How I Voted: Chipotle Mexican Grill (CMG) – Proxy Score 38

Chipotle Mexican Grill ($CMG) is one of the stocks in my portfolio. Their annual meeting is coming up on 5/17/2013. had collected the votes of three funds when I checked on 5/13/2013.  I voted with management 38% of the time.  View Proxy Statement. Warning: Be sure to vote each item on the proxy. Any items left blank are voted in favor of management’s recommendations. (See Broken Windows & Proxy Vote Rigging – Both Invite More Serious Crime)

I generally vote against pay packages where NEOs were paid above median in the previous year but make exceptions if warranted. According to Bebchuk, Lucian A. and Grinstein, Yaniv (The Growth of Executive Pay), aggregate compensation by public companies to NEOs increased from 5 percent of earnings in 1993-1995 to about 10 percent in 2001-2003.

Few firms admit to having average executives. They generally set compensation at above average for their “peer group,” which is often chosen aspirationally. While the “Lake Woebegone effect” may be nice in fictional towns, “where all the children are above average,” it doesn’t work well for society to have all CEOs considered above average, with their collective pay spiraling out of control. We need to slow the pace of money going to the 1% if our economy is not to become third world.

CMG’s Summary Compensation Table (page 43 and why no hyperlinked index?) shows Steve Ells, CEO & Chairman was the highest paid named executive officer (NEO) at about $19.7M in 2012. I’m using Yahoo! Finance to determine market cap ($11.4B) and Wikipedia’s rule of thumb regarding classification. CMG is barely into the large-cap company category. According to the United States Proxy Exchange (USPX) guidelines (pages 9 & 10), using data from Equilar, the median CEO compensation at large-cap corporations was $10.8 million in 2010.

CMG’s pay is substantially above median, even if we factor inflation.  Therefore, I voted against the pay package, bonus plan and members of the compensation committee: Darlene J. Friedman, Chairperson. Unfortunately, I couldn’t vote against Patrick J. Flynn and Jeffrey B. Kindler, since CMG has a classified board.

Five of the seven directors on the board have served for between 13 and 17 years, and the same five individuals all chair major committees. All told, the board consists of the five long-tenured directors whose only experience is at Chipotle, the company’s two co-CEOs, and a private investor who joined the board in 2007. Albert Baldocchi, a 15-year board veteran who sold stock worth nearly $4 million in February, currently serves as the board’s lead director. Also of note is the odd and rarely used Co-CEO structure.

I voted in favor of the board’s proposal to declassify the board over a three-year period and provide for an annual election of all directors beginning with the 2016 annual meeting of shareholders.  I also voted in favor of the shareowner proposal to prohibit acceleration of vesting of equity awards granted to senior executive in a change of control event. I’m not looking for executives to make a quick windfall by shopping CMG around. I want them focused on enhancing the long-term value of our company.

How I voted (CorpGov) below:

# ItemCorpGov Domini Calvert CBIS AFSCME Trillium
1.1Albert BaldocchiWithholdForWithholdWithholdWithholdWithhold
1.2Neil FlanzraichForForWithholdWithholdForWithhold
1.3Darlene FriedmanWithholdForWithholdWithholdWithholdWithhold
2Ratify NEO Pay AgainstAgainstAgainstAgainstAgainstAgainst
3Ratify AuditorsForForForAgainstAgainstFor
4Exec Bonus PlanAgainstAgainstForForAgainstAgainst
5Declassify Board ForAgainstForForForFor
6Limit VestingForForForForForFor
Mark your calendar:

Any proposal of a shareholder intended to be included in our proxy statement and form of proxy/voting instruction card for the 2014 annual meeting of shareholders pursuant to SEC Rule 14a-8 must be received by us no later than November 27, 2013, unless the date of our 2014 annual meeting is more than 30 days before or after May 17, 2014, in which case the proposal must be received a reasonable time before we begin to print and send our proxy materials. All proposals should be addressed to Chipotle Mexican Grill, Inc., 1401 Wynkoop Street, Suite 500, Denver, CO 80202, Attn: Corporate Secretary.

 Looking at, I see CMG has a classified board, which I expect to be addressed at this meeting.  CMG also has a plurality vote standard to elect directors with no resignation policy.  No action can be taken without a meeting by written consent. Shareholders cannot call special meetings. Supermajority vote requirement (66.67%) to amend all bylaw provisions.

This once high-flyer has performed poorly during the last year. As the company comes under increasing pressure to meet past lofty expectations of growth, the temptation to use accounting maneuvers to juice returns will increase.

Declining comparable sales means growth will likely need to come from new store growth. Further store openings could be risky without a pick-up in consumer spending and the company clearly has impending serious legal and governance issues to resolve.

Chipotle Mexican Grill, Inc.’s ISS Governance QuickScore as of May 1, 2013 is 9. The pillar scores are Audit: 1; Board: 8; Shareholder Rights: 9; Compensation: 7.  Brought to you by Institutional Shareholder Services (ISS). Scores range from “1” (low governance risk) to “10” (higher governance risk). Each of the pillar scores for Audit, Board, Shareholder Rights and Compensation, are based on specific company disclosure.

With that many issues, I’d say CMG is a prime candidate for discussions on Shareowners should be filing several proxy proposals for the next annual meeting.

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