By comparison, Chipotle does not prepare sustainability reports10; does not disclose sustainability targets, goals or progress; has not charged a Board committee with overseeing sustainability matters; and has not disclosed any intention of imposing any systematic changes to address these deficits. In 2014 and 2015, shareholder proposals requesting the preparation of an annual sustainability report received sizeable support from shareholders (approximately 31% of vote each year).
Chipotle’s lack of basic sustainability governance mechanisms is reflected in a number of areas where the company’s programs and policies are underdeveloped or nonexistent.
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6 See http://bit.ly/1PdSRSE, pp. 12-13.
7 See http://bit.ly/256ji8g, pp. 15-18.
8 See http://bit.ly/1S6bjB0, p. 60.
9 See http://bit.ly/1nR2UXs, p. 12, 134.
10Transparency is one of the most important drivers of accountability and is a well-established corporate sustainability tool. Over 9,000 organizations, most of them commercial businesses, have registered nearly 33,000 sustainability reports at www.http://database.globalreporting.org. Transparency drives the implementation of the “what gets measured, gets managed” philosophy. Had Chipotle prepared disclosures according to the Global Reporting Initiative’s protocol, management’s attention focus on two indicators might have led to more fortuitous outcomes:
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PR1 (Product Responsibility) asks companies to report on “Life cycle stages in which health and safety impacts of products and services are assessed for improvement, and percentage of significant products and services categories subject to such procedures.”
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PR2 calls upon companies to disclose the total number of incidents of non-compliance with regulations and voluntary codes concerning health and safety impacts of products and services during their life cycle, by type of outcomes.
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One of the largest global providers of corporate environmental, social and governance (ESG) research, Sustainalytics, assessed the Chipotle as an “average” performer relative to its global peers in its most recent review.
Based on of our internal research and Sustainalytics’ assessment, in addition to poor disclosure, other areas of underperformance include:
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No disclosed program for talent recruitment & retention
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Poor disclosure regarding water, energy and waste management
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No disclosed program or targets for renewable energy
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A weak environmental policy and management system
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No policies on collective bargaining or working conditions, for workforce or workers throughout the supply chain, despite several allegations of unfair wages, unpaid overtime and insufficient breaks
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Tying Compensation to Stock Price Will Not Address Underlying Issues
Tying compensation to the recovery of the pre-crisis price of CMG stock is not a substitute for the deficits identified above. Share prices can be artificially manipulated through stock buybacks, mergers and acquisitions, earnings restatements and other means. Depending upon the strategies Chipotle uses to elevate its stock price, the latter could recover while leaving the company just as vulnerable as before to sustainability-related failures.
For these reasons, the proponents believe that Chipotle shareholders would benefit by incenting senior executives to deliver measurable sustainability outcomes. Environmental and social impacts and opportunities are of too great a strategic importance to the company and its stakeholders to be handled in ad hoc fashion. Significant organizations changes must be driven from the top.
Please cast your vote in favor of Proposal No. 10.
Appendix 1
LINK EXECUTIVE COMPENSATION TO SUSTAINABILITY PERFORMANCE
RESOLVED: Shareholders request the Board Compensation Committee prepare a report assessing the feasibility of integrating sustainability metrics into the performance measures of senior executives under the Company’s compensation incentive plans. Sustainability is defined as how environmental and social considerations, and related financial impacts, are integrated into corporate strategy over the long term.
WHEREAS:
A large and diverse group of companies has integrated sustainability metrics into executive pay incentive plans, among them Unilever, Pepsi, Walmart, Group Danone and Mead Johnson.
Numerous studies suggest companies that integrate environmental, social and governance factors into their business strategy reduce reputational, legal and regulatory risks and improve long-term performance.
According to the largest study of CEOs on sustainability to date (CEO Study on Sustainability 2013, UN Global Compact and Accenture):
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76 percent believe embedding sustainability into core business will drive revenue growth and new opportunities.
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93 percent regard sustainability as key to success.
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86 percent believe sustainability should be integrated into compensation discussions, and 67 percent report they already do.
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A 2012 Harvard Business School study concluded that firms that adopted social and environmental policies significantly outperformed counterparts over the long-term, in terms of stock market and accounting performance.
In 2013, the Carbon Disclosure Project and Sustainable Insight Capital Management found companies with industry leading climate change positions exhibited better performance than peers, measured by return on equity, cash flow stability and dividend growth.
The Glass Lewis report Greening the Green 2014: Linking Executive Pay to Sustainability, finds a “mounting body of research showing that firms that operate in a more responsible manner may
perform better financially…. Moreover, these companies were also more likely to tie top executive incentives to sustainability metrics.”
A 2012 report by the United Nations Principles for Responsible Investment and the UN Global Compact found “the inclusion of appropriate Environmental, Social and Governance (ESG) issues within executive management goals and incentive schemes can be an important factor in the creation and protection of long-term shareholder value.”
A 2011 study of 490 global companies found that including sustainability targets in remuneration packages was sufficient to encourage sustainable development.
