Chipotle Mexican Grill, Inc. (NYSE:CMG) is one of the stocks in my portfolio. Chipotle Mexican Grill develops and operates fast-casual, fresh Mexican food restaurants throughout the U.S., which serve a focused menu of healthy burritos, tacos, burrito bowls and salads. The company also has restaurants in Canada, England, France and Germany. Their annual meeting is coming up on 5/13/2015. ProxyDemocracy.org had the votes of four funds when I checked and voted on 5/6/2015. I voted with management 24% of the time and assigned Chipotle Mexican Grill a proxy score of 24.
View Proxy Statement. Read Warnings below. What follows are my recommendations on how to vote the Chipotle Mexican Grill 2015 proxy in order to enhance corporate governance and long-term value.
Chipotle Mexican Grill: ISS Rating
From Yahoo! Finance: Chipotle Mexican Grill, Inc.’s ISS Governance QuickScore as of May 1, 2015 is 10. The pillar scores are Audit: 2; Board: 5; Shareholder Rights: 10; Compensation: 9. 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. That gives us a quick idea of where to focus…. Shareholder Rights and Compensation.
Chipotle Mexican Grill: Compensation
Chipotle Mexican Grill’s Summary Compensation Table shows the highest paid named executive officer (NEO) was co-CEO/Chair Steve Ells at about $28.9M in 2014. I’m using Yahoo! Finance to determine market cap ($19.5B) and Wikipedia’s rule of thumb regarding classification.
Chipotle Mexican Grill is a large-cap company. According to Equilar (page 6), the median CEO compensation at large-cap corporations was $10.1 million in 2013, so Chipotle Mexican Grill’s pay was substantially more than that, even factoring for inflation. Chipotle Mexican Grill shares outperformed the S&P 500 substantially over the most recent one, two, five and ten year periods but underperformed substantially over the six months.
The MSCI GMIAnalyst report I reviewed gave Chipotle Mexican Grill an overall grade of ‘F.’ According to the report:
- Unvested equity awards partially or fully accelerate upon the CEO’s termination. Accelerated equity vesting allows executives to realize pay opportunities without necessarily having earned them through strong performance.
- The company has not disclosed specific, quantifiable performance target objectives for the CEO. Disclosure of performance metrics is essential for investors to assess the rigor of incentive programs.
Pay of almost $29M, even for exceptional performance, combined with the above issues, led me to vote against the pay package and the stock plan.
Chipotle Mexican Grill: Board of Directors and Board Proposals
Generally, when I vote against the pay package I also vote against the compensation committee, since they recommend the pay package to the full board. Therefore, I voted against: Darlene J. Friedman, Chairperson and Patrick J. Flynn.
I am concerned that our Board appears to have an inordinate proportion of inside and entrenched members, with no minorities and only one woman. I voted against all except the two that have been there less than eight years.
With regard to Board proposals:
I voted in favor of the proposal to require majority voting in uncontested elections for directors to serve on the Board. I doubt the Board would have proposed this measure, except for the fact that shareholders demanded it. We demanded it; now we can deliver by voting “For.”
I also voted “For” removing supermajority requirements. We fought for this and already won a majority. Now let’s get a supermajority to get rid of the requirement.
I voted “Against” Chipotle’s proxy access proposal. The threshold is far too high and they attempt to impost other unnecessary restrictions. We have a much better alternative from the New York City Comptroller.
Chipotle Mexican Grill: Auditor
I voted against the auditor, since it appears more than 25 percent of total audit fees paid to the auditor were attributable to non-audit work. That can lead to a conflict of interest.
Shareholder Proposals at Chipotle Mexican Grill
Please vote “For” #8, the proxy access proposal from the UAW Medical Benefits Trust and the New York City Comptroller. This is the most important right on the proxy. Proxy access is the most important measure shareholders are getting to vote on at many companies.
I also voted in favor of #9 from New York State Comptroller Thomas P. DiNapoli, Trustee of the New York State Common Retirement Fund and the AFL-CIO Equity Index Fund. As I mentioned above, the pay package is too large and isn’t well connected to performance. This measure would go a long way to solving that.
I voted “For” #10 requesting a policy from the board that executives retain stock for a longer period. This will incentivize better long-term performance.
I voted in favor of the proposal (#11) from the International Brotherhood of Electrical Workers Pension Benefit Fund requesting that Chipotle adopt a policy that the Company will not automatically accelerate the vesting of equity awards in the event of a change in control, and instead allow equity to vest on a partial or pro rata basis.
I also voted in favor of the proposal (#12) seeking a sustainability report… crucial for a company in the public spotlight, especially one that purports to be green.
