CALABASAS HILLS Calif. The Cheesecake Factory Inc. has proposed that terms on its board of directors be reduced from three years to one as part of a series of governance changes announced Monday.
The change in directors’ terms of service would be subject to a shareholder vote. Other changes in the casual-dining company’s bylaws and governance policies are being adopted after unanimous approval by the board.
Those measures include the requirement that directors be approved by a majority of shareholders. Previously, nominees who won the most votes were elected, even if their tallies fell short of a majority. The majority-vote amendment is expected to be in effect for the 2009 stockholder meeting, though the change to simultaneous election of all directors to one-year terms would not take effect until the 2011 meeting.
In addition, executive officers are now required to repay, to the extent deemed appropriate by the audit committee, whatever portion of their bonuses based on results that had to be restated because of material violations of federal reporting standards. That policy is expected to be implemented in the current fiscal year.
The governance changes follow years of litigation, government probes and internal investigations arising from the company’s policies for granting stock options. Shareholder groups sued Cheesecake Factory in 2006, alleging a breach of the company’s fiduciary responsibilities in how the options were granted. The company also was one of several investigated by the U.S. Securities and Exchange Commission for alleged option backdating. As a result, the Calabasas Hills, Calif.-based chain restated its earnings.
Earlier this year, the company’s chairman and CEO David Overton and other current and former executives and board members agreed to repay a total of $940,000 to settle the litigation.
The settlement also provided for corporate governance reforms, including a provision for recovering performance-based cash bonuses that were based on incorrect financial results.
If approved, shortening the directors’ terms on the board may appease critics such as the California Public Employees' Retirement System, or CalPERS, which in March included Cheesecake Factory among its picks as the five worst stocks. The nation's largest pension fund cited the stock’s underperformance by at least 40 percent behind peers, and also the need for a “clawback” policy to recoup executive compensation that was based on fraudulent practices or erroneous earnings statements.
In a conference call with reporters in March, a CalPERS investment official said Cheesecake Factory was among "the poster children for bad performance and bad corporate governance," and he called for the company to eliminate the staggered election of directors so that their terms would all end at the same time, making it easier for shareholders to replace board members.
Cheesecake Factory’s annual shareholder meeting is scheduled for May 22. The company operates the namesake casual-dining chain, as well as a higher-end variation called Grand Lux Cafe.