Weekly Puzzle #2: Corporate Governance
Set up: A couple of weeks ago, Shake Shack, the burger/shake chain that was founded in New York, went public to lots of fanfare. Whether due its hometown advantage (since many of the bankers and traders who priced it are New Yorkers) or the superiority of its products (though as a chocolate shake connoisseur, I find its shakes to be over priced and underwhelming), the company's stock price almost doubled on the opening day. As its founder/owner, Danny Meyer, collected kudos, there was one sour note, which was the structure of voting in the new company and how it was tilted towards the founder. It is a good case study in whether corporate governance matters in a young company, especially when it is viewed as well managed and run by a charismatic CEO.
This Bloomberg story encapsulates the issues with corporate governance at Shake Shack, with the differences in voting rights. It also gives you the perspective of why the company's managers think it is okay.
This document lays out the rules that will govern how the board of directors will be chosen at the company.
Finally, here is the full prospectus, if you feel reading it (and especially if you want to read the secret tax provision that the Bloomberg story refers to):
1. If you are the founder of a company, taking your company public, make your best argument for having different (fewer or no) voting rights for those who buy shares in the IPO versus the voting rights (more or all) you retain with your holding?
2. If you are an investor in this company, what effect will different voting rights have on whether you buy the company or price it?
3. Should shares with different voting rights be legal? If yes, what is the justification? If not, why not?