The ouster of the entire 12-person board of directors last week at Darden Restaurants could trigger alarm bells at other companies where executives have ignored the demands of increasingly vocal shareholders, corporate governance experts say.
"It's a warning that you've got to take into account the concerns of shareholders," said Charles Elson, professor of finance and director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. "There's an election process and this can happen again—at any company."
Darden Restaurants shareholders voted on Friday to elect all 12 board nominees recommended by Starboard Value and remove the existing directors. The vote brought to an end a prolonged fight between Darden and two activist funds, Starboard and Barington Capital Group. Earlier this year, former Darden CEO Clarence Otis announced his resignation in the midst of the battle with the activists.
Starboard had urged the company to take several steps that management resisted, such as spinning off Darden's real estate into a separate vehicle and splitting in half the company, which owns the Olive Garden chain.
Instead, Darden's management sold its Red Lobster division without putting the matter to a shareholder vote. The sale stirred up ire among some shareholders because it was allegedly designed to prevent the activists from getting their way and generated a meager amount of money.
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"The problem was that management kept spitting in the activists' faces," said Jill Fisch, a law professor specializing in corporate governance at the University of Pennsylvania. "Management was saying 'we don't care what you want.'"
A Darden spokeman declined to comment to CNBC.com. However, in a statement Friday, outgoing Darden board director Charles A. Ledsinger Jr. said, "We are extremely grateful to Darden Restaurants' talented and dedicated management and employees who, day after day, serve our customers with distinction and are the backbone of what makes Darden the pre-eminent casual dining company."
Investment bankers say it has become very common for activists to approach management before waging a public campaign. The victory of the activists at a company as large as Darden, which has a market capitalization of $6 billion, could encourage companies to negotiate with activists rather than take the chance of going to battle with them.
"People are going to wake up to the fact that there's a serious risk that you're going to lose the entire board," Fisch said. "If an activist has an idea, maybe sit down and have the conversation."
Public activism has reached unprecedented levels as more money flows into hedge funds that focus on the strategy. Activist funds have $93 billion under management, with $14 billion in inflows so far this year, according to research firm eVestment.
While Darden was an usually large company to see its entire board replaced, others have given up seats to activist investors in recent months. In August, Sandell Asset Management won four board seats on the 12-member board of restaurant chain Bob Evans.
Aside from hedge funds, there are other potential winners in an environment with more activism: investment banks and law firms that advise companies that come under fire. Goldman Sachs advised Darden while Lazard advised Bob Evans. Wachtell, Lipton, Rosen & Katz served as legal advisor to both Darden and Bob Evans.
Neither Goldman, Lazard, nor Wachtell immediately responded to requests for comment from CNBC.com.
Darden's ousted board members also face a pending lawsuit related to the sale of Red Lobster earlier this year. The suit alleges that Darden misled shareholders when it said publicly that Red Lobster's business was in decline and needed to be sold.
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