Will Bill Ackman's presence hurt Chipotle's CEO search?

The Bottom Line: Some CEOs are turned off by activist investors and their short-term focus.

The Bottom Line

Steve Ells’ resignation as the CEO of Chipotle led to immediate speculation that the fast-casual burrito chain would choose from a wide selection of top-name, highly successful CEOs to fill the job.

One such oft-uttered name was Domino's Patrick Doyle, who announced his upcoming departure earlier this month and quickly put to rest any idea that he would take a job in Colorado.

Another one was Ron Shaich, the now-former CEO of Panera Bread. But it seemed clear from his interview with RB's Peter Romeo that he wouldn’t be taking the Chipotle gig. And then on Wednesday he said it outright to Business Insider.

The story included this quote: “After running a public company for 26 years,” Shaich said, “why would I ever go to work for Bill Ackman?”

Keep in mind that Shaich has no love for activist investors. He ripped them in his interview with Restaurant Business, saying, “I worry profoundly for the next Sally Smiths, the next generation of CEOs who want to make long-term bets.” That was a reference to the departing CEO of Buffalo Wild Wings, who announced her retirement last year after the activist Marcato Capital won three seats to the company’s board.

Smith, of course, would get the last laugh, helping to engineer a sale to Arby’s and Roark Capital that would net Marcato only a meager profit.

Activist investors can do some good by lighting a fire under management, forcing them to rethink operations with a reminder that they could lose their jobs. Olive Garden owner Darden Restaurants has thrived since the activist Starboard Value won every seat to that company’s board in 2014.

Failed campaigns at Denny’s and at Cracker Barrel helped spur turnarounds at both of those chains. And for small-cap companies, activist investors can reveal questionable tactics or entrenched management that can be overlooked because few people are paying attention.

But the biggest problem with activists is a short-term mindset, and an often simplistic view of how restaurant companies should operate. Activists can dust off tired ideas frequently repeated in campaigns, such as refranchising or real estate sales. And they too often criticize investments that can be important for a restaurant chain’s long-term success.

As such, restaurant CEOs don’t like activists very much.

In 2015, Panera was the subject of one of the most inexplicable activist campaigns in recent history—one that ultimately led the company to refranchise a number of its locations. That campaign has clearly colored Shaich’s view of the world, and likely gave him an incentive to push a sale last year to JAB Holding for $7.5 billion.

Which brings us back to Chipotle. The Denver-based burrito chain should have its pick of CEOs. It is a high-profile job that can make a career. The company pays a lot of money to its executives. And before sales fell in 2016, it boasted some of the strongest profits in the restaurant industry.

But the presence of Ackman could make the CEO search more of a challenge. At the very least, it could eliminate some of the strongest candidates.

bill ackman

Ackman is one of the best-known activists in the country. His 2005 campaign against McDonald’s is one of the most notable activist operations in the restaurant industry and helped create the playbook many activists use today.

Ackman’s Pershing Square Capital bought 10% of Chipotle stock in 2016. By the end of the year, Monty Moran was out as Chipotle’s co-CEO, and the company had added four new board members. A year later Ells decided to step away as the chain’s sole CEO.

The company has hired a new chief operating officer and is doing a lot of things now that it probably should have done early in 2016, such as slowing down development.

Still, there is a lot of pressure on Pershing for a Chipotle turnaround. The investor bought up its 2.3 million shares of Chipotle stock at an average price of $418.

Chipotle stock over the last year fell to as low as $263 a share. Even now, after some bounceback, it is at $330. Pershing’s investment in Chipotle is thus $177 million in the red.

That hasn’t been the only loss. A number of Pershing’s investments have suffered losses and, according to Reuters, the firm has had to lay off staff. And Ackman himself, who is on television a lot, is now avoiding the limelight.

There will be plenty of pressure on any incoming CEO to turn around Chipotle as it is. But if you’re a strong candidate for a top job at the restaurant industry, would you choose one with an activist in the background?

Ultimately, Chipotle is going to get a good executive to be its next CEO, and Pershing will do what it takes to get the right person on board—perhaps even muting Ells, who will be the executive chairman and who might have a tough time relinquishing control of the chain he founded.

But to get that candidate, Ackman will likely have to assure any potential CEO that he will let that person do what is necessary to turn the chain around. Even if it doesn’t produce short-term results.

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