship between company performance and greater board diversity.

 

Of special issue at Chipotle, following last year’s food safety scandal, is the need for board oversight and action to reverse the company’s fortunes in this area. CtW, among others, has called for the board to appoint a separate food safety committee. At the moment, the only board member responsible for overseeing this crucial issue is director John Charlesworth, the “food safety liaison” on the audit committee. He is far from new blood, however: Charlesworth is a 17-year board veteran and yet another long-time McDonald’s employee.

A board makeover may be inevitable. While no new directors have been nominated, shareholders who’ve owned 3% or more of the company’s outstanding shares continuously for three years did win the right—widely known as proxy access—to nominate board directors at this year’s annual meeting. They beat out a competing management proposal that would have set the limit at 5%, making it considerably more difficult to nominate a non-management board member.

This win came alongside support for a range of other shareholder rights resolutions. A company spokesman said, “We have a history of taking action in response to the outcome of shareholder votes, and we don’t see any reason this year will be any different in that regard.” Of course, given that a similar proxy access proposal received 49.9% of the vote last year, compared to this year’s 57%, company responsiveness to shareholder desires doesn’t seem to be deeply ingrained.

Lastly, it looks like the co-CEO management structure is not working for Chipotle, any more than it is at Oracle (orcl). As at Oracle, where the stock price has been largely stagnant since Mark Hurd and Safra Catz became co-CEOs, it has been very expensive for Chipotle to pay two CEOs, not just one. One of the few shareholder resolutions that did not make the proxy this year was for the appointment of a non-executive, independent chairman (i.e. not one of the co-CEOs) who could take charge and hold some feet to the grill.

Next year, perhaps.

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