Investor: Chipotle lacking sustainability management

by Erica Shaffer
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Chipotle is looking to make some changes to its performance measures for executives.

NORWICH, Vermont – Norwich-based Clear Yield Asset Management wants Chipotle’s board compensation committee to commission a report on the feasibility of tying sustainability metrics into the performance measures of the chain’s executives as part of the company’s executive compensation plan. In a Security and Exchange Commission filing, Clear Yield asked shareholders to approve the proposal on the 2016 Chipotle proxy ballot. Clear Yield is an asset management company that advocates for stronger policies and practices on social issues such as climate change and labor standards on behalf of its clients.

The compensation committee of Chipotle’s board of directors recently announce it would withhold 2015 bonuses for executive officers in addition to integrating 2016 performance bonuses solely to restoring the price of Chipotle’s stock to pre-food safety crisis levels over a three-year period. But Clear Yield said those actions don’t go far enough to address underlying issues that may have contributed to a series of food safety problems that dogged the chain. Clear Yield argued that tying compensation to stock price won’t work because the company could employ strategies to elevate its stock price while leaving its restaurants vulnerable to another food safety crisis.

“This is a shortsighted approach that skirts the underlying issues that may have contributed to the E. coli and norovirus outbreaks that left hundreds of people sickened, injured sales, led to ongoing investigations by health authorities and the federal government, damaged our company’s reputation, and will likely lead to expensive litigation,” Clear Yield said in its filing. “For years, Chipotle has resisted calls by shareholders to implement robust and transparent management and reporting systems to handle a range of environmental, social and governance issues that present both risks to operations as well as opportunities.

“While no one can know for certain whether a more rigorous management approach to food safety might have averted the current crisis, moving forward, shareholders can insist upon a proactive approach to the management of sustainability issues by altering top executives’ compensation packages to incentivize it.”

Steve Ells, chairman and co-CEO of Chipotle, described the company’s most recent quarter as “the most challenging period in Chipotle’s history…” Net income for fourth quarter ended Dec. 31 dropped 44 percent to $67.9 million, or $2.17 per diluted share, down from $121.2 million or $3.84 per diluted share reported a year ago. Additionally, the US Attorney’s office for the Central District of California broadened its criminal investigation into the company.

In a regulatory filing, Chipotle said it expects its first quarter earnings per share to be a loss of $1 per share or worse. “During the quarter we will incur higher expenses driven by increased marketing and promotions spend in other operating costs, which are anticipated to be significantly higher in the first half of 2016 compared to historic reporting periods. We also anticipate higher food costs due to additional food safety protocols put into place, as well as higher food costs related to food waste, rejection rates related to high resolution DNA testing, and lower volumes.”

The company also expects an increase in legal expenses associated with an investigation by the US Attorney’s Office.

Clear Yield said that if shareholders approve the compensation package on the 2016 proxy ballot, Steve Ells, chairman and co-CEO and Monty Moran, co-CEO “will have pocketed nearly $211 million for their services since 2011.”

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