CorpGov Recommendations for Chipotle Mexican Grill – Votes Against Board Position in Bold
| # | PROPOSAL TEXT | CorpGov | CALVERT | DOMINI | CBIS | TRILLIUM |
|---|---|---|---|---|---|---|
| 1.1 | Elect Director John S. Charlesworth | Withhold | Withhold | Withhold | Withhold | Withhold |
| Calvert Social Index Fund: The board does not include at least one minority director after the election. | ||||||
| Trillium Asset Management: Research The board does not include at least one minority director after the election.Less than 30 percent of the board is diverse. | ||||||
| 1.2 | Elect Director Kimbal Musk | For | Withhold | Withhold | Withhold | Withhold |
| Calvert Social Index Fund: The board does not include at least one minority director after the election. | ||||||
| Trillium Asset Management: Research The board does not include at least one minority director after the election.Less than 30 percent of the board is diverse. | ||||||
| 1.3 | Elect Director Montgomery F. (Monty) Moran | Withhold | Withhold | Withhold | Withhold | Withhold |
| Calvert Social Index Fund: The board does not include at least one minority director after the election. | ||||||
| Trillium Asset Management: Research The board does not include at least one minority director after the election.Less than 30 percent of the board is diverse. | ||||||
| 1.4 | Elect Director Patrick J. Flynn | Withhold | Withhold | Withhold | Withhold | Withhold |
| Calvert Social Index Fund: The board does not include at least one minority director after the election. | ||||||
| Trillium Asset Management: Research The board does not include at least one minority director after the election.Less than 30 percent of the board is diverse. | ||||||
| 1.5 | Elect Director Steve Ells | Withhold | Withhold | Withhold | Withhold | Withhold |
| Calvert Social Index Fund: The board does not include at least one minority director after the election. | ||||||
| Trillium Asset Management: Research The board does not include at least one minority director after the election.Less than 30 percent of the board is diverse. | ||||||
| 1.6 | Elect Director Stephen Gillett | For | Withhold | Withhold | Withhold | Withhold |
| Calvert Social Index Fund: The board does not include at least one minority director after the election. | ||||||
| Trillium Asset Management: Research The board does not include at least one minority director after the election.Less than 30 percent of the board is diverse. | ||||||
| 2 | Advisory Vote to Ratify Named Executive Officers’ Compensation | Against | Against | Against | For | Against |
| Calvert Social Index Fund: The magnitude of CEO pay exceeds the 75th percentile of the company’s peer group. | ||||||
| Trillium Asset Management: Research Total CEO compensation exceeds 7 million dollars. Total compensation to outside directors exceeds 100,000 dollars. | ||||||
| 3 | Ratify Ernst & Young LLP as Auditors | Against | Against | Against | Against | Against |
| Calvert Social Index Fund: More than 25 percent of total audit fees paid to the auditor were attributable to non-audit work. | ||||||
| Trillium Asset Management: Research Greater than 25 percent of total audit fees were attributable to non-audit work. | ||||||
| 4 | Amend Omnibus Stock Plan | Against | Against | Against | Against | Against |
| Calvert Social Index Fund: The plan’s dilution exceeds 10 percent. | ||||||
| Trillium Asset Management: Research Total CEO compensation exceeds 7 million dollars. Total compensation to outside directors exceeds 100,000 dollars. | ||||||
| 5 | Adopt Majority Voting for Uncontested Election of Directors | For | For | For | For | For |
| Calvert Social Index Fund: Calvert supports management resolutions to adopt majority voting for uncontested election of directors. | ||||||
| Trillium Asset Management: Research A majority vote standard transforms director elections from a largely symbolic exercise to a meaningful process, thereby enhancing the company’s governance structure. Therefore, a vote FOR this proposal is warranted. | ||||||
| 6 | Eliminate Supermajority Vote Requirement | For | For | For | For | For |
| Calvert Social Index Fund: A vote FOR this proposal is warranted given that the reduction in the supermajority vote requirement enhances shareholder rights. | ||||||
| Trillium Asset Management: Research We support resolutions to reduce supermajority vote requirements. | ||||||
| 7 | Provide Proxy Access Right | Against | Against | Against | Against | Against |
| Calvert Social Index Fund: A vote AGAINST this proposal is warranted as the provisions of this management presented proxy access proposal are more restrictive than those of the alternative shareholder proposal on proxy access. | ||||||
| Trillium Asset Management: Research A vote AGAINST this proposal is warranted as the provisions of this management presented proxy access proposal are more restrictive than those of the alternative shareholder proposal on proxy access. | ||||||
| 8 | Adopt Proxy Access Right Included in 1 FocusList: Proxy Access | For | For | For | For | For |
| Calvert Social Index Fund: A vote FOR this non-binding proposal is warranted because adoption of proxy access will enhance shareholder rights while providing necessary safeguards to the nomination process. Additionally, the terms and provisions of this proxy access proposal are more favorable to shareholders than the management proposal on the same matter. | ||||||
