AUDIT COMMITTEE REPORT
With regard to the fiscal year ended December 31, 2011, the Audit Committee (i) reviewed and discussed with management our
audited consolidated financial statements as of December 31, 2011 and for the year then ended; (ii) discussed with Ernst & Young LLP, the independent auditors, the matters required by the Statement on Auditing Standards
No. 61, Communication with Audit Committees, as amended, as adopted by the Public Company Accounting Oversight Board, or PCAOB, in Rule 3200T; (iii) received the written disclosures and the letter from Ernst & Young LLP required
by applicable requirements of the PCAOB regarding Ernst & Young LLPs communications with the Audit Committee regarding independence; and (iv) discussed with Ernst & Young LLP their independence.
Based on the review and discussions described above, the Audit Committee recommended to our Board of Directors that our audited financial
statements be included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 for filing with the SEC.
The Audit Committee:
Albert S. Baldocchi, Chairperson
Neil W. Flanzraich
John S. Charlesworth
POLICY FOR PRE-APPROVAL OF AUDIT AND PERMITTED NON-AUDIT SERVICES
The Board of Directors has adopted a policy for the pre-approval of all audit and permitted non-audit services proposed to be provided to
Chipotle by its independent auditors. This policy provides that the Audit Committee must pre-approve all audit, review and attest engagements and may do so on a case-by-case basis or on a class basis if the relevant services are predictable and
recurring. Any internal control-related service may not be approved on a class basis, but must be individually pre-approved by the committee. The policy prohibits the provision of any services that the auditor is prohibited from providing under
applicable law or the standards of the PCAOB.
Pre-approvals on a class basis for specified predictable and recurring services
are granted annually at or about the start of each fiscal year. In considering all pre-approvals, the committee may take into account whether the level of non-audit services, even if permissible under applicable law, is appropriate in light of the
independence of the auditor. The committee reviews the scope of services to be provided within each class of services and imposes fee limitations and budgetary guidelines in appropriate cases.
The committee may pre-approve a class of services for the entire fiscal year. Pre-approval on an individual service basis may be given or
effective only up to six months prior to commencement of the services.
The committee periodically reviews a schedule of fees
paid and payable to the independent auditor by type of covered service being performed or expected to be provided. Our Chief Financial Officer is also required to report to the committee any non-compliance with this policy of which he becomes aware.
The committee may delegate pre-approval authority for individual services or a class of services to any one of its members, provided that delegation is not allowed in the case of a class of services where the aggregate estimated fees for all future
and current periods would exceed $500,000. Any class of services projected to exceed this limit or individual service that would cause the limit to be exceeded must be pre-approved by the full committee. The individual member of the committee to
whom pre-approval authorization is delegated reports the grant of any pre-approval by the individual member at the next scheduled meeting of the committee.
AN ADVISORY VOTE ON A SHAREHOLDER PROPOSAL
Proposal D is a shareholder
proposal. If the shareholder proponent, or representative who is qualified under state law, is present at the annual meeting and submits the proposal for a vote, then the proposal will be voted upon. The shareholder proposal and related supporting
statement is included in this proxy statement as submitted by the proponent and we accept no responsibility for its contents. The Boards statement in opposition to the proposal is presented immediately following the proposal. The
proponents address is 180 North LaSalle Street, Suite 2015, Chicago, Illinois 60601. The proponent represented to us that as of October 11, 2011, it owned 2,581 shares of our common stock.
Proposal to Repeal Classified Board
RESOLVED, that shareholders of Chipotle Mexican Grill, Inc. urge the Board of Directors to take all necessary steps (other than any steps that must be taken by shareholders) to eliminate the
classification of the Board of Directors and to require that all directors elected at or after the annual meeting held in 2013 be elected on an annual basis. Implementation of this proposal should not prevent any director elected prior to the annual
meeting held in 2013 from completing the term for which such director was elected.
This resolution was submitted by the Illinois State Board of Investment. The Harvard Law School Shareholder Rights Project represented and
advised the Illinois State Board of Investment in connection with this resolution.
The resolution urges the board of
directors to facilitate a declassification of the board. Such a change would enable shareholders to register their views on the performance of all directors at each annual meeting. Having directors stand for elections annually makes directors more
accountable to shareholders, and could thereby contribute to improving performance and increasing firm value.
Over the past
decade, many S&P 500 companies have declassified their board of directors. According to data from FactSet Research Systems, the number of S&P 500 companies with classified boards declined by more than 50%; and the average percentage of votes
cast in favor of shareholder proposals to declassify the boards of S&P 500 companies during the period January 1, 2010 June 30, 2011 exceeded 75%.
