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On Big Macs and Flak Attacks

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Controversy and backlash can blindside your stocks when you least expect it, leaving shareholders to pay the price. Just ask McDonald's (NYSE: MCD  ) , which has stumbled into a regulatory slugfest in California.

Not so happy anymore
The Happy Meal is one of the fast-food chain's best-known items. But Mickey D's burgers and fries aren't exactly healthy fare, and the Happy Meal is targeted squarely and heavily at little kids. Apparently, that didn't sit well with San Francisco's Board of Supervisors, which has voted to prohibit McDonald's or any other restaurant from packaging toy giveaways alongside meals that exceed set standards for calories, sodium, and fat.

For years, news headlines have trumpeted the legitimate health risks of obesity in America, especially among children, so it's no surprise that McDonald's, Yum! Brands (NYSE: YUM  ) , and other fast-food companies might face even greater backlash over their menu options in the years ahead. Personally, I think San Francisco's decision is absurd, since parents have always had the power to say no when their tots beg for Happy Meals.

All the same, political or consumer brouhahas like San Francisco's ruling represent a serious risk for publicly traded companies. Luckily, there's at least one good way to spot rising risks and growing public ire before they start taking their toll on your investments' sales and profits.

An SEC filing that's good reading
To see what kind of issues might gather momentum, check out the shareholder proposals in your companies' proxy statements. These proposals often reflect issues that a lot of people truly care about, and which could ultimately result in bans or consumer boycotts of companies' products.

Here are a few notable examples from several major companies' proxy statements last year:

  • Wal-Mart (NYSE: WMT  ) shareholders demanded disclosure of political contributions, a gender identity non-discrimination policy, and humane poultry slaughter practices for suppliers.
  • Microsoft (Nasdaq: MSFT  ) and Oracle (Nasdaq: ORCL  ) both faced environmental shareholder proposals after being removed from sustainability indexes compiled by NASDAQ .
  • ExxonMobil's (NYSE: XOM  ) proxy statement has a slew of predictable shareholder proposals relating to environmental issues like water, wetlands, Canadian oil sands, natural gas production, and greenhouse emission goals. However, it also includes an interesting proposal suggesting reincorporating in North Dakota, a shareholder-friendly state that's near and dear to corporate governance fans' hearts.

Is trouble brewing?
Even companies with relatively squeaky clean images, like Google (Nasdaq: GOOG  ) and its "don't be evil" motto, face serious flak on certain issues. A shareholder proposal in Google's most recent proxy statement seemingly seeks to head off privacy battles, urging the company to adopt a policy seeking users' prior consent regarding their sensitive information.

Privacy issues have become a serious hot-button issue for Web-centric companies, and Google's livelihood is closely tied to how people feel about their privacy on the Internet.

Many activist shareholders push for changes that reflect issues about which many consumers care deeply. If companies and their shareholders ignore these controversies, they can eventually devastate brand loyalty, damage sales, and hurt share prices.

Companies' proxy statements are a great way to find out the story behind your stock, and spot emerging future risks. Don't ever let a flak attack take you by surprise.

Check back at every Wednesday and Friday for Alyce Lomax's columns on corporate governance.

Google, Microsoft, and Wal-Mart are Motley Fool Inside Value picks. Google is a Motley Fool Rule Breakers recommendation. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of ExxonMobil, Google, Microsoft, Oracle, Wal-Mart, and Yum! Brands. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's highly nourishing disclosure policy comes with Tom and David Gardner action figures.

Read/Post Comments (12) | Recommend This Article (12)

Comments from our Foolish Readers

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  • Report this Comment On November 05, 2010, at 6:47 PM, midnightmoney wrote:

    Mcdonald's spokeswoman Danya Proud:

    "We are extremely proud of our Happy Meals which give our youngest guests wholesome food and toys of the highest quality. Getting a toy with a kid's meal is just one part of a fun, family experience at McDonald's."

    Spin doctress got game, no? Or some damn fine drugs. Wonder what kinda take our man over at whole foods would have on it all:)

  • Report this Comment On November 05, 2010, at 10:55 PM, roadrunning wrote:

    Happy Meals are crappy meals as far as nutrition is concerned. Nothing wrong promoting good wholesome food for our kids. It benefits us all if our younger generation which has seen an increase in diabetes type II is eating a better more nutritional meal. Thanks San Francisco for taking a stance against the big corporations who reward the kids with toys for eating a high calorie, high saturated fat meal.

  • Report this Comment On November 06, 2010, at 6:03 PM, longtermgrowth09 wrote:

    this is why you never invest in any kind of fads. a fad is something like crocs but also is something more long macdonalds,because the fast food is increasingly targeted by consumers as unhealthy(like soda), so here you have a fad. the difference between crocs and this is the timeline in which it develops. if you start thinking in that regard you can see in a general way that 30 years from now you will see a moribund fast food industry and soda industry. if you want something real buy FOOD stocks. LIKE KRAFT. thats not a fad and its not have ANY piece of issues that can be dangerous. be patience and identify the mistakes quickly or regreat it later.

