Fitch Comments on Reconstituted Darden (DRI) Board; New Slate Removes Some Uncertainty

October 14, 2014 10:42 AM EDT

The ousting of incumbents on Darden Restaurant, Inc.'s (NYSE: DRI) board of directors by activist shareholder Starboard Value LP is more a valuable lesson in corporate governance than an amazing feat by dissident investors, according to Fitch Ratings. Shareholders last Friday elected all 12 Starboard directors to Darden's board.

The vote provides a clean slate and removes some of the uncertainty caused by a drawn out proxy battle. Darden could look like a different company two years from now with new executive leadership, fewer brands and less real estate ownership. In terms of credit quality, the verdict is still out given the tendency for activists to increase leverage and seek short-term gains over long-term value, Fitch says.

Darden's recent stock price performance left the firm vulnerable to dissident investors. The company's total return was 0.6% over the two-year period ended Sept. 30, 2014 versus 25.2% for the S&P 500 Restaurant Index. Darden's industry leading $2.20 dividend, which Starboard says it will strive to maintain, was not enough to solidify shareholder support for Darden's long-time board and executive management team.

Deficiencies in the former Darden board were less obvious than its equity performance. Members of the board were mainly independent. As shareholders, directors like management were incentivized to make decisions in the best interest of stakeholders, and director responsibilities were clearly outlined. However, Darden's board was not staggered, leaving the group vulnerable to full turnover. In addition, the chairman of the board and CEO positions were held by the same person, which concentrated power and potentially influenced the objectivity of board members. Furthermore, although there was a balance of skill sets, Darden's board lacked in-depth restaurant managerial experience.

Darden's reconstituted board is highly qualified with deep restaurant industry experience, positioning the company to move forward with a fresh set of eyes. Members include Bradley D. Blum, former President of Olive Garden from 1994 through 2002; Charles M. Sonsteby, former CFO of Brinker International, Inc. - the operator of Chili's Grill & Bar; Alan N. Stillman, the founder of T.G.I. Fridays and Smith & Wollensky; and Jean M. Birch, former President of IHOP Restaurants, Romano's Macaroni Grill and Corner Bakery, who also held senior leadership positions at YUM! Brands, Inc.

Although Darden's Brand Renaissance plan for Olive Garden may be starting to gain traction, significant work still needs to be done to drive sustainable same-restaurant sales growth.

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Fitch Ratings, Standard & Poor's, Dividend, Starboard Value