The significant shareholder support for proposals to declassify boards is consistent with empirical studies reporting that classified boards could be associated with lower firm valuation and/or worse
corporate decision-making. Studies report that:
Classified boards are associated with lower firm valuation (Bebchuk and Cohen, 2005; confirmed by Faleye (2007) and Frakes (2007));
Takeover targets with classified boards are associated with lower gains to shareholders (Bebchuk, Coates, and Subramanian, 2002);
Firms with classified boards are more likely to be associated with value-decreasing acquisition decisions (Masulis, Wang, and Xie, 2007); and
Classified boards are associated with lower sensitivity of compensation to performance and lower sensitivity of CEO turnover to firm performance
Please vote for this proposal to make directors more accountable to shareholders.
Statement in Opposition by our Board of Directors
Underlying this proposal to de-classify our Board of Directors is a viewpoint that one size fits all. The shareholder
proponent and its representative conceded to us that this proposal is not aimed specifically at Chipotle, but rather is a part of a broader initiative to cause S&P 500 companies to employ annual elections for all directors. Our Board, however,
has always believed that a classified Board is in the best interests of Chipotle, its shareholders and our long-term value creation, and careful consideration by the Board of this proposal has not changed that belief. Accordingly, the Board
recommends that you vote AGAINST the proposal. A more detailed explanation of the Boards views follows.
believes that any decisions relating to corporate governance matters should not be made without considering the specific circumstances of the company involved. In the case of Chipotle, there are a number of factors that make us unique. From our
vision to change the way the world thinks about and eats fast food, to our unique corporate strategy based on top-performing employees who are promoted from within our company serving freshly-prepared food from high quality ingredients, we believe
were different than just about anyone else in our industry. Our growth strategyto grow organically by opening exclusively company-owned restaurants rather than franchisingis also unique in the restaurant world.
These factors, while differentiating Chipotle from most of our peers, could be questioned by those who believe in a more
traditional way of running and growing a restaurant company. It is certainly foreseeable that one or more investors may believe that growing faster through franchising, or that decreasing food costs by serving lower quality ingredients,
would improve our business over the short term. Such investors might be emboldened to try to force these kinds of strategies on us, including by taking control of the Board. Our Board believes that, while in some circumstances there might be
potential short-term gains to be made by pursuing these or other changes to our unique strategy, such changes would be detrimental to our company and our shareholders over the long term. That being the case, the Board believes that it is important
to protect the stability of the Board, and by extension our management team, and an effective way to maintain that stability is by continuing classified elections for seats on the Board. The unique aspects of Chipotle, our business model and our
culture may well be lost on the shareholder proponent, which informed us that, as a fund managed by an appointed external manager, it did not make its own decision to invest in Chipotle stock.
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The proponent of this proposal also espouses the theory that classified boards could
be associated with lower firm valuation. Leaving aside that the proponents do not claim that classified boards ARE associated with lower valuations, but only that they COULD be, Chipotles performance relative to its peer group suggests
that in the case of Chipotle, our classified Board structure has not had an adverse impact on our valuation. As reflected in the graph below, our total shareholder returns have significantly outpaced the S&P 500, the S&P 500 Restaurants
Index, and the S&P SmallCap 600 Restaurants Index over the past five years. In fact, an investor who had purchased our stock at the closing market price on the day trading in our stock commenced on the NYSE would have earned total returns of
over 660% as of December 31, 2011.
This extraordinary stock price performance is reflective of the strong business performance weve
enjoyed under our current Board and management team. Our research has shown that over the past three years, our sales growth has ranked us in the 98th, 100th, and 92nd percentiles of our restaurant industry peer group (the composition of which is
further described on page 28), and our net income growth has ranked us in the 72nd, 77th, and 84th percentiles. In light of this record of performance, the Board believes that our shareholders best interest is in maintaining the stability of
Chipotles top level leadership, allowing the Board and management to remain focused on building long-term value for years to come.
The proponent also asserts that having directors stand for elections annually makes directors more accountable to shareholders. Having a classified Board does not mean our Board is
unaccountable to shareholders. Our directors are required by law to fulfill fiduciary duties owed to Chipotle and to our shareholders, regardless of the length of their terms. Moreover, it appears the proponents belief is that added
accountability will result from directors needing to be constantly mindful that their tenure is solely on a year-to-year basis. The result of that mindset may well be, rather than increased accountability, an increased
focus on short term results. We believe that our Board and management team should be focused instead on long-term value creation, a focus that our Board believes is more easily maintained in the
framework of staggered three year terms for directors.
Finally, we note the proponents assertion that declassification
of our Board would enable shareholders to register their views on the performance of all directors at each annual meeting. There is of course nothing inherent in our classified Board structure that prohibits shareholders from registering
their views on the performance of any or all of our directors at any time, including at any annual meeting. We provide on page 14 a means for shareholders to communicate with the Board or any member thereof, and welcome any constructive feedback for
the Board on any matters related to Chipotle, including the performance of the Board.
Because of our Boards commitment
to increasing long-term shareholder value, as evidenced by our performance for as long as weve been a public company, and in view of the proponents arguments in support of its proposal, which are at best, vague, and at worst, misguided,
our Board recommends that you vote AGAINST the proposal.
The Board of Directors recommends a vote AGAINST the shareholder proposal.