Activist Overthrows Entire Darden Board
of Directors: What It Means for Senior Managements
Starboard's 100 percent replacement of Darden Restaurants' board is a
landmark activist event. Never before has any board been wholly thrown
out of office absent a fundamental financial or operational meltdown.
There is little doubt this will embolden activists, and likely
stimulate one-upmanship among Starboard competitors. In fact, one can
credibly argue that activists were emboldened even before the outcome
of the Darden imbroglio was known. Following Labor Day, an abnormally
high number of companies across all spheres of size and success
received private overtures from activists. Many of these requests
contained the same essential message: Undertake to return cash to your
shareholders right away, or break up your company or we will take our
message public. The timing of this type of request—and the embedded
threat—is that if the company fails to respond, the activist has
plenty of time to present a competing slate of directors before the
target's next annual meeting.
More fundamentally, activism has become a major, permanent investment
asset class, and activists no longer target only underperforming or
mid-cap companies. In fact, it is not hyperbole to say that almost any
company is a potential activist target today.
And so, in all meaningful respects, the annual meeting season has
The question is, what to do now?
The Darden situation is not alone in teaching that the conventional
holy war defensive playbook is ineffective and out of touch. Instead,
a more nuanced approach can often be orderly, constructive, and even
insightful. Here is our perspective on pursuing a more thoughtful
First and foremost, know thyself. You and your advisors should
spend real time looking at your company through activists' eyes. It
has been said that activists are "value investors on steroids,"
ruthlessly economically rational. (They have egos, too.) Assess your
company against its peers, and then assess it in isolation. Have you
truly achieved organic growth? Has your capital investment strategy
paid off as expected? Are you fully putting your balance sheet to
work? Once you've done this, schedule time—lots of it—with your
board. More on this later.
Second, take a fresh look at how you present your company. Does
your road show stump speech really precisely reflect your company and
its opportunities, or has it become rote? Do your disclosures do your
company justice? Most critically, are you taking on key activist
themes—most importantly, smart capital allocation?
Third, cultivate the right shareholders. There are two
important points here: that you do in fact cultivate, and that you
should be clear-eyed and plainspoken about who should be
your shareholders. Reach out to your shareholders, and not just at the
IR level. Senior-most management and, in the right circumstances,
board leaders should spend quality time with your most significant
shareholders before you ask for their vote. Don't let your
lawyers thwart prudent engagement by reflexively pulling out the
Regulation FD yellow card; it is not a barrier to engagement, and
particularly not a barrier to actually listening. Also, if someone has
entered your stock with an investment theory that doesn't fit, you
should say so. Over time, you can influence who's invested in your
Fourth, eliminate governance issues that invite unwelcome scrutiny.
If you have underperforming directors (low meeting attendance, long
tenure, underwhelming résumés) or governance practices that are
outdated, clean them up. Any perceived governance "foot faults" will
be used by activists, with the support of proxy advisory firms, to
gain traction on the theme that your board just doesn't get it. This
does not mean that you should immediately embark on dismantling every
defensive measure you have in place, but it does mean you should
retain only those as to which you have a principled—and recently
Fifth, maintain a pool of well-qualified, independent, and
available potential director candidates. This is hard. However,
our experience has been that when an activist comes calling seeking
board change, companies often can achieve a private resolution by not
only considering the activist's candidates on the merits, but also by
creating a successful compromise that includes one or more of its own
new director candidates. Activists want change, and may be agnostic
about who embodies that change, as long as it is scored as a win for
them. It is important to note here that activists have substantially
lifted their game in terms of the caliber of board candidates they
nominate. (Witness the Darden slate—the dissident nominees had
credible senior-level industry experience, as well as significant
diversity.) Often, activist candidates who hail from the corporate
world prove to be hardworking, properly motivated directors and even
committee chairs at the invitation of their fellow board members. But
again, just in case activists nominate candidates who are of a lesser
caliber or a wrong "fit" with your board, you should be prepared to
counter with a few names of your own.
Last, and most important, actively engage with your board on
activism. There is, of course, a meaningful risk that a divide
will open up between management and the board in an activist situation
because the board will inevitably feel that it is, or is likely to
become, a target at the very time that it is important that management
and the board work together for the long-term benefit of the company.
Management has to be mindful of this and be responsive to director
requests but, most important, have laid the foundation so that the
board is not thinking through how to respond after the activist has
shown up. That's too late. Open dialogue and the introduction of PR
and other appropriate advisors to the board are critical to avoiding
an urge that directors need to take control of the situation.
When the activist reaches out, remember the adage "Kings to Kings." Do
not poke the activist in the eye with a sharp stick, as it will have
the expected reaction. This is the ego point already mentioned.
Instead, implement a cordial but escalating series of interactions: IR
to analyst, CFO to managing director, CEO to principal. There are, or
should be, no hard and fast rules regarding meetings with board
members, other than that they are not casual events. Ideally, they
should be used to bring to closure any preliminary agreements between
the activist and the company. In any event, all of these meetings
should be characterized by ample preparation, good listening, and a
lack of defensiveness.
Moreover, we urge companies to use caution and restraint when
considering activists' requests to appoint new board members, return
cash to shareholders, or take other significant actions. We agree with
the statements made by Ken Moelis, whose advisory firm has represented
both activists and targeted companies, in that some companies may be
acting too hastily in acceding to activists' demands, which demands
may be buttressed by premature or ill-considered advice from
investment bankers. But that only works if other steps of a type
outlined above have been taken.
We may decry the short-termism inherent in the activism worldview, but
the reality is that the market has spoken. Activist investors are here
to stay. They have lifted their game. It is time for Corporate America
to do the same.
For further information, please contact your principal Firm
representative or one of the lawyers listed below. General email
messages may be sent using our "Contact Us" form, which can be found
Lyle G. Ganske
Robert A. Profusek
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