| Trillium Asset Management: Research A vote FOR this non-binding proposal is warranted because adoption of proxy access will enhance shareholder rights while providing necessary safeguards to the nomination process. Additionally, the terms and provisions of this proxy access proposal are more favorable to shareholders than the management proposal on the same matter. | ||||||
| 9 | Require Shareholder Approval of Specific Performance Metrics in Equity Compensation Plans | For | Against | Against | Against | Against |
| Calvert Social Index Fund: A vote AGAINST this proposal is warranted. The company has modified its incentive plans to address several compensation-related concerns. As such, requiring shareholder approval of specific equity performance measures and formulas does not appear necessary at this time and may unduly inhibit the compensation committee’s flexibility to make determinations and set goals relating to incentive plans. | ||||||
| Trillium Asset Management: Research A vote AGAINST this proposal is warranted. The company has modified its incentive plans to address several compensation-related concerns. As such, requiring shareholder approval of specific equity performance measures and formulas does not appear necessary at this time and may unduly inhibit the compensation committee’s flexibility to make determinations and set goals relating to incentive plans. | ||||||
| 10 | Stock Retention/Holding Period | For | For | For | For | For |
| Calvert Social Index Fund: A vote FOR this proposal is warranted. The Co-CEOs are the beneficial owners of a significant portion of the company and the current ownership guidelines appear reasonably robust. However, this proposal would materially enhance the executive’s retention of company equity, and shareholders may benefit from implementation of a holding requirement for some portion of equity. | ||||||
| Trillium Asset Management: Research A vote FOR this proposal is warranted. The Co-CEOs are the beneficial owners of a significant portion of the company and the current ownership guidelines appear reasonably robust. However, this proposal would materially enhance the executive’s retention of company equity, and shareholders may benefit from implementation of a holding requirement for some portion of equity. | ||||||
| 11 | Pro-rata Vesting of Equity Awards | For | For | For | For | For |
| Calvert Social Index Fund: A vote FOR this proposal is warranted. The pro-rata vesting of equity awards in connection with a change in control up to the time of an executive’s termination would further align the interests of executives with shareholders. | ||||||
| Trillium Asset Management: Research A vote FOR this proposal is warranted. The pro-rata vesting of equity awards in connection with a change in control up to the time of an executive’s termination would further align the interests of executives with shareholders. | ||||||
| 12 | Report on Sustainability, Including Quantitative Goals | For | For | For | For | For |
| Calvert Social Index Fund: Calvert supports shareholder proposals seeking reporting initiatives regarding corporate sustainability. | ||||||
| Trillium Asset Management: Research We support resolutions asking for sustainability reports. | ||||||
Corporate Governance Issues at Chipotle Mexican Grill
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- 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.
Chipotle Mexican Grill Proxy Proposal Deadline for Next Year
Mark your calendar to submit future proposals:
Any proposal of a shareholder intended to be included in our proxy statement and form of proxy/voting instruction card for the 2016 annual meeting of shareholders pursuant to SEC Rule 14a-8 must be received by us no later than November 27, 2015, unless the date of our 2016 annual meeting is more than 30 days before or after May 13, 2016, in which case the proposal must be received a reasonable time before we begin to print and send our proxy materials. All proposals must be addressed to Chipotle Mexican Grill, Inc., 1401 Wynkoop Street, Suite 500, Denver, CO 80202, Attn: Corporate Secretary.
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.
Economic performance explains only 12% of variance in CEO pay. More than 60% is explained by company size, industry, and existing company pay policy. None of those are performance driven. Additional findings by Mark Van Clieaf of Organizational Capital Partners, as reported in The Alignment Gap Between Creating Value, Performance Measurement, and Long-Term Incentive Design:
- Some 75% of companies have no balance sheet or capital efficiency metrics in their disclosed performance measurement and long-term incentive plan design.
- Only 17% of companies specifically disclose return on invested capital or economic profit as a long-term performance measure for long-term executive compensation.
- Some 47% of S&P 1500 companies over the last five years (2008 – 2012) did not generate a positive cumulative economic profit or return on invested capital greater than their cost of capital.
- More than 85% of the S&P 1500 have no disclosed line of sight process metrics aligned to future value such as innovation and growth drivers.
- Only 10% of all long-term incentives have a disclosed longest performance period for named officers of greater than three years.
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