Thursday, May 12, 2016

Chipotle Retains Food Safety Gurus as Board Wants Ability to Pick Executive Board

Chipotle shareholders approved a proposal to give the chain's board approval to be able to nominate directors to the board.  At the same time, the chain acknowledge that it had hired two additional food safety experts.

Business | Wed May 11, 2016 6:22pm EDT
Chipotle shareholders vote for more power to pick board
LOS ANGELES | By Lisa Baertlein

Chipotle Mexican Grill Inc's (CMG.N) shareholders approved a proposal on Wednesday to give investors more power to shake up the burrito chain's board after a string of food safety-related outbreaks undermined confidence in its directors.

Over the board's objection, investors at Chipotle's annual meeting passed a non-binding proposal that would allow an investor or group of investors owning three percent or more of the company's outstanding shares continuously for at least three years to nominate directors to the board.

Investors also heeded the call of an activist shareholder and a proxy adviser to withhold support for some directors in protest of lax oversight. While the entire board was reelected, three members received unusually low numbers of votes.

The New York City Pension Funds, which sponsored the successful proxy access proposal, had predicted that the vote would be a referendum on Chipotle's board.

"Today's vote serves as a wake-up call for a board that urgently needs to restore investor confidence in the wake of costly risk oversight failures," Scott Stringer, investment adviser at the proposal's sponsor, the New York City Pension Funds, said in a statement.

Those failures include a lack of response to early red flags on food safety, his office said. The proposal received 57 percent of votes cast, according to Reuters' calculations from results in a Chipotle regulatory filing. A counterproposal by Chipotle that would have required a 5-percent ownership threshold failed with about 24 percent of votes in support.

Company spokesman Chris Arnold said, "We have a history of taking action in response to the outcome of shareholder votes, and I don't expect this will be any different." He did not immediately clarify what action the company might now take.

Several major pension funds supported the measure this year, including the California Public Employee Retirement System, which helped Stringer drum up investor support.

Stringer has pushed through similar measures at other companies and made a similar proposal last year at Chipotle, citing what the fund saw as excessive executive compensation. That 2015 proposal failed after falling just short of winning majority support.

Calls for board changes and oversight have grown louder since the company's food safety problems hammered its formerly high-flying shares.

Chipotle stock is down about 30 percent since October, when the chain closed restaurants in the Pacific Northwest due to an E. coli outbreak.

That news sparked intense scrutiny of other 2015 Chipotle-linked E. coli, salmonella and norovirus outbreaks, scared away customers and sparked a federal criminal investigation.

Shareholder CtW Investment Group separately called on fellow investors to withhold votes for long-time board members Patrick Flynn and Darlene Friedman, saying the chain's recent food safety crisis shows the company needs a more independent and diverse board.

Institutional Shareholder Services (ISS), a major proxy advisory firm, recommended votes against Flynn and audit committee chair Albert Baldocchi, given that committee's "failure to provide sufficient oversight of food safety risk."

Shareholders withheld the most votes for Flynn and Baldocchi, at 29.6 percent and 21 percent, respectively.

Only 1 percent of S&P 500 directors received that level of opposition in last year's proxy season, said CtW, which noted that Chipotle's board was re-elected with over 95 percent support last year.

"This board was not only caught flat-footed by the food safety scandal, but even worse, has failed to draw lessons for itself from what is the most significant failure to oversee risk one could imagine under its watch," Dieter Waizenegger, Executive Director of the CtW Investment Group, said in a statement.

Chipotle shares closed down 1.6 percent at $454 on Wednesday.

CNBC / Reusters
Chipotle hires former critic to help improve food safety
Wednesday, 11 May 2016 | 6:27 AM ET

Chipotle Mexican Grill has retained two leading food safety experts — including a critic of the burrito chain's early response to disease outbreaks last year — as it redoubles its efforts to guard against health scares.

David Acheson, a former official at the U.S. Food and Drug Administration and the U.S. Department of Agriculture, was brought on as an adviser, Chipotle told Reuters.

The company also confirmed it is working with David Theno, a food safety consultant and former Jack in the Box executive who is credited with fixing food safety at the fast-food chain following a deadly E. coli outbreak in the 1990s.

The two are respected among food safety experts, and their involvement may signal an expansion in Chipotle's reforms. But the scope is not yet clear.

Spokesman Chris Arnold confirmed the consultants were retained last year but would not say when or detail their duties. As recently as early December, Acheson was sharply critical of the company's initial response to the outbreaks.

In March, the company announced it had hired James Marsden, a former meat science professor at Kansas State University, as executive director of food safety. Arnold said Marsden would have "primary responsibility for our food safety programs."

Expanding its complement of food safety experts is part of Chipotle's effort to rebound from a spate of disease outbreaks — including E. coli, salmonella and norovirus — last year that crushed sales, repulsed customers and slashed $6 billion off its market valuation.

Chipotle's ability to win back diners is vital to reviving sales and is expected to be a key topic at the company's annual meeting on Wednesday.
"We have committed to establishing Chipotle as an industry leader in food safety, and we have assembled an extremely capable team to help us achieve that goal," Arnold told Reuters.

Chipotle declined to make members of the team available for for interviews.

"If I had to put together a dream team to fix something, you could do a lot worse," said Don Schaffner, a food science professor at Rutgers University. But, he added: "I've begun to wonder a little bit about too many cooks. Each of those guys is going to have a perspective on what to do to fix the problem."

Michael Doyle, director of the Center for Food Safety at the University of Georgia, said he expected the group's focus "would likely be more on food safety preventive controls and less on food testing."

Chipotle's initial response emphasized testing ingredients for pathogens with the goal of stopping any source of illness from getting into its restaurants. The company touted a testing regime set up by another consultant, Mansour Samadpour, chief executive of IEH Laboratories & Consulting Group.

Acheson criticized the Chipotle for relying too heavily on that one approach. "I'm not a believer that you can test your way to safety," he told Reuters in early December.

At the time, he said the focus should be on improving food sourcing and handling practices, including how suppliers are approved, "how they are leveraged in terms of training, storing, handling, and preparing of food."

Arnold said Chipotle continues to work with the IEH testing firm. Its more recent changes have focused on food preparation. For instance, Chipotle said on its latest earnings call that it had started blanching bell peppers in an effort to kill germs.

The chain also has cut some small suppliers. Kenter Canyon Farms said it lost business providing oregano to Chipotle through a third-party distributor.

"When that whole scandal happened with the E. coli, when they revamped their food safety. They cut ties with a lot of growers," said Mark Lopez, sales director for the farm.

Chipotle also began buying more red onions from Oregon-based River Point Farms, which said it is the country's largest onion supplier, a source involved in the situation said.

The goal was to make it easier for Chipotle to trace the origins of the products, according to the source, who did not want to be identified. River Point declined to comment.

Chipotle's Arnold said the chain would continue to support smaller farms, and has committed to spending $10 million to help them meet its standards. But he said the company has noted that it may be difficult for "some of our smaller suppliers to meet our heightened food safety standards."

Big chains — including Yum Brands, the parent of Taco Bell and KFC, and McDonald's — tend to work with a small number of large suppliers, which often have more resources and controls.

No comments:

Post a Comment