  • Report this Comment On November 06, 2010, at 9:28 PM, cordwood wrote:

    Tell ya what, I don't consider MCD in anyway our food source,no more than I would "trick or treat",birthday parties,picnics, etc.Family enjoys one or two stops at MCD per month...get off of our backs bureaucratic zealot food freaks....govern your selves NOT others.

    Oh yeah,flaks in San Francisco...that figures!!

    Yes, proxy proposals should always be read re "gathering problem momentum", but winnowing down subject matter is required ,and therefore MORE IMPORTANT is the followup re the voting results!

  • Report this Comment On November 06, 2010, at 11:33 PM, kwl1763 wrote:

    I have no problem doing something like a proposed tax on high caloric/fat/salt food. It is bad for you, you should be discouraged from using it. Just banning it though or discouraging it like this is not the answer. That's a gov't running your life and telling you what you can and can't do. It's not like smoking in public which I actually do think should be banned since you are injuring others. Eating non-nutritious food is not hurting anyone other then yourself.

  • Report this Comment On November 07, 2010, at 10:04 AM, aleax wrote:

    @longtermgrowth09, basing your investment strategy on 30-years-ahead guesses (even if you call them "predictions"!-) is a big mistake warned against by every value-investing guru, from Graham onwards (the same fallacy that's behind the mathematically correct, practically useless attempt to compute a business's value as present value of long-term future returns). The bit in Allen's "Sleeper" where the future Dr. Orva reassures Woody "It's tobacco, it's one of the healthiest things for your body." should be instructive: on such a generational time scale, you just can't KNOW with any reasonable accuracy what science and/or popular opinion will have concocted or reversed compared to today's "everybody knows" stuff.

    Even if, as seems likely, fast food is hated a generation in the future, what of it? We're talking about buying part of a *business*, not "burger futures", you know!-) McD is already today doing a good job of offering healthy salad bars and coffee drinks competitive with (say) Starbucks' (but cheaper) -- their corporate health and profit need not stay tied to burgers, over decades-long horizons, any more than, say, 3M's need be to Mining, to Manufacturing, OR to Minnesota.

    And on the flip side, even though groceries and other kinds of food may probably keep thriving, it's far from impossible than KFT may nevertheless suffer over the next 30 years if competitors do a better job, ingredient costs, soar, consumers stop caring so much about brands and buy more identical store-branded "generics" (Europe, esp. Germany, shows a lot of that having happened over the LAST 30 years, already!).

    KO may actually have a better moat than KFT, in term of brand effect on consumer choices -- over 30 years, that of course is a guess too, but you can see it stirring in the air already today: if in the long run coke sales decrease 20%, but all the coke brought is still Coke brand, while mac&cheese sales increase 20%, but all of it is cheap store-branded generics and nobody pays the premium for the Kraft-branded products that give KFT their operating margins, then KFT as a business and as a stock will suffer much more than KO.

    Indeed, so many "rock-solid" blue chips have foundered over the last few generations that you'd think people would start catching on to the fact that bottom-up value analysis (focused on today and the predictable-ish range of the future, say 3-5 years, NOT on the 30-50 years range that only Nostradamus could really say anything about!-) is the only way to go. Just one example...: if EK is selling below $5, compared to the $20-40 range (split-adjusted) where the stock spent most of the last 30 years (with not a few times over 40 and a few crazy times over 80;-), it's not because consumers don't take family photos any more: they do more than ever, they just by and large use different firms' products instead of EK's (and it wasn't Polaroid's epic court victory in 1986, which forced Kodak out of the instant photography business: remember, Polaroid itself went Chapter 11 in 2001, and AGAIN in 2008...!-). "The general future of photography", even if you could have predicted it accurately 30 years ago, would have told you little about the 30-year-span fortunes of firms then synonymous with consumer's photography (and their stock), like Kodak and Polaroid... so, why waste time and energy peering into the cloudy crystal ball?-)

  • Report this Comment On November 07, 2010, at 7:40 PM, longtermgrowth09 wrote:

    @aleax. The same store generic brand can be found in soft drinks and the soft drink sales are going down 3% a year in the US. Thats a red flag. Coke will need emerging market growth to offset that drag but im not counting on any china miracle because of the corruption and so. So i can see in a general way that Kraft, Pepsico will be healthier investmens. Also, if QE2 estimulates the economy and puts on track then consumers will be willing to pay a premium for such food brands with over 100 years of history. So as long as the economy keeps growing there is no problem with kraft and the brand power(the strongest in the industry) can pass on some costs by increasing prices 3% per year (estimated inflation). So i can see very clear the picture withouth any doubt and 100% confidence.

  • Report this Comment On November 07, 2010, at 7:41 PM, longtermgrowth09 wrote:

    @Alyce Lomax. Please give me your opinion on my feelings because i like your articles and appreciate your insight and clarity. thank you.

