Shake Shack

May 27, 2023

Average cost: n / A Activist Comment: Engaged Capital was founded by Glenn W. Welling, former Principal and Managing Director of Relational Investors. Engaged is an experienced and successful small cap investor and makes investments with an investment horizon of two to five years. His style is to hold management and boards accountable behind closed doors. What is happening? Shake Shack has entered into a cooperation agreement with Engaged. As part of the deal, the restaurant chain has named Jeffrey D. Lawrence, former chief financial officer of Domino’s Pizza, to its board of directors and has agreed to work with Engaged to identify an additional mutually-agreed independent director. to be appointed to the Shake Shack Board of Directors with experience in restaurant operations. . In the wings Shake Shack is an iconic fast-casual restaurant founded by culinary visionary, Danny Meyer. Through Union Square Hospitality Group, Meyer has founded and operated some of the most critically acclaimed fine dining restaurants in the world for many years. Over the past 20 years, he and his team have grown one of the nation’s largest casual burger restaurant chains, Shake Shack. They went public with Shake Shack in 2015 with 63 restaurants and expanded to 436 restaurants in eight years. Much of the management team came from Union Square Hospitality Group and the fine dining industry. Perhaps most notably CEO Randy Garutti has worked with Meyer for a long time and served as general manager of Union Square Café and Tabla in New York. The problem is that the same skills required to build a brand and run high-end fine dining restaurants are not the same skills needed to operate and scale a quick service restaurant. In fact, some might say it’s the complete opposite skill set. As a result, Shake Shack restaurant margins have shrunk 790 basis points since 2018, and business return on capital has fallen from over 30% to less than zero today. As a public company, Shake Shack has significantly underperformed both the market and its peers. The good news is that the hardest part – creating an iconic brand – has already been done. Few people can do that. The easy part – scaling an already strong and growing brand – has been done by countless people, many of whom are available to do it again. This means getting a board of directors that is focused on building a management team with experience operating and expanding quick service or casual dining restaurants and holding that team accountable if they are not successful. not. To that end, Engaged announced that it had identified three new director candidates and was pushing for the company to retain an operational consultancy. One such nominee, Kevin Reddy, has extensive experience operating and growing restaurant chains like Chipotle. Another candidate is a co-founder of Engaged, and the other is an experienced advisor and consultant. Because the board is staggered, only four of the 11 directors are up for election this year. This is just the tip of the iceberg of the challenges Engaged faces in this campaign, as it is as bad a corporate governance structure as we have seen in a public company. Meyer controls just under 9% of the company’s stock, but he has special rights to the company’s stock that far exceed his economic ownership, including (i) the ability to appoint five directors; (ii) the ability to appoint 50% of the members of each board committee; (iii) the hiring or firing of the CEO; and (iv) increase or decrease the size of the board. In other words, it’s Meyer’s company and only he can bring about meaningful change. As a result, it’s a crusade of persuasion for Engaged. Engaged had the opportunity to participate in a proxy contest and ask shareholders to replace three outgoing directors, including the CEO, with new directors. While that wouldn’t have given Engaged or the new board the power to undo whatever Meyer and his incumbent directors wanted, it would have sent a strong message to them that shareholders expected change. Instead, Engaged settled for one admin who wasn’t even one of the three offered and a second to be agreed, who probably won’t be one of the three offered either. business. This is a definite win for the company because there is very little a director can do on a board like this. This allows Engaged to claim a win, but the company is still dependent on Meyer’s decisions, and she lost a valuable opportunity to send a message to management. This effectively changes nothing and no longer gives Engaged the power to institute the changes it has so astutely identified to create shareholder value. Identifying problems is one thing and having a path to solving them is entirely different. The path here is entirely controlled by management. Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist investments. cnbc Business Not all news on the site expresses the point of view of the site, but we transmit this news automatically and translate it through programmatic technology on the site and not from a human editor. William 21 mins ago