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Chipotle Provides Yet More Reminders of D&O and Food Safety Risks

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If the average food safety crisis or product recall forces companies to weather a storm, Chipotle has spent the past year trying to weather a category 4 hurricane. Now months into their recovery effort, it seems they are still seeing significant storm surges.
Last week, a group of Chipotle shareholders filed a federal lawsuit accusing executives of “failing to establish quality-control and emergency-response measures to prevent and then stop food-borne illnesses that sickened customers across the country and proved costly to the company,” the Denver Post reported. The suit accuses executives, the board of directors, and managers of unjust enrichment and seeks compensation from Chipotle’s co-CEOs, while also asking for corporate-governance reforms and changes to internal procedures to comply with laws and protect shareholders.

Sales remain significantly impacted by the series of six foodborne illness outbreaks last year.

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The company reported in July that same-store sales fell another 23.6% in Q2, marking the third straight quarter of declines for performance even lower than analysts had predicted. The company’s stock remains drastically impacted, currently trading at about 4 compared to a high of 9 before the outbreaks came to light a year ago.

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In addition to the most recent shareholder lawsuit, the bad news for directors and officers specifically has also been further compounded recently.

Shareholder lawsuits were filed earlier this year alleging the company had misled investors about its food safety measures, made “materially false and misleading statements,” and did not disclose that its “quality controls were not in compliance with applicable consumer and workplace safety regulations.” In June, a group of shareholders sued a number of top executives for allegedly violating their fiduciary responsibilities and engaging in insider trading.

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Relying on insider knowledge about insufficient food safety protocols, the suit alleges that the executives sold hundreds of thousands of shares in the first half of 2015 before the food poisoning scandal was made public.

Check out previous coverage of the Chipotle crisis in the Risk Management March cover story “Dia de la Crisis: The Chipotle Outbreaks Highlight Supply Chain Risks.”

Chipotle Food-Borne Illness Outbreaks Highlight Supply Chain, Reputation Risks

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For the past month, Chipotle Mexican Grill has been mired in a food safety crisis. An e. coli outbreak linked to Chipotle has sickened at least 52 people in nine states. In a seemingly unrelated outbreak, 120 people in Boston – most of them students at Boston College – also fell ill after contracting norovirus from eating at the quick-service chain.

While food safety and product recall concerns are always a major liability for industry players, the spate of infections poses even more of a threat to Chipotle as the company has built its reputation on the foundation of a healthy, responsible supply chain, boasting its use of fresh produce, meat raised without antibiotics, and a network of hundreds of small, independent farmers. As Bloomberg put it, the company’s biggest strength is suddenly its biggest weakness. Given the chain’s 1,900 locations and the rate at which it has expanded (about 200 new locations every year), its supply chain is already under significant pressure. When an audit found unacceptable practices earlier this year, the company suspended a primary pork supplier, pulling carnitas from the menu at about a third of its restaurants nationwide. The company pointed to its decisive action as proof of its commitment to sustainable agriculture, but many analysts said it highlighted the company’s inherent vulnerability to supply chain issues.

“You can never eliminate all risk, regardless of the size of suppliers, but the program we have put in place since the incident began is designed to eliminate or mitigate risk to a level near zero,” Chris Arnold, the company’s director of communications, told Bloomberg.

Now, as the number and geographical spread of E. coli cases grows, the company has closed dozens of restaurants for what it promises will be thorough investigation and cleaning. Steve Ells, the company’s co-chief executive, went on the “Today” show to publicly apologize and vow that reforms currently being put into place would turn Chipotle into a leader in food safety. “The procedures we’re putting in place today are so above industry norms that we are going to be the safest place to eat,” he said.

But consumers are not so sure, leading sales to fall 16% in November, and its stock price has dropped almost 30% since the outbreak was first detected, the Washington Post reports. Analysts and the company itself have said they expect the outbreak to continue to cause a drop in sales. Take a look at how the ongoing crisis has impacted the company’s stock:

chipotle stock e coli

These doubts may have long-term impacts on Chipotle and may even extend to other food industry stakeholders.

“Fast-food companies are 100 percent reliant on their food supply to send them something that is pathogen-free, but the supply chain is still extremely reluctant to test every [food] product it provides,” food safety consultant Mansour Samadpour told the Washington Post. “Many companies are starting to do it, but the reluctance is real and it’s problematic — and that’s getting in the way of food safety.”

“I worry that [consumers] look at food safety from the organic, non-GMO, sustainability, animal welfare standpoint,” Bill Marler, a lawyer specializing in food-borne illness, told the Post. “And a lot of people in that space, in that agricultural movement, tend to believe that because they do those things their food is automatically safer than food that’s served at McDonald’s or Jack in the Box or Walmart. But that’s just not the case.”

For more about food safety crises and product recall, check out the following articles from Risk Management:
Feeding an Appetite for Trust, A Q&A with Center for Food Integrity CEO Charlie Arnot
Food Safety Updates Stalled by Funding
Maximizing Coverage for a Product Recall

What to Do About Reputation Risk

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Of executives surveyed, 87% rate reputation risk as either more important or much more important than any other strategic risks their companies face, according to a new study from Forbes Insights and Deloitte Touche Tohmatsu Limited. Further, 88% say their companies are explicitly focusing on managing reputation risk.

Yet a bevy of factors contribute to reputation risk, making monitoring and mitigating the dangers seem particularly unwieldy. These include business decisions and performance in the following areas:

Financial performance: Shareholders, investors, lenders, and many other stakeholders consider financial performance when assessing a firm’s reputation.

