On the Margin
SEC says McDonald's shareholders should vote on franchisee proposal

Should franchisees get a seat on McDonald's board?

Blog: Franchisees operate more restaurants, but few companies give them board seats

This post is part of the On the Margin blog.

Franchisees are running an increasing number of the country’s restaurants. So should they have a say in running the actual companies? 

It’s a question shareholders at McDonald’s Corp. could get a chance to decide, after the Securities and Exchange Commission last week said the company had to let shareholders decide on a proposal to let franchisees pick a board member. McDonald’s has appealed the decision.

The proposal came from shareholder Segal Marco Advisors, a firm that works with large investors like pension plans. The proposal, which few expect to be approved, would nevertheless have big implications for a restaurant business increasingly operated by franchisees. 

“Any time McDonald’s moves, it creates precedent,” said John Gordon, a restaurant consultant who has long advocated for franchisee board representation.

Under the proposal, franchisees would get a special class of stock and would vote on a person to represent them on McDonald’s board of directors. It’s a proposal unique to corporate governance in the U.S., said Maureen O’Brien, vice president and director of corporate governance at Segal Marco. 

“McDonald’s doesn’t have much franchise experience on its board,” O’Brien said. “We really think, given it comprises such a huge part of the success of the company, there needs to be somebody on the board who is familiar with the challenges and issues that franchisees have.” 

McDonald’s, for its part, gives franchisees some say in many of the company’s initiatives. The company itself said in a statement that its franchisees have plenty of communication with the board and management. 

“The board has a fiduciary duty to act in the best interests of all shareholders,” the company said. “In selecting director candidates, the board seeks individuals who, among other things, display the independence of mind and strength of character to effectively represent the best interests of all shareholders. Existing robust lines of communication already exist between the board, management and franchisees, and all stakeholders are able to communicate directly with the board.”

Franchisees operate a growing percentage of the country’s restaurants, a long-term trend dating back at least two decades. As of 2015, according to Nation’s Restaurant News data, franchisees operated 76 percent of the restaurants in the 100 largest chains. That was up from 75 percent two years earlier.

Investors have pushed brands to sell company stores to franchisees. Applebee’s, IHOP, CKE Restaurants Inc., Yum Brands Inc., TGI Friday’s, The Wendy’s Co., Burger King and many others have all sold off company stores. McDonald’s is in the process of doing so, with plans to have 95 percent of the company’s restaurants franchisee owned by 2018.

Yet few companies go so far as to put franchisees on their boards.

Bojangles’ Inc., and Famous Dave’s of America Inc., both have operators who serve on the board. CKE Restaurants Inc., a private company, has had franchisees on its board for years — including its time as a publicly traded company a few years ago.

“They're great additions and have been meaningful contributors,” CKE's CEO, Andy Puzder, told me in 2015. “Plus, the franchisee community feels more involved and confident in how the company is run.”

Gordon believes that companies have feared giving up control, which has kept more of them from putting franchises on their boards. “There’s always this us-versus-them mentality,” he said. “There is a fundamental fear baked into the franchisor DNA that somehow they are going to lose control.”

Gordon believes that putting franchisees on the board could improve communications between brands and their operators. He also believes it would promote internal ownership of the company, while also giving the board a more long-term focus. 

“It could create a larger pool of committed shareholders over time, as opposed to mercenary ownership who might not be invested in the brand.”

O’Brien, for her part, acknowledged that McDonald’s and its franchisees do communicate regularly. But her firm’s proposal would elevate that line of communication, putting the operators on more of an equal footing with the company.

“McDonald’s has some experience, with directors from different countries, and it certainly has a diverse board,” O’Brien said. “It just seems like this is an obvious piece of experience that the company is missing.”

Few, however, ultimately see the proposal winning. Shareholders and franchisees are different constituents whose goals might not always coincide with one another. Concerns that shareholders’ own votes could be diluted under the proposal might keep them from giving it the go-ahead.

And there are other potential landmines in the idea of franchisee board membership. Richard Adams, a former franchisee turned consultant, believes there would be intense pressure on the franchisee who received that seat. 

“The political pressure on such franchisees would be unbearable,” he said. “If the franchisee doesn’t support the CEO’s direction it’s going to impact the way the franchisee is treated by McDonald’s employees in the field. 

“And, if the franchisee representative appears to be getting any perks from corporate they will become distrusted by their fellow franchisees. It’s an impossible position.”

Jonathan Maze, Nation’s Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company.

Contact Jonathan Maze at [email protected]

Follow him on Twitter at @jonathanmaze

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