  • Report this Comment On November 09, 2010, at 7:01 AM, TMFLomax wrote:

    Thanks for all the comments here, folks! It's an interesting topic.

    midnightmoney: Yeah I have some ideas of what our man at Whole Foods might say! Somehow I doubt he'd agree with McDonald's view of the venerated Happy Meal as you pasted there. ;)

    roadrunning: Crappy meals, that's a good one!

    longtermgrowth09: Very interesting thoughts, thank you for sharing them. I guess I would couch it in terms of consumer trends, and if healthy eating trends become very strong as opposed to the longstanding trend that people have wanted cheap, fast food (which is often unhealthy, especially in excess) that could be a problem for McDonald's. But, McDonald's has been offering healthier options on its menu, so that is a forward thinking move. It's an interesting thought, that maybe the fast food industry could be "moribund" over the very long term. It's great food for thought. I'm still overall optimistic on McDonald's, though, although I wouldn't say stuff like this doesn't matter, it most certainly is a risk that McDonald's has to contend with. I can see why you might prefer a more straightforward food stock for the long term though. (I haven't dug very deeply into KFT though; the first thought I have though, is KFT does offer a lot of processed food offerings, and that also might be more widely looked down upon if healthy eating trends become more prevalent.)

    Thanks again for all the thoughts!

    Best, Alyce

  • Report this Comment On November 09, 2010, at 7:48 PM, CMFStan8331 wrote:

    I think the issue is that political correctness aside, McDonald's doesn't believe people will actually buy a healthier, more expensive and likely less tasty Happy Meal in adequate numbers to justify the change. McDonald's has brought healthier options to the menu where they see an opportunity - salads being a prime example. While many adults will intentionally eat a somewhat less appetizing alternative for the health benefit, kids are notoriously less so inclined. And even when parents can get them to eat healthier food, there's still the problem that it's likely to cost the parents more.

    If parents have a choice of paying more for the privilege of fighting with their kids to get them to eat something at McDonald's versus a cheaper, kid-pleasing meal at Burger King, McDonald's knows they're going to lose a ton of customers. That's why the Happy Meal is still a burger and fries, in spite of the fervent protests of child health advocates.

    I suspect McDonald's will cope just fine with the SF law, since it applies to all restaurants. They might even try out a healthier meal there that includes a toy. I don't expect to see them take any unilateral action on this issue, even if it does bring more criticism, because it would almost certainly require ceding market share to competitors.

    There are situations where a strong case can be made that a company's intransigence will end up costing them dearly (political adventurism being among them) but I don't think it makes sense to say that a company should accept a reduction in market share and/or profits as a result of bowing to a politically correct concept that will not be borne out in folks' actual behavior.

  • Report this Comment On November 10, 2010, at 3:06 PM, Ironbob wrote:

    This thread and it's subsequent amount of STUPID is astounding. First of all, this is a GOOD thing for McDonald's! Why? Because not one parent is going care whether there's a cheesy Ironman toy being given away, they're going to buy the damn Happy Meal anyway! Why? Probably because they don't like a far leftist whacko Bored of Stuporvisors telling them what they should and should not do!

    So with that, McDonald's can now save the cost on the toy AND blame it on the snoopervisors! Sounds like a win to me! To whomever thinks that McDonald's is a FAD, are you really this freaking stupid????

    I hate to bust your bubble, but McDonald's has an R&D department that rivals most aerospace companies. They have a management chain and an organization that is the envy of most Fortune 500 companies and they have what every long-term successful company has--a strict process control system in everything they do.

    Trust this--if America gave a crap about Tofuburgers, guess who would be selling them more than anyone else? McDonald's has been assailed by leftist consumer guerillas in every imaginable way and through out all that, what has been accomplished?

    What's been accomplished is they are now a household brand. Ask Starbuck's if Mickey D's is a fad! Ronald McDonald is eating their lunch now!

    The only possible outcome is the same outcome that's always true for San Franciscans. They continue to be the laughing stock of the world! I have news for those whackadoodles, SF has a lot more to lose if McDonald's closes up shop then vice versa.

    If McD's was smart, that is EXACTLY what they'd do, they'd move out, tell SF to go pound sand and let the city lose out on what has to be some really sweet revenue.

  • Report this Comment On November 10, 2010, at 3:19 PM, Ironbob wrote:

    LOL, yeah food companies like KRAFT...

    Cadbury high fat eggs

    Macroni and cheese

    Barnum's animal crackers

    Cheese Nips


    Chips Ahoy


    Cheese Whiz


    Comet Ice Cream cones

    Cool Whip

    Taco Bell!

    Corn Nuts

    You know! Health food! None of this crap is "dangerous", and surely marshmellows, sugar, cream and cheese doesn't fatten you up does it!

    Man, the level of leftist communism on this topic is astonishing! I don't want nor need government to tell me what I can eat. The only reason they limit anything is that there's a buck to be made and it's usually under the guise of government "taking care of me" which is utter hogwash.

    All anyone needs to do is look at that pig Barney Frank or her Hideousness Nancy Pelosi to get a good description of what government taking care of our every need actually means.

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