How important is it for corporate boards to keep the commitments they make to shareholders? It seems now that failing to do so could land you in a proxy fight – even if what was committed to might seem minor.
The McDonald’s board’s failure to keep a commitment it made years ago now has the company in the uncomfortable position of potentially giving up board seats over its pork sourcing policies. Corporate board members can learn from this.
Billionaire activist investor Carl Icahn has launched a campaign seeking two seats on McDonald’s board over the fast-food chain’s failure to honor a commitment to only purchase pork products from producers who do not use gestational crates for pregnant pigs. McDonald’s first committed to stop sourcing from producers who used the crates in 2012. Then in 2017 the company said that by the end of 2022, it would only buy from producers who do not use those crates, which are so small that they do not allow the pregnant sows to turn around or lay down during times when they are pregnant.
In a statement, McDonald’s admitted that it will not meet what it committed to by the 2022 deadline. “By the end of 2022, the Company expects to source 85% to 90% of its U.S. pork volumes from sows not housed in gestation crates during pregnancy,” the statement said. However, the statement also pointed out that since 2012, McDonald’s has been a leader on this issue, and currently sources 1 percent of pork in the U.S.
Although McDonald’s board said that it now expects to meet its pork sourcing commitment by the end of 2024, Icahn doesn’t believe it. He has nominated Leslie Samuelrich, president of Green Century Capital Management and Maisie Ganzler, the chief strategy and brand officer at Bon Appetit Management to stand for election at the 2022 annual meeting. The stage has now potentially been set for shareholders to decide whether directors should lose their board appointments due to this issue.
As McDonald’s deals with this challenge, directors might want to consider:
• The impact failing to meet commitments has on a board. When leaders don’t honor their commitments, it creates a lack of trust, which then gets magnified when those same leaders consistently raise their compensation. Any time the board fails to do something it says it is going to do activist investors can seize on this and charge the board and management with incompetence. In general, investors are reasonable and don’t expect perfection, but they also don’t generally tolerate it taking 10 years to solve a problem. If a company board made a commitment 10 years ago and then asks for two additional years to meet that commitment, investor confidence that the board will follow through on its commitment will likely be low. Distrust in the board is the first step toward ousting board members.
• The impact that small investors will continue to have on boards. Carl Icahn is a big name when it comes to activist investing, but his share ownership in McDonald’s is small—a reported 200 shares. Technically he’s a small investor, but he has instigated a proxy fight about an issue that larger shareholders apparently care about too. Norway’s pension fund, KLP, which holds $72 million worth of McDonald’s shares, has publicly expressed support for Icahn’s push for two board seats. This shows that an investor with 200 shares can ignite a proxy fight the same way an investor with 2 million shares can.
Boards should be aware that they must be more sensitive to reviewing the concerns of smaller investors who may have key alliances with larger investors that were not readily apparent. Ignoring small investors is not as effective a strategy as it was in the past.
• The impact that time has on the perception of board competence. America has become an “I want it in an instant” society – so the time it takes to get something done matters more than it did in previous years. Boards should be aware that in some cases, the longer it takes to get something done, the more impatient shareholders become. Even worse, if the board takes too long to get something done, it could be viewed as the board not knowing what it is doing.
Under the best circumstances it would be a difficult task for a board to explain why something didn’t get done in 10 years. And if after 10 years the board claims that the task can’t be done, investors will likely ask: “Why did it take 10 years to figure that out?” or “If it can’t be done, why was the commitment made in the first place?”
Fair or not, this is the type of added scrutiny on boards today. Boards must deliver on their commitments or expect to have their members replaced. Boards should be aware that their commitments can also be unspoken, as in meeting regulatory compliance issues and legal requirements for the industry in which they operate. Doing what you say you are going to do has become a higher priority among the many expectations of board membership.