Chipotle Mexican Grill, Inc (NYSE:CMG, $CMG) develops and operates Chipotle Mexican Grill restaurants, which serve a focused menu of burritos, tacos, burrito bowls (a burrito without the tortilla) and salads. It is one of the stocks in my portfolio. Their annual meeting is coming up on May 11, 2016. ProxyDemocracy.org had collected the votes of 2 funds when I checked. Vote AGAINST pay, compensation committee, audit chair, fake management reforms; FOR all shareholder proposals, especially genuine proxy access. I voted with the Board’s recommendations 37% of the time. View Proxy Statement.
Read Warnings below. What follows are my recommendations on how to vote the proxy in order to enhance corporate governance and long-term value.
Chipotle Mexican Grill, Inc.: ISS Rating
From Yahoo! Finance: Chipotle Mexican Grill, Inc.’s ISS Governance QuickScore as of Apr 1, 2016 is 8. The pillar scores are Audit: 2; Board: 5; Shareholder Rights: 6; Compensation: 9. Brought to us 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. That gives us a quick idea of where to focus: Shareholder Rights and Compensation. http://www.wsj.com/articles/influential-proxy-firm-pressures-chipotle-on-board-makeup-1461790801
Chipotle Mexican Grill, Inc: Compensation
Chipotle Mexican Grill, Inc’s Summary Compensation Table shows the highest paid named executive officer (NEO) was Co-CEO and Chair Steve Ellis at $13.8M. I’m using Yahoo! Finance to determine market cap ($12.3B) and Wikipedia’s rule of thumb regarding classification. Chipotle Mexican Grill, Inc is a large-cap company. According to the Equilar Top 25 Executive Compensation Survey 2015, the median CEO compensation at large-cap corporations was $10.3M in 2014, so pay is higher than that amount. Chipotle Mexican Grill, Inc’s shares underperformed the S&P 500 over the most recent one, two, and five year time periods, outperforming only over the last ten year time period.
The MSCI GMIAnalyst report I reviewed gave Chipotle Mexican Grill, Inc’s an overall grade of ‘D.’ According to the report:
- Unvested equity awards partially or fully accelerate upon the CEO’s termination, characteristic of 89% of companies in the home market. 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, essential for investors to assess the rigor of incentive programs.
- The CEO’s total summary pay for the last reported period was more than three times the median pay for the company’s other named executive officers. Such disparity in pay raises concerns regarding the company’s succession planning process and the distribution of responsibilities among the executive management team.
Similarly, Egan-Jones Proxy Services takes various measures to arrive at a proprietary rating compensation score, which measures American Express Company’s wealth creation in comparison to other widely held issuers. “Superior” is the rating given. On the actual compensation advisory vote, Egan-Jones concludes:
Our qualitative review of this Company’s compensation has identified one minor issue: the CEO’s salary at $1,526,00 exceeds the $1 million dollar deducibility limit imposed by section 162m for salaries and non-qualified incentive payments. Failure to abide by IRS 162m rules results in loss of deductibility for the compensation in question and possibly increased and unnecessary tax payments. While this issue is not sufficient to trigger a negative vote alone, it does impact the Company’s overall compensation score, we would recommend the board investigate and consider alternative means of compensation for the CEO and any other 162m covered NEOs who exceed this limit in the future…
We believe that the Company’s compensation policies and procedures are centered on a competitive pay-for-performance culture, strongly aligned with the long-term interest of its shareholders and necessary to attract and retain experienced, highly qualified executives critical to the Company’s long-term success and the enhancement of shareholder value. Therefore, we recommend a vote “FOR” this Proposal.
Given the issues above, including pay over median and underperformance, I voted Against the pay package and the compensation committee: Neil Flanzraich, Lead Director and Chair of the Compensation Committee, Darlene Friedman, Pat Flynn.
