Last week, shareholder activism showed just how far it’s come when Starboard Value LP won a decisive proxy fight against Darden Restaurants, Inc. (NYSE:DRI)’a now-former management, replacing the entire board with its own nominees. Darden’s decision to sell Red Lobster earlier this year despite heavy shareholder opposition played a big role in the board’s replacement, but according to proxy solicitor Bruce Goldfarb, the President and CEO of Okapi Partners, we may be seeing more results like it in the coming years.
“Shareholders overwhelmingly indicated that they wanted to vote on any transaction involving Red Lobster. That consent campaign in many ways galvanized investors who just wanted to have an ability to make decisions about this company. The company ignored the wishes of shareholders to have a vote, and they sold Red Lobster for what turned out to be very little value,” Goldfarb explained in an interview with ValueWalk.
Darden – Counting the votes
As proxy solicitor, Goldfarb plays a similar role as a campaign manager would in the political arena. Whether he’s working with a corporate board or activist investors (and he works with the former more often than the latter), he helps his client understand who a company’s shareholders are, what issues they care about, whether they rely on shareholder advisory services like ISS and Glass Lewis, and anything else that might impact their votes. In some cases he even vets candidates for a proxy fight, but the exact job requirements vary from client to client.
Okapi also tracks voting throughout a campaign, making Goldfarb one of the first people to know with some certainty that Darden Restaurants, Inc.’s (NYSE:DRI) board was on the way out.
“You never know how a result will come in until close to the end, in part because these campaigns are very dynamic. A company could take action prior to the election that could change the results, but as the meeting date approached it became pretty clear that Starboard’s nominees were going to get very high support and we certainly knew before the polls closed that Starboard’s nominees were going to win every seat,” says Goldfarb.
Darden – Corporations taking action preemptively
By now, most corporate boards realize that market cap is no obstacle to dedicated activists if their performance is lacking, and placating activists with a couple of board seats doesn’t look like it will be enough in the future either. In the past, institutional shareholders might have supported one or two seats for activists, figuring that there was no harm in letting them have a voice in corporate activity. But this conservative approach is giving way to more engaged shareholders (not just the activists themselves) who really want to put together the best possible management team instead of differing to the people already in place and hoping for the best. Wholesale changes like we’ve just seen at Darden Restaurants, Inc. (NYSE:DRI) may not be quite as extraordinary if underperforming boards aren’t able to pick up the slack.
For their part, more and more corporate boards are reacting to this change by tackling problems on their own, anything from corporate governance and compensation packages to simply not having a great IR strategy, instead of waiting for activists to come calling.
“Clients have a heightened interest in how their investors think and behave, in part because investors have also become more dynamic in their dialogue,” says Goldfarb. “We’ve found that the interest level on the corporate side for engagement over the last three years especially has picked up. Some of that has to do with say-on-pay and compensation issues and some of it has to do with the recognition that better communicating plan and strategy can be a way of preempting potentially disruptive election campaigns.”