In 2013, CH2MHill found that firms that set tangible sustainability goals are more likely to tie executive compensation to the achievement of sustainability goals.
SUPPORTING STATEMENT:
Effectively managing for sustainability offers positive opportunities for companies, and we believe should be a key area in which executives should be evaluated.
Linking sustainability metrics to executive compensation could reduce risks related to sustainability underperformance, incent employees to meet sustainability goals and achieve resultant benefits, and increase accountability. Examples of such metrics might include: greenhouse gas emissions measurements, energy and water consumption per unit of product output (or dollar of revenue), renewable energy consumption, volume of recycling packaging used, and food and worker safety incidents.
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Appendix 2
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Related Studies
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Exploring the Link Between Active Management of Social and Environmental Issues and Superior Financial Performance
“The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance,” by Robert G. Eccles, Ionnis Ioannou and George Serafeim. Harvard Business School. May 9, 2012.
Firms that adopted social and environmental policies significantly outperformed counterparts over the long-term, in terms of stock market and accounting performance. These firms were more likely to tie top executive incentives to sustainability metrics.
“Linking Climate Engagement to Financial Performance: An Investor’s Perspective,” Sustainable Insight Capital Management, Carbon Disclosure Project, September 2013.
Companies with industry leading climate change positions exhibited better performance than peers, measured by return on equity, cash flow stability and dividend growth.
“Corporate Social and Financial Performance: A Meta-Analysis,” Marc Orlitzky, et. al., Organization Studies, March 2003 (24:3).
A 2003 meta-study of 52 studies, on a range of industries and activities, found:
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The relationship between CSR and financial performance was universally positive, varying between highly positive and moderately positive.
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Social responsibility and financial performance affect each other in a “virtuous cycle”: successful firms spend more because they can, but such spending helps them become more successful.
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Because markets do not penalize companies for being socially responsible, it is compatible with maximizing shareholder value and thus can be pursued by managers.
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“Greening the Green 2014: Linking Executive Pay to Sustainability,” Glass Lewis, 2014.
“[A] mounting body of research shows that firms that operate in a more responsible manner may perform better financially…. Moreover, these companies were also more likely to tie top executive incentives to sustainability metrics.”
“Sustainability Goals That Make an Impact,” CH2MHill, 2013
Firms that set tangible sustainability goals are more likely to tie executive compensation to the achievement of sustainability goals.
On the Effectiveness of Linking Compensation to Sustainability Performance
“Sustainability Targets in Executive Remuneration: An Analysis of the Contribution of Sustainability Targets in Executive Remuneration to Sustainable Development,” S.B.M. Rosendaal. Erasmus School of Economics. August 11, 2011.
Study of 490 global companies found that including sustainability targets in executive remuneration packages was sufficient to encourage sustainable development. (Executives were not additionally incented by a higher percentage, or whether the rewards were tied to short- or long-term compensation.)
“Both short-term and long-term sustainability targets are found to be effective in encouraging sustainability development.” (p. 53)
“Inclusion of the sustainability target is sufficient for a contribution to sustainable development.” (p. 56)
“The Effects of CEO Pay Structure on Corporate Social Performance,” John R. Deckop, Kimberly K. Merriman, and Shruti Gupta, Journal of Management, 32, no. 3, June 2006, pp. 329–342.
Increase found in the corporate social performance of companies using a long-term focus in CEO pay (as indicated by the % value of restricted stock + stock options in total pay).
“The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance,” Robert G. Eccles, Ioannis Ioannou, and George Serafeim, , Harvard Business School, 2011.
Companies considered to be sustainability leaders more likely to align senior executive incentives with non-financial metrics (including E&S).
“Environmental Performance and Executive Compensation: An Integrated Agency-Institutional Perspective,” Pascual Berrone and Luis R. Gomez-Mejia, Academy of Management Journal, Vol. 52, No. 1, 2009, p. 120.
A sustainability pay-for-performance system makes management explicitly accountable for a co.’s environmental behavior, even encouraging CEOs to monitor behaviors at lower organizational levels. Creating a link can also provide incentives to dedicate real resources toward environmental initiatives, building legitimacy in the eyes of shareholders and the public.
Prevalence of Policy Among Corporations
Integrated Financial and Sustainability Reporting in the United States (Investor Responsibility Research Center and the Sustainable Investment Institute, 2013)
43.4 percent of the S&P 500 had linked executive pay to environmental, social and/or ethical issues, such as fraud.
Ceres Road Map for Sustainability (2014)
Identified 24% of the 600 companies it surveyed implemented the linkage, a rise from 15% in 2012.
Remuneration Theme Report: 3rd in a Series (Eurosif and EIRIS, 2010)
29% of the 300 largest listed cos. in Europe have link pay to sustainability targets.
A New Era of Sustainability (Accenture, United Nations Global Compact. 2010).
50% of 800 CEOs are incented for meeting sustainability goals.
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