Chipotle Mexican Grill, Inc: Accounting
I have no reason to believe the auditor has rendered an inaccurate opinion, is engaged in poor accounting practices, or has a conflict of interest — so voted to confirm.
Chipotle Mexican Grill, Inc: Board Proposals
Egan-Jones recommended in favor of all directors. As noted above, I voted against all members of the compensation committee. I also joined with several funds in a vote AGAINST Audit Committee chair Albert Baldocchi, given the Committee’s failure to provide sufficient oversight of food safety risk.
#4 Special Meeting. EJ recommended FOR. This management proposal would all shareholders representing 25% of more of outstanding shares of common stock to call a special meeting. I have a proposal for a far more reasonable threshold of 10% on the same proxy. Vote AGAINST this one and for #8.
#5 Management proposal for proxy access ‘lite.” I just can’t help noting that while shareowners are required to describe proposals with only 500 words, management’s proxy access proposal takes over 2600. I won’t go into detail. All you need to know is that it would allow groups of up to 20 shareholders with not less than 5% of Chipotle Mexican Grill, Inc’s common stock held for 3 years to nominate 1 director or up to 20% of the board rounded down. The board is living in a fantasy world. Even Vanguard, their largest stockholder, now favors a threshold of 3%. EJ recommends a vote “FOR,” since “adopting ‘proxy access’ can more easily promote independent director candidates to enhance accountability to shareholders.” However, this is proxy access in name only. This is corporate governance ‘greenwashing.” Vote AGAINST.
Chipotle Mexican Grill, Inc: Shareholder Proposals
Egan-Jones recommends Against all the shareholder proposals except proxy access, where they recommend FOR.
Item #6, Proxy Access. I think this comes from NYC Comptroller, with thresholds of 3% held for 3 years to place nominees up to 25% of the board on the proxy. This is the most fundamental right of shareholders not required by law or regulations. Vote FOR.
#7, Stock retention holding period for senior executives; 50% until retirement age or leaving the company. This seems to reasonably incentivize management for the long term, while allowing executives to diversify half their portfolio. The lowest number of applicable shares appears to be 3000 owned by Mark Crumpacker worth in excess of $1.5M owned, $4M recently vested (why isn’t that same as owned?), option awards of $5M and god knows what else on top of annual pay of more than $1/2M. Don’t shed crocodile tears if this proposal results in executives having to hand onto their stock longer. Vote FOR.
#8. Shareholders may call special meeting. This is a good governance measure submitted by me to reduce entrenchment. Allowing special meetings is associated with higher share values. See classic study by Gompers, Paul A. and Ishii, Joy L. and Metrick, Andrew, Corporate Governance and Equity Prices. 10% is a threshold that might actually be met in rare circumstances; 25% is not. Vote FOR.
#9. Sustainability report. EJ recommends Against. However, I believe such reports add value, especially for consumer facing companies like Chipotle Mexican Grill, Inc. Vote FOR.
#10 Assess Sustainability as a Performance Measure for Sr Exec Compensation. Similar logic to #9 above. EJ recommends Against. I recommend FOR.
Chipotle Mexican Grill, Inc: CorpGov Recommendations Below – Votes Against Board Position in Bold
I guess I’m voting early, trying to keep up with all the proxies. Proxy Insight hadn’t collected any more votes than ProxyDemocracy.org when I checked, although I assume they will soon, since I found the votes of CPPIB, OTPP and TRS using the links in our section entitled Shareowner Action: Vote. For additional views and recommendations, see Influential Proxy Firm Pressures Chipotle on Board Makeup, WSJ, 4/27/2016.
Chipotle Mexican Grill, Inc: Issues for Future Proposals
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- No action can be taken without a meeting by written consent.
- Shareholders cannot call special meetings.
Chipotle Mexican Grill, Inc: 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 2017 annual meeting of shareholders pursuant to SEC Rule 14a-8 must be received by us no later than November 24, 2016, unless the date of our 2017 annual meeting is more than 30 days before or after May 11, 2017, 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.
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