A Split Decision for Darden Restaurants, Inc.?

Two really is better than one when it comes to running the business.

Feb 1, 2014 at 3:45PM

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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