Time to Spice Up Chipotle’s Board

December 6, 2016, 10:44 PM UTC
William 'Bill' Ackman, founder and chief executive officer of Pershing Square Capital Management LP, shows a copy of his testimony during a Senate Special Committee on Aging hearing on Valeant Pharmaceuticals International Inc. in Washington, D.C., U.S., on Wednesday, April 27, 2016.
Photos by Keith Srakocic—AP & Andrew Harrer—Bloomberg via Getty Images

For months now critics have pointed to Chipotle’s board as emblematic of poor corporate governance: directors have remained on the board for lengthy terms (the median tenure is 17 years); the group is 100% white and has only a single woman out of nine members; and few among them have the heavyweight credentials one would expect of a $4 billion publicly traded company.

When times were good at Chipotle (CMG), the board’s lack of “fire power,”as one corporate governance expert called it, mattered less. But as the company struggled through a devastating food safety crisis that began last year, the make up of its board became harder to ignore. When activist investor Bill Ackman took a stake in the company in September, it became impossible.

Today Chipotle co-CEO Steve Ells sent the strongest signal yet that he is acquiescing to the pressure to shake up the company’s board. During a Barclays investor conference Ells said Chipotle has been “working diligently in recent months to identify folks we think would make excellent board members,” with a specific focus on directors who have expertise in finance, corporate governance, law, marketing, branding, communications, and crisis management.

“We are taking a very careful look at the people we have, what might be missing, what we can refresh,” he said. “One of the complaints has been long tenure on our board.” Ells said the company would “take action shortly” on that. Ells acknowledged that Ackman has been pushing for representation on the board but said that he had nothing further to announce.

Back in April, CtW Investment Group, which advises union-backed pension funds on how to wield their ownership clout, called Chipotle’s board “one of the least diverse, least independent boards among the S&P 500.” In a letter to shareholders, CtW criticized the company for “excessively long director tenure,” a lack of board diversity, and a director base with many ties to Boulder, Colo., where the company is based.

Essentially, critics have suggested that the composition of the company’s board had not kept up with its radical increase in size and complexity. At the time I reported on the letter in April, Jim Neale, a partner with law firm McGuireWoods who specializes in food safety defense, told me:

They replicated the mom and pop recipe, and that’s probably what contributed a lot to their success. But there’s a level of sophistication that you need if you’re going to do things on a large scale so you can respond to large-scale problems.

The company also had what governance experts call “soft” ties between boards members. Those are permissible, but these experts say they make it harder for directors to think and act independently. Examples of directors with soft ties at Chipotle include two board-members who had stints at McDonald’s, and two others who spent time at a small pharmaceutical company where Steve Ells’s father was once a senior executive. (Ells’s father was the first financial backer of Chipotle.)

In recent years, Chipotle has slowly begun improving the credentials of its directors. Last year it added Stephen Gillett, a senior executive at Google[x] and a former Starbucks CIO, to its board. And in 2013 entrepreneur Kimbal Musk (the brother of Tesla founder Elon Musk) joined the board.

Ackman is agitating for change, and at a company like Chipotle where the median director tenure is some 17 years, a board shake up just might be the most necessary.

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