Industry News | May 28, 2010

An Inside Job

Every public company likes to hear that investors are buying its shares. But when an investor’s purchase comes with strings attached, that’s another story. In January, the Humane Society of the United States (HSUS) announced that it was buying shares in Domino’s Pizza, Steak ’n Shake, and Jack in the Box with the intention of using its position to influence the quick-service chains toward products and practices that meet HSUS standards.

In this case, the HSUS wants these companies to move away from suppliers that confine pigs to “gestation crates” and chickens to “battery cages,” and that slaughter fully conscious animals.

“This is a strategy that we and other organizations have used with great success in the past. We have purchased stock in 39 companies ranging from McDonald’s to Tyson Foods,” says Matthew Prescott, corporate outreach director for the HSUS. “But it’s part of a process as we work with corporations to become more aware of animal welfare.”

Prescott says when the organization finds a food supplier that does not and has no interest in conforming to its animal welfare guidelines, it will approach the corporate clients of the supplier to see if it can pressure the supplier to change its policies.

“We’ve found that most end users will work with us privately on the issue, and changes are made,” Prescott says. “However, if they don’t want to work with us, we take the next step.”

The next step is to call a stockbroker to purchase $2,000 worth of shares in the company. The HSUS purchases $2,000 in shares because that’s the minimum amount an investor can hold in order to make a shareholder resolution demanding the company act on an issue.

“When we file a resolution, we’ll work closely with the corporation’s major institutional investors to let them know about our concerns and to make a business case for why voting for our resolution will improve the corporation’s bottom line,” Prescott says.

In Domino’s case, spokesman Tim McIntyre says the corporation received two e-mails from the HSUS, the second saying the organization had bought shares in Domino’s Pizza.

“We told them we work with some of the best suppliers in the world that meet or exceed government guidelines,” McIntyre says.

Stuart Morris, a restaurant consultant for QSR Consulting Group and a former executive with PepsiCo, Pizza Hut, and Taco Bell, says ultimately this type of Wall Street strategy by interest groups will affect Domino’s and others in the quick-serve industry.

“If you don’t respond to the concerns of a powerful and legitimate interest group, there’s usually not a good outcome for you,” Morris says.

Morris points out that when public sentiment favors the interest group, it usually wins. “That’s their objective, to shine a light and let customers know that you purchase your beef and chicken from suppliers that use cruel and inhumane farming practices,” he says. “If you’re doing that, you’re going to be perceived as not being a good citizen.”

The best way to counter an adversarial shareholder situation is to talk, Morris says.

“Listen to their concerns and let them know your limitations,” he says. “In a best-case scenario, you establish a timeline showing when certain standards are met.”

Morris says this was used by McDonald’s after the company faced criticism regarding its use of oversized drinking cups.

“They established a timeline showing when this situation would be improved,” he says. “This is because in most cases, the company can’t turn on a dime. There are contracts that are in place or inventory that needs to be used before suppliers can be changed or before they can make changes to their operations.”

Creating a reasonable timeline also helps deal with higher supply costs. “When you have time, you can look for places to cut costs in order to make up for increases from your supplier,” Morris says. “When a company is targeted in this type of situation, it may try to stand up to them at first, but eventually you have to give in. What works best is if you give in, but on your own terms.”

In the meantime, Domino’s says it will uphold its responsibility to its shareholders. “Our job is to provide the best return on investment for our shareholders,” McIntyre says. “As a shareholder, the Humane Society can be assured that we’re working to give them a good return.”

By John Morell
News and information presented in this release has not been corroborated by QSR, Food News Media, or Journalistic, Inc.