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A Split Decision for Darden Restaurants, Inc.?

In the battle over the future of Darden Restaurants (NYSE: DRI  ) , hedge fund Barington Capital just turned up the heat a notch on management by calling for the restaurant operator to split the role of chairman and CEO, positions that are currently vested in just one person, Clarence Otis, who has held both titles since 2005.

The private equity firm is pushing Darden to spin off its Red Lobster and Olive Garden chains and is being joined in the effort by fellow hedge fund Starboard Capital. They've been taking turns ganging up on the restaurant as it's rebuffed the larger message of reform they're pushing and only agreeing to what they would deem to be half-measures.

Where the hedge funds would like some form of a split between restaurant concepts along with the creation of a real estate investment trust to house Darden's valuable properties, the restauranteur has said it's only willing to shed the Red Lobster chain, as Olive Garden still has significant turnaround possibilities that would work well with the smaller concept chains it recently added to its portfolio.

That led Barington to charge that management's plan was "incomplete and inadequate," while Starboard chimed in a few days later with a letter to management telling it to take a timeout and view the realignment holistically. Management again rejected the advice and said it was plowing ahead. Now Barington is back calling for Otis to give up control, though it's not sure whether they think he should have any role at Darden.

One of the reasons usually provided for splitting the role of chairman and CEO is greater independent oversight. The chairman is tasked with ensuring that the company is operated in a manner consistent with the long-term objectives of the board, but when that power is vested in one person charged, distinctions become blurred and conflicts of interest arise. 

While some recent studies suggest that cleaving the two roles has little to no impact on performance and, in fact, could work against a company, others note that beyond just simple returns, companies with independent chairman tend to adopt more good governance policies.

Yet the dual role is increasingly becoming a point of contention between shareholders and their companies. Teen retailer Abercrombie & Fitch (NYSE: ANF  ) , which is itself tussling with an activist investor, just announced the other day it was separating the CEO and chairman roles, seemingly ceding the argument made by Engaged Capital that the man who held both positions, Michael Jeffries, had too much control. Last year oil and gas firm Hess (NYSE: HES  )  also agreed to split the titles following a battle with Elliot Management, and others have followed suit.

Some companies, such as Symantec, voluntarily divvied up the roles,while others, such as EMC, are battling shareholder efforts to breakup the positions. Then there are those such as Accenture and Fortinet that actually joined the two positions together.

Jamie Dimon has held both titles at JPMorgan Chase (NYSE: JPM  ) since 2006, and when shareholders agitated last year to split the roles, he stomped his feet and said he'd quit if he couldn't be completely in charge. He ended up winning the day, and the investment giant rewarded him by handing him a 74% pay hike for 2013, raising his pay to $20 million despite mounting regulatory investigations and lawsuits. 

Barington contends Darden has been a "poor steward" of its assets over the past five years, leading to disappointing performance, both in its stock price and its financials. Calling management "bloated and bureaucratic," it's advocating the CEO-chairman split as a means of making the restaurant chain less sclerotic.

That Darden Restaurants has moved to spin off Red Lobster shows it knows there's something wrong at heart, but with the hedge fund operators running game on management, taking turns pummeling the restauranteur, it would seem they will wear it down to the point it will want to tap out.

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Read/Post Comments (5) | Recommend This Article (2)

Comments from our Foolish Readers

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  • Report this Comment On February 02, 2014, at 9:11 AM, JAF5460 wrote:

    We lets see why is the Olive garden failing? Could it be that nothing is made from scratch like in the early 1990's or that they only server the dinner menu on Sat and Sun. Not everyone wants a $40.00 bill for lunch and a small portions. How about getting offered wine at 11 am every time you go? How about all the free refills on the bread sticks and soup, when they come back over to your table to ask u. Could it be the new chairs are very uncomfortable? How about when u first opens you catered towards the retired and older crowds who time for lunch and took the grandkids they were watching for the day. Could it be the cheapest thing it cost the restaurant is the pasta and that is the most portioned controlled item? Did u every eat a bowl of pasta it has about 6 oz. Go back to your roots and you will succeed again.

  • Report this Comment On February 02, 2014, at 12:47 PM, Howdie wrote:

    Let Red Lobster and Olive Garden go bankrupt. They are boring. There are too many. The quality and value has gone down hill. You might as well nuke TV dinners are home; it would taste about as good.

    How many Howard Johnson restaurants were there 30 or 40 years ago? A Gazillion. How many are there now? Two. OG and RL will go the same way.

  • Report this Comment On February 02, 2014, at 4:34 PM, imDanielle2 wrote:

    Keep milking these restaurants for what they can before filing for bankruptcy and leaving creditors out in the wind while being owed millions.. No worries, Republicans like "Capitalism" and this kind of behavior is OK to them! Oh, at the same time the employee's will not receive their last pay checks, they will lose their jobs and benefits but I am bet you that the CEO's will still walk away with their bonus's even after filing for bankruptcy protection! Exactly what happened to Hostess and we see how that has worked out now ..

  • Report this Comment On February 03, 2014, at 9:51 AM, JazmanToo wrote:

    What's with the constant negative stories about Red Lobster and Olive Garden? They have their problems, but its beginning to look like there is some short selling going on in the market.

  • Report this Comment On February 03, 2014, at 10:45 AM, TMFCop wrote:


    It's not so much "negative" articles about the two chains (at least not from me), but a description of the reality of their operations and the battle for the soul of the company that runs them. As I recently wrote, same store sales at RL have plunged and OG is only slightly better so it's tough to write what could be seen as a "positive" story.

    No doubt short-selling is prevalent, but that would be on Darden itself, not on the chains, and would have no bearing per se on whether people dined there.



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Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


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