Unlimited bread sticks and disappointing shares helped contribute to the demise of the entire board of Darden Restaurants, Inc. on October 10, 2014. As Steven Davidoff Solomon, a professor at the University of California, Berkeley, School of Law simply put it, “We have an epic fail, the entire board replaced, which almost never, never happens.”
Darden Restaurants Inc. is a leading full-service restaurant company with annual sales of approximately six billion dollars. Employing over 150,000 people, the company owns and operates over 1,500 Olive Garden, LongHorn Steakhouse, Bahama Breeze, Seasons 52 and other restaurants in North America. Last year, shares of Darden rose 20.6 percent after two consecutive down years, though it trailed the 54 percent advance of a broad group of restaurants. Their shares have declined 11 percent this year while the Standard & Poor’s 500 Index advanced 3.1 percent. As a result, tensions between the Darden board and shareholders increased as many shareholders pushed for change. The replacement of an entire board is an extremely rare occurrence, but shareholders have continuously been disappointed with Darden’s numbers.
Starboard Value LP, a New York-based investment advising company, owns 8.8 percent of the shares in Darden. Starboard and other shareholders criticized the Darden board for its abrupt decision to sell Red Lobster for $2.1 billion to Golden Gate Capital in May 2014, despite shareholders advising against the action. Instead, many shareholders wanted to hold onto the restaurant by creating a separate company for its Red Lobster and Olive Garden chains. Shareholders saw the sale of the restaurant as “contempt for shareholder interest” and “unconscionable.” As a result of the sale, Starboard led a campaign for the replacement of the board. Starboard criticized Olive Garden for wasting money by providing customers with unlimited breadsticks and reducing food quality in different instances, such as failing to salt the water used to cook their pasta. Starboard went as far as to write a 300-page plan as to how they would be able to increase Darden’s earnings by as much as $326 million dollars. They plan on cutting more than two hundred million dollars in costs and spinning off chains including the Capital Grille and Yard House.
Shareholders agreed with the need for change and unseated the entire board, which led Darden Restaurants’ CEO, Clarence Otis, to step down. New directors include Starboard’s chief executive, Jeffrey Smith, and a previous president of Olive Garden, Bradley Blum. Starboard has pledged several changes that include higher quality food, better customer service, simplified menu, logo change, and lower prices.
Now, these major changes raise one question: will this benefit Darden Restaurants Inc. and its investors? Hedge funds have been known for their inconsistent success because of the risks they are willing to take, so only time will tell. Starboard plans to adopt similar strategies that Brinker International Inc. used to turn around Chili’s. Brinker sold noncore brands and invested, divested real estate, and cut labor and food costs. However, the increases in sales at Chili’s have come from raising menu prices (a tactic that Olive Garden cannot implement, as its prices are already too high).
On the other hand, Starboard convinced investors that it could do the job. They will incorporate conventional and unconventional rebranding strategies to reinvent Olive Garden. Many investors, like Barington Capital Group LP, have expressed confidence in Starboard’s plan. For now, we will have to wait and see what happens in the future.