Chipotle Mexican Grill (CMG): How I Voted – Proxy Score 0

cmgChipotle Mexican Grill, $CMG, is one of the stocks in my portfolio. Their annual meeting is coming up on 5/15/2014. had collected the votes of three funds when I checked and voted on 5/8/2014.  I voted with management 0% 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. The rationale for peer group benchmarking is a mythological market for CEOs

CMG’s Summary Compensation Table shows co-CEO & chairman Steve Ells was the highest paid named executive officer (NEO) at about $25.1M in 2013. I’m using Yahoo! Finance to determine market cap ($15.5B) and Wikipedia’s rule of thumb regarding classification. CMG is a large-cap company.  According to Equilar (page 6), the median CEO compensation at large-cap corporations was $9.7 million in 2012, so CMG is well over median. Therefore, I voted against the pay package, stock plan and would have voted against the members of the compensation committee: Darlene J. Friedman, Chairperson, Patrick J. Flynn, and Jeffrey B. Kindler. However, I didn’t get that opportunity. For additional relevant points on CMG’s proposed pay package, see CtW Exempt Solicitation at Chipotle Mexican Grill.

GMIAnalystThe GMIAnalyst report I reviewed gave CMG an overall ‘F.’ From their report the following were listed as potential areas of concern: High Impact Governance Events, Related Party Transactions, Entrenched Board, Severance Vesting, and Waste Production. A few highlights from the report stood out:

GMI has flagged the board as potentially entrenched due to a high number of long-serving directors. Of particular importance during periods of extended underperformance, the impact of an entrenched board can be particularly damaging to sustainable shareholder interests, and we do see the potential for such entrenchment at this firm due to a significant number of long-serving directors… These concerns are aggravated due to additional factors, e.g. , a classified board, entrenching takeover defenses, which together with the high number of long-tenured directors raises concerns about whether the board is able to provide an effective counterbalance to management. We note that only 21.9% in United States have been flagged for having an entrenched board.

The company has not adopted a full majority director election standard, greatly limiting the ability of company shareholders to hold members of the board accountable in uncontested elections. Majority voting has become a widely prevalent practice in the S&P 500 index, with only 14.4% failing to adopt this standard. There are 9 directors in all and the board met 4 times in the last reported year…

The company has not disclosed specific, quantifiable performance target objectives for the CEO, in contrast to 73.9% of companies in its home market that have provided such metrics. Disclosure of performance metrics is essential for investors to assess the rigor of incentive programs…

The board is elected in separate classes with terms that expire in different years rather having all directors subject to annual reelection… the company has charter and bylaw provisions that would make it difficult or impossible for shareholders to achieve control by enlarging the board or removing directors and filling the resulting vacancies. This combination is widely associated with inferior board performance and 24.7% of U.S. companies are flagged for this…

The company has been flagged for its failure to establish specific environmental impact reduction targets, a critical practice for any company operating in a high environmental impact industry that is committed to its own long-term sustainability. The company has been flagged for its failure to utilize an environmental management system or to seek ISO 14001 certification for some or all of its operations…

Chipotle Mexican Grill does not regularly publish a formal sustainability report. It does not currently report on its sustainability policies and practices via the Global Reporting Initiative, a commonly used and highly effective standard for such reporting, nor has it become a voluntary signatory of the UN Global Compact, yet another commonly employed global standard for achieving and maintaining more effective sustainability practices. In the area of workplace safety this company has not yet implemented OHSAS 18001 as its occupational health and safety management system, nor does it actively disclose its workplace safety record in its annual report or other reporting vehicle…

In January 2014, Chipotle Mexicon Grill filed suit in federal court to exclude a shareholder proposal made by John Cheveddden from its proxy ballot. This lawsuit bypasses the SEC’s well known process for providing no-action enforcement relief under Rule 14-a-8, and reflects a board that has chosen to sue, rather than engage its shareholders on topics that have traditionally garnered significant support. The company failed to receive a favorable ruling in court, however, and Chevedden’s proposals can proceed.

At the time CMG filed suit against John Chevedden and me, rather than seeking no-action relief from the SEC, I vowed to vote against members of their corporate governance committee, since that committee would normally have made the recommendation to go to court with a SLAPP type suit against its shareowners. That would have meant voting against Mr. Flynn (Chairperson), Ms. Friedman and Mr. Kindler. However, because of CMG’s classified board, I was denied that opportunity. Instead, I voted against all directors standing for election. As elaborated above in the report from GMIAnalyst, CMG has very poor corporate governance practices. If more shareowners vote against the standing directors, perhaps they’ll get the message.

I joined with the Calvert Fund in voting against the auditor, since more than 25 percent of total audit fees paid to the auditor were attributed to non-audit work. That sets up a conflict of interest, since the auditor has an incentive to provide a favorable audit report in order to maintain its other, often more lucrative, consulting contract.

With regard to shareowner proposals, I voted in favor of the proposal by Trillium and Domini to issue an annual sustainability report describing the company’s short- and long-term responses to ESG-related issues. The report should include objective quantitative indicators and goals relating to each issue where feasible, be prepared at a reasonable cost, omit proprietary information, and be made available to shareholders by October 2014. Given the failings noted by GMIAnalyst, the proposal, if implemented, would move our company in the right direction… good for the environment and good for CMG.

Of course, I voted for my own proposal to eliminate supermajority requirement to remove directors and to amend bylaws. Simple majority provisions are simply better governance. The Council of Institutional Investors, whose members have over $3T in assets invested agree and have the following policy.

3.6   Voting Requirements:  A majority vote of common shares outstanding should be sufficient to amend company bylaws or take other action that requires or receives a shareowner vote. Supermajority votes should not be required.

Of course, in this case the fact that CMG took us to court in attempt to keep this proposal off the proxy just adds fuel to the fire. Why go to all the expense of hiring a team of lawyers, rather than using the simple inexpensive ‘no-action’ process through the SEC? See 3 Victories in a Row for Shareowner Rights: CMG Still Bumbling.

How I voted (CorpGov) below, with votes against the Board’s position noted in bold:

1.1Elect Director John CharlesworthWithholdWithholdWithholdWithhold
1.2Elect Director Monty MoranWithholdWithholdWithholdWithhold
1.3Elect Director Kimbal MuskWithholdWithholdWithholdWithhold
2Ratify NEO CompensationAgainstAgainstAgainstAgainst
3Ratify AuditorsAgainstAgainstAgainstAgainst
4Amend Omnibus Stock PlanAgainstAgainstAgainstAgainst
5Report on SustainabilityForForForFor
6Reduce Supermajority Vote RequirementForForForFor

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 2015 annual meeting of shareholders pursuant to SEC Rule 14a-8 must be received by us no later than November 25, 2014, unless the date of our 2015 annual meeting is more than 30 days before or after May 15, 2015, 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 
  • Plurality vote standard to elect directors with no resignation policy.
  • Directors can be removed with or without cause by a 66.67% of outstanding shares shares entitled to vote, instead of a majority.
  • 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, instead of a majority.
From Yahoo! Finance, CMG’s Chipotle Mexican Grill, Inc.’s ISS Governance QuickScore as of May 1, 2014 is 9. The pillar scores are Audit: 1; Board: 6; Shareholder Rights: 10; 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 disclosures. 

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