Chipotle 2020 annual meeting is 5/19/2020 at 8AM Pacific virtually by entering the eligible shareholder’s 16-digit control number found on the proxy card. To enhance long-term value: Vote AGAINST Baldocchi, Niccol and Flanzraich, Auditor, Pay. Vote FOR Retention of Shares, Independent Chair, Report on Arbitration and Written Consent. See list of all virtual-only meetings maintained by ISS.
Chipotle Mexican Grill, Inc., together with its subsidiaries, operates Chipotle Mexican Grill restaurants. As of December 31, 2019, it operated 2,580 restaurants in the United States; 39 international Chipotle restaurants; and 3 non-Chipotle restaurants. Reading through almost 70 pages of the proxy takes too much time for most. Your vote could be crucial. Below, how I voted and why.
If you have read these posts related to my portfolio and proxy proposals for the last 25 years and trust my judgment, skip the 9 minute read. See how I voted in my ballot. Voting will take you only a minute or two. Every vote counts.
I voted with the Board’s recommendations 31% of the time. View Proxy Statement via SEC’s EDGAR system (look for DEF 14A).
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 2020: ISS Ratings
From the Yahoo Finance profile:
Chipotle Mexican Grill, Inc.’s ISS Governance QualityScore as of December 5, 2019 is 3. The pillar scores are Audit: 2; Board: 4; Shareholder Rights: 4; Compensation: 5. Corporate governance scores courtesy of Institutional Shareholder Services (ISS). Scores indicate decile rank relative to index or region. A decile score of 1 indicates lower governance risk, while a 10 indicates higher governance risk. We need to pay close attention to compensation.
Chipotle 2020 Proxy Voting Guide: Board Proposals
1. Chipotle 2020 Directors
Egan-Jones Proxy Services recommends Against (Withhold) Albert S. Baldocchi, Brian R. Niccol and Neil W. Flanzraich. Baldocchi and Flanzraich should not be considered independent, since they have served for 10 years or more, so should no longer be considered independent nor should they serve on compensation, audit or nominating committees. Brian R. Niccol is the CEO/Chair, so should be held responsible for poor cybersecurity at Chipotle, an overall score of D.
Vote: Albert S. Baldocchi, Brian R. Niccol and Neil W. Flanzraich.
2. Executive Compensation
Chipotle 2020 Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO/Chair Brian Niccol at $16.1M. I’m using Yahoo! Finance to determine market cap ($25.8B) and I define large-cap as $10B, mid-cap as $2-10B, and small-cap as less than $2B. Union Pacific is a large-cap company.
According to MyLogIQ , the median CEO compensation at large-cap corporations was $12.2M in 2019. Chipotle shares outperformed during the last one, two and five year time periods. The ratio of the annual total compensation of the CEO to the median of the annual total compensation of all employees was 1,136:1.
Egan-Jones Proxy Services recommends For:
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
Given the above median pay, very high pay ratio and my general concerns about inequality, I voted AGAINST.
Vote: AGAINST
3. Ratification of Independent Auditor
I have no reason to believe the auditor engaged in poor accounting practices or has a conflict of interest. Egan-Jones recommends voting against the auditor if they served for seven years. Independence becomes compromised by that time. Ernst & Young LLP has served more than seven years. No other issues appear significant.
Vote: AGAINST
Chipotle 2020 Shareholder Proposals
4. Shareholder Proposal: Retention of Shares by Executive Officers
This good governance policy comes from the Comptroller of the City of New York. It requests Chipotle to disclose if, and how, it seeks to require that senior executives retain a significant percentage of shares acquired through equity compensation programs until reaching normal retirement age. Deferring a substantial amount of pay until retirement will help avoid decisions that bump up share price temporarily but end up being costly in the long run. Egan-Jones also recommends For.
Vote: FOR
5. Shareholder Proposal: Independent Board Chair
This good governance proposal comes from SEIU. I voted FOR. An independent Chairman is best positioned to build up the oversight capabilities of our directors while our CEO addresses the challenging day-to-day issues facing the company. The roles of Chairman of the Board and CEO are fundamentally different and should not be held by the same person. There should be a clear division of responsibilities between these positions to insure a balance of power and authority on the Board.
SEIU cites academic studies that found five-year shareholder returns at companies that separated the CEO and chair roles also outperformed companies with a unified structure by 28%, as well as other advantages.
Recently shareholders voted a majority of shares in favor of a similar proposal at Boeing,
Egan-Jones recommends For:
We believe that there is an inherent potential conflict, in having an Inside director serve as the Chairman of the board. Consequently, we prefer that companies separate the roles of the Chairman and CEO and that the Chairman be independent to further ensure board independence and accountability.
Vote: FOR
6. Shareholder Proposal: Report on Arbitration of Employment-Related Claims
This proposal comes from the Comptroller of the State of New York. Mandatory arbitration precludes employees from suing in court for wrongs like wage theft, discrimination and harassment, and requires them to submit to private arbitration, which has been found to favor companies and discourage claims. Sexual harassment is an urgent concern.
This makes sense to me. Egan-Jones agrees since it “would allow shareholders to assess the risks posed by the use of mandatory arbitration of employment-related claims.”
Vote: FOR
7. Right to Act by Written Consent
This proposal from me (James McRitchie), since having the right to act by written consent would allow shareholders to take emergency action before an annual meeting.
Many boards and investors assume a false equivalency between rights of written consent and special meetings. However, any shareholder, regardless how many (or few) shares she owns, can seek to solicit written consents on a proposal.
By contrast, calling a special meeting may require a two-step process. A shareholder who does not own the minimum shares required must first obtain the support of other shareholders. Once that meeting is called, the shareholder must distribute proxies asking shareholders to vote on the proposal to be presented at the special meeting. This two-step process can take more time and expense than the one-step process of soliciting written consents, especially at Chipotle, which allows only investors with 25% of outstanding shares to call a special meeting, instead of 10%, as allowed by many companies. Egan-Jones recommends For.
Similar proposals won more than 50% of the vote recently at Stanley Black & Decker, Berry Global Group, Flowserve, JetBlue, United Rentals, Capital One, Cigna, Applied Materials and Nuance.
Vote: FOR
Chipotle 2020 CorpGov Recommendations
Proxy Insight had not reported any votes in advance of the meeting when I last checked but may have updated by the time I post this.
Looking up a few funds announcing votes in advance, Calvert and Praxis voted Against Executive Pay; For all other items. Domini voted Against all directors (except Patricia Fili-Krusheld) and Executive Pay; For all other items. New York City Comptroller voted Against Fili-Krusheld, Flanzraich, Namvar, Executive Pay; For all other items. Trillium voted Against Flanzraich, Hickenlooper, Namvar, Executive Pay; For all other items.
- Directors: Albert S. Baldocchi, Brian R. Niccol and Neil W. Flanzraich.
- Auditor: AGAINST
- Executive Pay: AGAINST
- Retention of Shares by Executive Officers: FOR
- Independent Board Chair: FOR
- Report on Arbitration: FOR
- Written Consent: FOR
Chipotle 2020: Mark Your Calendar
Under SEC rules, any shareholder who wishes to present a proposal to be included in our Proxy Statement and introduced at our 2021 Annual Meeting of Shareholders must submit the proposal to the Secretary of the Company so that it is received no later than the close of business on December 4, 2020, and must satisfy the other requirements of SEC Rule 14a-8.
Warnings
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,” chosen by aspiration. 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. For more on the subject, see CEO Pay Machine Destroying America.
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