Quality: An organization’s willingness to adhere to quality standards goes a long way to enhancing its reputation. Product defects and recalls have an adverse impact.

Innovation: Firms that differentiate themselves from their competitors through innovative processes and unique/niche products tend to have strong name recognition and high reputation value.

Ethics and integrity: Firms with strong ethical policies are more trustworthy in the eyes of stakeholders.

Crisis response: Stakeholders keep a close eye on how a company responds to difficult situations. Any action during a crisis can ultimately affect the company’s reputation.

Safety: Strong safety policies affirm that safety and risk management are top strategic priorities for the company, building trust, and value creation.

Corporate social responsibility: Actively promoting sound environmental management and social responsibility programs helps create a reputation “safety net” that reduces risk.

Security: Strong infrastructure to defend against physical and cybersecurity threats helps avoid security breaches that could damage a company’s reputation.

But brand crises make headlines with increasing frequency, and companies are laying responsibility at the feet of the C-suite, particularly chief risk officers. Deloitte reports that respondents considered the primary responsibility to rest with: the chief executive officer (36%), chief risk officer (21%), board of directors (14%), or chief financial officer (11%).

What can they do? The study offered these key points to consider when crafting a crisis management plan:

  • Don’t wait until a crisis hits to get ready. Monitoring, preparation and rehearsal are the most effective ways to get ready for a crisis event. Organizations that can plan and rehearse potential crisis scenarios should be better positioned to respond effectively when a crisis actually hits.
  • Every decision during a major crisis can affect stakeholder value. Reputation risks destroy value more quickly than operational risks.
  • Response times should be in minutes, not hours or days. Teams on the ground need to take control, lead with flexibility, make decisions with less-than-perfect information, communicate well internally and externally, and inspire confidence. This often requires outside-the-box thinking and innovation.
  • You can emerge stronger. Almost every crisis creates opportunities for companies to rebound. However, those opportunities will surface only if you’re looking for them.
  • When a crisis seems like it’s over, it’s not. The work goes on long after you breathe a sigh of relief. The way you capture and manage data, log decisions, manage finances, handle insurance claims, and meet legal requirements on the road back to normality can determine how strongly you recover.

But the real objective should be preventing these potential crises to begin with. Deloitte recommends exploring the possibilities of “risk sensing” – using real-time data to monitor the issues that might impact a company’s reputation:

Crisis management for C-suite executives

Check out the infographic below for more insights from the Deloitte Reputation@Risk survey:

Deloitte Reputation@Risk Global Survey

Executive Focus Shifting to Operational Risks in 2015, Study Finds

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Board members and C-suite executives across industries perceive the global business environment in 2015 as somewhat less risky for organizations than in the past two years. In “Executive Perspectives on Top Risks for 2015,” consulting firm Protiviti and the Enterprise Risk Management Initiative at the North Carolina State Univeristy Poole College of Management found that this is far from bad news for risk managers, as organizations are actually more likely to invest additional resources for risk management. Internal challenges like succession, attracting and retaining talent, regulation and cybersecurity are drawing the most attention, according to the report.

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“Our survey findings indicate that operational risk issues are keeping many senior executives up at night,” said Mark Beasley, Deloitte Professor of Enterprise Risk Management and NC State ERM Initiative director. Indeed, for the third consecutive year, regulatory changes and heightened regulatory scrutiny ranked as the number one risk on the minds of board members and corporate executives, with 67% indicating that it will “significantly impact” their organizations. More than half of global survey respondents indicated that insufficient preparation to manage cybersecurity threats is a risk that will “significantly impact” their organizations in 2015, pushing cyberrisk up three spots from last year to the third-greatest risk.

The Top 10 Risks for 2015

The top 10 risks identified in the annual risk survey, along with the percentages of respondents who identified each risk as having a “Significant Impact” on their business, were:

1. Regulatory changes and heightened regulatory scrutiny may affect the manner in which our products or services will be produced or delivered (67%)

2. Economic conditions in markets we currently serve may significantly restrict growth opportunities for our organization (56%)

3. Our organization may not be sufficiently prepared to manage cyber threats that have the potential to significantly disrupt our core operations and/or damage our brand (53%)

4. Our organization’s succession challenges and ability to attract and retain top talent may limit our ability to achieve operational targets (56%)

5. Our organization’s culture may not sufficiently encourage the timely identification and escalation of risk issues that have the potential to significantly affect our core operations and achievement of strategic objectives (51%)

6. Resistance to change may restrict our organization from making necessary adjustments to the business model and core operations (49%)

7. Ensuring privacy/identity management and information security/system protection may require significant resources for us (52%)

8. Our organization may not be sufficiently prepared to manage an unexpected crisis significantly impacting our reputation (46%)

9. Sustaining customer loyalty and retention may be increasingly difficult due to evolving customer preferences and/or demographic shifts in our existing customer base (48%)

10. Our existing operations may not be able to meet performance expectations related to quality, time to market, cost and innovation as well as our competitors (46%)

The survey also identified differing perceptions of the current risk environment between boards of directors and members of the executive team. CEOs and boards of directors reported more optimism about risk issues, while CFOs and chief audit executives perceived a more risky business environment.

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“Given encouraging signs in the economy, we’ve observed an overall shift in focus from macroeconomic risks to operational risks, which had the greatest increase in risk scores from 2014.

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Notably, however, CEO respondents remained extremely focused on macro trends affecting their business,” Beasley said.

Check out the infographic below for more of the study’s key findings:

Protiviti Top Risks for 2015