Reporter's Notebook
Darden's Jeff Smith on breadsticks and activism

Darden's Jeff Smith on breadsticks and activism

Jeffrey Smith likes Olive Garden’s breadsticks. No, really.

“It might surprise people,” Smith said Sunday on Wall Street Week, “But I actually like the breadsticks.”

Indeed, he said, Olive Garden is coming out with a line of breadstick sandwiches — they’ll be introduced in June, a company spokeswoman later confirmed, in two varieties: Meatball and Chicken Parmesan.

“We’re going to use some of that great brand equity,” Smith said.

The breadstick comments refer to publicity that came out after Starboard released a nearly 300-page report suggesting improvements at Darden Restaurants Inc. during Starboard’s epic proxy fight against the Orlando-based casual dining operator last fall.

That report included a suggestion that Olive Garden cut back on unlimited breadsticks. It got a lot of attention, to the point where it was routinely lampooned on late-night television.

The new breadstick Chicken Parmesan sandwich at Olive Garden. Photo: Darden Restaurants

It worked — Starboard won all 12 seats to the Darden board, and in the process perhaps changed how public company CEOs respond to activist investors. Yet Smith on Wall Street Week said that the breadstick issue “got blown out of proportion.”

Smith said the breadstick proposal was aimed at discipline in operations. “We were very clear that we were talking about a return of discipline at Olive Garden and Darden,” he said. “The company had lost its way in terms of discipline.”

In that case, he said, it was about ensuring that wait staff only fill baskets with enough breadsticks so each person at the table gets one, with one extra. That helps ensure the breadsticks stay warm, among other things, he said.

Still, the breadstick issue does illustrate Starboard’s investment and activism strategy. And the Wall Street Week interview was far more interesting than the breadstick reports would have you believe. (The whole interview is worth watching.)

Starboard is an experienced activist that has added or replaced 150 board members at 50 companies over the years, Smith said in the interview. And Smith himself has become “the investor CEOs fear the most.”

Yet Smith said he’s not that scary. “The overwhelming majority of CEOs we work with would say something different,” he said. “The CEO of Darden, Gene Lee, would tell you we’re fantastic partners. Feared is the word that might be used, but that’s not the way we behave.”

He said that Starboard is an “operational activist,” that look to improve cash flow and profits at the companies it targets. “We’re looking at changes so companies can be run better,” he said. And while some company executives criticize activists for having a short-term view of the companies they target, Smith said that Starboard only pushes changes shareholders want.

“If you’re going to be an effective activist, you can’t be selfish, that doesn’t work,” he said. “We are minority shareholders, usually less than 10 percent. The only way to be effective is if we’re advocating for something the majority of shareholders would like. If we see short-term and the rest of the investors are long term, we’re not going to be effective.”

Still, Smith did suggest that the Darden fight changed the way executives deal with activists.

Now that shareholders have proven willing to completely overhaul a board that doesn’t do what they want, executives and board members are treading carefully when they face an activist.

“Most companies nowadays, and certainly after Darden, believe they need to look at shareholders either as allies or people they work with,” Smith said.

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