Chipotle Mexican Grill (CMG) has been called out on corporate governance by an advisory firm, echoing extensive research by Real Money in March of the fast-food chain's weak board of directors.
On Wednesday, CtW Investment Group, which works with union-sponsored pension funds with over $250 billion in assets under management, demanded several changes to Chipotle's board. Citing a flawed recruitment process for Board members, CtW says long-time Chipotle board members Patrick Flynn and Darlene Friedman should not be reelected at the May 11 annual meeting.
CtW didn't stop there, however. Here are some of the advisory firm's top concerns, according to its letter to shareholders:
--"Persistent governance problems, including excessively long director tenures (a median tenure of 17 years) and low demographic diversity (an all-white and overwhelmingly male [Board]) are symptoms of enduring Board insularity and a lack of recognition that governance needs to evolve alongside a rapidly growing corporation."
--"Following multiple calls from shareholders for reform, the board is refusing to adopt a meaningful form of proxy access, despite 49.9% shareholder support at last year's annual meeting."
--"We are particularly worried about the board 's decision to install only a single member of the Audit Committee as a food-safety liaison. This central function should not be left to one person. Even more concerning is the designee picked by the board, John Charlesworth. He should not be considered independent given his excessively long, 17-year director tenure. A more comprehensive approach that would go further in reassuring shareholders and customers would be to establish a standalone food safety and sustainability committee and to recruit several new directors that could bring fresh, objective expertise to the human capital and supply-chain challenges likely at issue."
I would argue even more change is needed on Chipotle's Board than that laid out by CtW. What am I proposing? A complete hit of the reset button: removing everyone on the Board except for founder and co-CEO Steve Ells. I think Chipotle has to start acting as a more mature restaurant concept, especially in the wake of several food-safety incidents that destroyed the stock price, upended employee morale and is requiring all sorts of new operating procedures to be put into place.
For an example of a best-in-class restaurant Board, Chipotle should look no further than Starbucks (SBUX). The coffee giant's founder Howard Schultz is Chairman and the Board is outfitted with execs from consumer products giants, former high-ranking government officials and leaders from top retail outfits.
I think the CtW letter could weigh on Chipotle's stock near term, especially as the company gets ready to announce an expected first-quarter sales plunge and net loss in the coming weeks. Getting corporate governance right at Chipotle at such a critical juncture is important, and you should stay away from the stock until a new structure is put in place.