The Red Flag Group®

Chipotle stake demonstrates the share value of good governance

Chipotle stake demonstrates the share value of good governance

Companies that are caught in the middle of industry wide scandals face an uphill struggle to recover from both financial loss and reputational damage. For instance, Chipotle’s 2016 norovirus outbreak, which affected 400 people across 13 US states resulted in US$11 billion being wiped off the company’s market cap value. In the wake of the outbreak, the restaurant chain has been strengthening its food safety controls and introducing initiatives to bring customers back.

While the price of stock is still significantly lower than the amount posted in the same period last year, recent after-hours trading has seen the value increase by 5.8 percent. This was spurred by news that Pershing Square Capital Management, headed by Bill Ackman, purchased 9.99 percent of the organisation’s stock, valued at approximately US$1.2 billion.

Additionally, the hedge fund plans to discuss plans that aim to improve corporate governance and bring about operational upgrades at the restaurant chain, according to the Financial Times.

For Ackman, this investment in Chipotle is valuable and attractive as it is bought from a company that has a strong brand and great potential for growth. Pershing’s regulatory filing is a welcome change from previous negative campaigns against Chipotle.

This case shows the positive consequences of a company that values transparency in the midst of a crisis. Repairing consumer trust and brand reputation is easier if a company is honest about previous misconduct and is able to show that it is proactively seeking to rectify such behaviour.

One way of demonstrating this is to show that your corporate culture encourages compliance, especially if you are operating in an industry with its own set of unique risks such as the food industry.

This culture of compliance has to be built with strong tone from the top, involving senior management and executives who must set an example by embracing compliance and condemning unethical practices.