DARDEN’S LOGICAL FALLACY

Darden’s board is so desperate that it wants us to believe the company is on a slippery slope, which is also known as a logical fallacy.

A slippery slope is a fallacy in which a person asserts that some event must inevitably follow another without any argument for the inevitability of the event in question.

This argument typically assumes the following form:

1. Event X might occur or has occurred
2. Therefore, Event Y will inevitably happen

In this case, Event X is Starboard getting all 12 board seats and Darden wants us to believe it will be a destabilizing event for the company.

This is simply not true! In fact, Starboard’s independent board will provide significantly better oversight and stronger corporate governance than the Darden slate of directors.

This weeks announcement about the continued shakeup at Darden is another example of how poorly managed and desperate the company is. Currently, Starboard will be awarded four board seats and Darden will replace four other board members at its October shareholder meeting. We’d note that we believe two of the five directors that are leaving the board (Leonard L. Berry, Victoria D. Harker, Charles A. Ledsinger, William M. Lewis and William S. Simon) would have been strong members of the new Darden board, but we can certainly understand why they are leaving.

The four remaining directors are:
 Michael W. Barnes – 53 years old; 2 years on the board
 Christopher J. Fraleigh – 50 years old; 6 years on the board
 Michael D. Rose – 72 years old; 20 years on the board
 Maria A. Sastre – 59 years old; 17 years on the board

Now shareholders are faced with backing the eight directors nominated by the company or throwing out the entire board and electing the 12 directors nominated by Starboard. It’s come down to which group of independent directors shareholders want to oversee the company: Darden’s or Starboard’s? We believe Starboard’s slate is better qualified.

The person directly responsible for the aforementioned logical fallacy is the ex-Lead Director and now ex-Chairman of the Board, Charles A. Ledsinger Jr., who also publicly supported the Red Lobster spin-off. According to Ledsinger, “We believe this slate avoids many of the risks and destabilization that would result from full board turnover and giving control to a single shareholder’s nominees, particularly given the positive momentum we are achieving in Darden’s operations.” If all of Starboard’s slate is elected, why can’t the departing board members assure the transition goes smoothly?

After all, management is running the day-to-day operations, not the board!

Additionally, why should shareholders trust a board member who apparently knows he’s not going to be re-elected to the board and is effectively abandoning the company? The WSJ even challenged the company’s and Ledsinger’s credibility with shareholders in a recent article titled “Fishy Financial Disclosure at Darden’s Red Lobster.” Ledsinger would not be leaving the company if he didn’t fail to fulfill his fiduciary duties to shareholders.

Some sell-side analysts are even buying into Ledsinger’s logical fallacy. According to the WSJ, a KeyBanc analyst is quoted as saying: “We expect shareholders will like this plan as it should provide the change agents that shareholders are seeking without giving Starboard complete control.” The article also goes on to quote a Barclays analyst who called Darden’s board offering “more balanced” and a “reasonable concession, particularly along with the company’s improving results.”

Let’s be clear about a few things:

1. Massive changes are needed at DRI.
2. “Reasonable concessions” will not return the company to its former leadership role.
3. Starboard must get a majority of the board to effect meaningful change.
4. The Brand Renaissance plan at Olive Garden was developed under the watch of a soon to be ex-CEO and should be scraped because it is not the proper way forward for the brand.

On the surface, it may appear as though giving Starboard control of the company could be a destabilizing force, but an important piece of the puzzle is missing: Starboard’s plans to revitalize Darden and, more importantly, Olive Garden. While we don’t know all the details of Starboard’s plan, we’re confident it’s a better way forward for the company. The people that Starboard has retained to form its advisory group for the Darden investment are some of the very best players in the restaurant industry.

Let’s take a quick look at Starboard’s slate of directors. You have a past Vice Chairman of Darden and President of Olive Garden, the former CFO of Brinker, the Founder of Friday’s and others with significant experience in the casual dining industry.

Looking at Darden’s slate, you have long-tenured Darden directors who voted for the sale of Red Lobster, someone who ran a third-tier regional brand (O’Charley’s) into the ground the same way Otis destroyed Darden and someone running a drive-thru burger joint (Checkers) who previously served in a mid-level operations role at Burger King. Restaurant experience is important, but running a quick-service restaurant is much different than running a casual dining restaurant.

We disagree with the notion that giving control to Starboard would be a destabilizing force. In fact, it’s exactly what the company needs at this point. The next big event for Darden shareholders will be when Starboard reveals their plans to revitalize operations at the company.

In the meantime, try not to get sucked into Darden’s logical fallacy.