The string of food safety problems at Chipotle Mexican Grill last year, including outbreaks of e-coli and salmonella, wiped 40 per cent off the company’s shares. A year later, customer numbers are still down sharply.
Not by coincidence, the burrito chain has been the focus of one of the biggest corporate governance fights of 2016. Some shareholders blame a stale, insular board of directors for failing to move fast enough or aggressively enough to deal with the crisis.
The company is emblematic, campaigners say, of how too many of America’s boardrooms are failing to protect investors’ interests. A Financial Times analysis of data from the shareholder advisory group ISS Analytics shows US boards are “maler, staler and frailer” than their European counterparts, having directors who are older on average, stay in post longer and are less likely to be women.
There is a straight line between the ensconced position of many board members — the average tenure of Chipotle’s current directors is 13 years, five years more than the US average — and a “slow, superficial and unconvincing” response to the safety issues, according to CtW Investment Group, which represents union pension funds and wrote a thunderous public letter to fellow shareholders.
“Chipotle is in need of genuinely independent oversight now more than ever,” CtW wrote, complaining that one of the longest-tenured directors had been put in charge of overseeing food safety issues for the audit committee. “Its growth has long since outsized its governance arrangements.”
Chipotle argued it has a small, active and engaged board that has been fully involved in the food safety response, but that did not prevent 30 per cent of shareholders opposing the re-election of Patrick Flynn, who runs the committee in charge of nominating new directors. A company spokesman says it is interviewing for one new independent director and will “consider additional board changes to meet longer-term needs”.
Slow to reform
Shareholders of companies around the world have long fought to get the basics of boardroom accountability right. Yet many still express dissatisfaction with the quality of candidates and the make-up of even large corporate boards, especially in the US, which has been slower to hand shareholders rights that have been common elsewhere for years, thanks to standards like the 1992 Cadbury Code in the UK. There are increasing calls for companies to create more board seats for minorities and women and for “board refreshment” to sweep away vestiges of the clubroom atmosphere.
“I depend on the individuals inside that room to hold management to task,” says Anne Sheehan, head of corporate governance at Calstrs , the $190bn California teachers’ pension fund, which withheld its support from six of the nine members of the Chipotle board this year. “Having too many people that think alike, act alike, come from the same background, perhaps went to the same school or who have all been on other boards together, can lend itself to groupthink. We need directors to ask the tough questions, to probe management and be a little more provocative.”
Demands for board refreshment usually explode into the open after a scandal, or when a company’s performance sours, or if there is an egregious example of executive pay. Shareholders confronted board members this year at BP over chief executive Bob Dudley’s $19.6m pay deal, which they voted down. Dame Ann Dowling, head of the remuneration committee, faced calls to resign.
Ms Sheehan singled out energy and mining as sectors where Calstrs was making a concerted push to shake up boards, including pressure to add more female directors. “It’s a throwback to a lot of the petroleum engineers being the good ol’ boys in Oklahoma and Louisiana,” she says.
The data from ISS, which covers more than 45,000 directors across 5,000 companies in 30 markets, show that the energy sector has the oldest directors, at 61 years, a year older than the average for all directors, and it has by far the fewest women on boards. Female directors account for 12 per cent of board members in the sector, compared with an average of 17 per cent across all the companies in the data.
In terms of length of tenure, however, energy sits in the middle of the pack. Directors in finance have served the longest with an average tenure of 7.9 years, compared with six in telecoms, the sector with the freshest boards.
‘Brandy and cigars’
Board members are widely regarded as less independent-minded after long service. Under many formal governance codes around the world, they cannot serve on important board subcommittees like the compensation committee after a certain length of tenure, “though they can be found lurking around for the brandy and cigars afterwards”, in the words of Anne Simpson, head of corporate governance at Calpers , the largest US pension fund.
In the US, where there is no single code, investors have shied away from saying they will automatically vote against longstanding directors, but Calpers and others demand an explanation when a term lasts beyond 12 years.
The assault has been enough to generate a rearguard action by Wachtell, Lipton, Rosen & Katz, the august law firm which for 50 years has been defending US corporations against the advance of shareholder activism. In a paper in the New York Law Journal last month, Wachtell partner David Katz and his colleague Laura McIntosh wrote that “director tenure is an issue at once too picayune — as it is well within the discretion of the board — and too significant — as it affects the board’s latitude to do its job effectively — to be determined by shareholders or outside groups rather than by directors themselves”.
They went on: “We believe that many investors as well as proxy advisory firms are looking at this issue the wrong way. Rather than focusing on simply the longest tenured directors, we believe that it is the average tenure of the entire board that is most relevant.”
The ideal is a mix of seasoned and new executives, says Glenn Booraem, fund treasurer at Vanguard, one of the largest shareholders of US listed companies. “Not everyone can be new all the time. There is a value to institutional memory and a degree of consistency.”
Mr Booraem adds that directors may become more independent from management, not less, if they have seen several chief executives come and go. And Michelle Edkins, head of corporate governance for BlackRock, the world’s largest asset manager, says companies could justify longer board tenures if they are overseeing investment decisions that play out over a longer cycle, such as in oil and gas, than in, say, fast-moving consumer goods. Ms Edkins says most of the largest multinationals now tended to have “world-class boards” and investor attention was turning to midsize companies.
The FT’s analysis of ISS Analytics data shows that larger companies tend to have fresher and more gender-diverse boards. Those with a market capitalisation above $50bn have an average tenure for sitting directors of 6.9 years, the only segment below seven years. Among companies worth less than $500m, a sitting director has been in place for 7.5 years on average. The proportion of women on the boards of $50bn-plus companies has hit 25 per cent; among sub-$500m companies it is half that.