MCD McDonalds Corp

William Ackman's large stake in Chipotle Mexican Grill Inc. adds pressure to the struggling burrito chain that has faced longstanding shareholder concerns about the board and executive pay.

Judging from the stock bounce Wednesday morning, investors welcome the move by Mr. Ackman, whose Pershing Square Capital Management LP late Tuesday disclosed a 9.9% stake in the company. Chipotle shares rose more than 5% in morning trading.

Chipotle is still reeling from a series of food-safety problems last year, including a case of salmonella in Minnesota, E. coli in several states, and norovirus in California and Boston. Its strategy to lure back customers with free burritos and free children's meals doesn't appear to be working, while its new loyalty program hasn't kept restaurants full.

"Most of our loyal customers have returned but not at the same frequency," Chief Financial Officer Jack Hartung told investors in July, when the chain reported that same-store sales in the quarter ended June 30 dropped 24%.

Chipotle's shares have fallen more than 40% in the past year.

Mr. Ackman, who has previously taken stakes in well-known consumer brands that fall on hard times said in the regulatory filing Tuesday that he would seek talks with Chipotle about costs and the board, among other topics, without being more specific.

Chipotle spokesman Chris Arnold said the company had its first call with Mr. Ackman on Wednesday and that he expects a meeting with him soon. "We certainly welcome the opportunity to engage in conversation with Mr. Ackman, just as we do with all of our investors," Mr. Arnold said.

Mr. Ackman's past involvement in restaurant companies has revolved around financial and structural changes. He has also called on other companies to shed noncore brands, which is something analysts expect him to do at Chipotle, which owns a small Asian chain called ShopHouse and has announced plans to open an upscale burger chain.

In 2005, Mr. Ackman called on Wendy's Co. to spin off its Tim Hortons coffee chain, which the company did the following year.

Also in 2005, he pressured McDonald's Corp. to separate its company-owned stores from a holding company for real estate and franchised restaurants. McDonald's franchised more stores and bought back stock, but didn't sell its real estate.

Pershing Square helped private-equity firm 3G Capital take Burger King public in 2012. In 2014, Burger King purchased Tim Hortons with the help of Warren Buffett in a deal that lowered the burger chain's tax basis.

Analysts and investors also expect Mr. Ackman to push for board changes, including a possible seat for his firm. Chipotle's board earlier this year was criticized for its directors' lack of experience in dealing with the type of crises that can befall restaurant companies.

Proxy advisory firm Institutional Shareholder Services in April recommended that shareholders vote against the re-election of two Chipotle board members, saying the chain's food safety problems "exposed a flawed board succession process that has not allowed the directors' skill sets to keep pace with the company's size and complexity."

The board is made up of nine directors, five of whom have served for 17 years or more. Three directors are over 70 years old. And it is chaired by Chipotle founder and co-CEO Steve Ells.

At Chipotle's annual meeting in May, the targeted board members were all re-elected, but shareholders approved a nonbinding proxy-access proposal that would give an investor group that has owned 3% or more of Chipotle's shares outstanding for at least three years the ability to nominate its own board candidates. That beat out Chipotle's more restrictive proxy-access proposal.

Mr. Arnold, the Chipotle spokesman, said Wednesday that Chipotle may make additional changes to its board and that it is in the process of adopting new proxy access provisions.

In his filing Tuesday, Mr. Ackman praised Chipotle for its "visionary leadership," but some analysts don't think that means he wants Mr. Ells to stay.

"No one can disagree that Steve is visionary, but it doesn't mean he's right for the job going forward," Hedgeye Risk Management analyst Howard Penney said.

Shareholder groups have been pushing for changes to executive compensation for two years.

In 2014, 77% of Chipotle shareholders opposed the company's compensation terms in a nonbinding say-on-pay referendum after CtW Investment Group, a union-backed pension-fund firm, encouraged shareholders to vote against a pay package of $49.5 million for its two CEOs.

Chipotle pledged at the time to review its compensation programs. Chipotle's compensation committee in March moved to tie executive compensation more closely to its share performance, dictating that shares would have to return to above $700 for 30 consecutive days to trigger new stock awards. The company also said last month that it has begun looking for a new board member.

Total pay for co-chief executives Monty Moran and Mr. Ells last year fell by more than 50% each to $13.3 million and $13.6 million, respectively, and they didn't receive bonuses. But the declines in compensation stem mostly from a lack of option awards in 2015.

Some shareholders don't think the company has gone far enough.

"It's like a startup board, but the company has matured," said Dieter Waizenegger, executive director of CtW Investment Group, which represents pensions that collectively own about 55,000 Chipotle shares. "They should appoint an independent chairman to the board and break out of their insularity."

Write to Julie Jargon at julie.jargon@wsj.com and David Benoit at david.benoit@wsj.com

(END) Dow Jones Newswires

September 07, 2016 14:27 ET (18:27 GMT)

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