A recent shareholder lawsuit filed against the Chipotle restaurant chain may serve as a reminder for corporate board members and their company management teams to (1) pay greater attention to customer feedback, (2) carefully consider the consequences of cutting back on products and services to save on organizational costs and (3) shareholders are going to be focused on company transparency in a number of areas more than ever.
According to news reports from Reuters, the class action lawsuit alleges that in its official disclosures, Chipotle understated customer dissatisfaction regarding the “highly inconsistent” portion sizes of burritos and rice bowls served at its more than 3,600 restaurants. Servings were characterized as “skimpy” on social media, which eventually created backlash against the company. Since July, company officials have re-emphasized providing “generous portions at its restaurants, but the damage had already been done. Company second- and third-quarter results declined, and on October 30, Chipotle stock lost about $6.5 billion in market value.
Shareholders are suing to recover losses for those who invested in the company as the truth about skimpy portion sizes was coming to light. According to a CNN report, the lawsuit states, “As a result of Defendants’ wrongful acts and omissions, and the precipitous decline in the market value of the Company’s common shares, Plaintiff and other Class members have suffered significant losses and damages.”
For Chipotle, the costs associated with fixing the “skimpy portion sizes” problem will likely outweigh any financial benefit gained from giving customers smaller portions for the same price. While the company says, “there was never a directive to provide less to our customers,” convincing shareholders and customers that the company meant no harm is now going to take a lot of time and money.
The current economic environment has many companies facing the challenge of finding ways to boost revenues when customers are cash-strapped. Here are some insights corporate board members may want to consider if they want to avoid situations similar to what Chipotle is dealing with:
Improve systems to monitor customer feedback. Customers can provide extremely valuable information to a company, but they must be approached in the correct manner. Many companies only want to hear good things from customers—it may be wise to make sure there is an easy way for customers to lodge complaints as well. Creating a system to hear the good and bad from customers creates trust. Comments about what is working well can provide clues on which products and services to expand on for future revenue growth. Comments about what isn’t working well can help the company get ahead of major problems and fix issues that may drive customers away and destroy shareholder value.
Passing costs onto customers may not work in an inflationary environment. Since customers have been hit with higher costs on just about everything due to higher inflation over the last few years, companies may need to re-examine their customer base and determine whether increasing prices may have the unintended consequence of forcing customers to stop using their products and services. Customer loyalty isn’t guaranteed, and higher prices may convince customers to try a competitor’s product, cutting into market share. Boards and management teams will be challenged to find innovative ways to cut costs while providing the same products and services that they have in the past. Recruiting board members who have experience managing growth through difficult economic times will be crucial going forward.
Lack of transparency leads to shareholder actions. Shareholders have become much more aggressive at asking for information from company boards and management teams, so providing accurate information in proxy statements, annual reports and other public documents is essential to the operation of any company. As in the case of Chipotle, allegations of a lack of transparency can result in lawsuits. It can also lead to shareholders taking actions to remove directors and key executives. This can be costly to the company and should be avoided. Members of the board must be diligent at ensuring that all disclosures are transparent and meet governance best practices. Expect transparency about climate goals, diversity, sustainability measures and compensation metrics to be at issue next year.
