More of this in the future - the impact of activist investors upon corporate governance

Activist Investors - Hero's of Agency Theory or Simple Opportunists?

Foretelling of what the future may hold given the increasing role of activist investors (or what I describe as engagement investors), the entire Board of Directors of Darden Restaurants (NYSE: DRI) was removed by shareholder vote earlier this month.  Darden is the parent of Olive Garden and its shares are down for the past 2-years versus broader gains of 28% for the composite index.

Starboard Value LP, an investment firm, owns an 8.8% stake in Darden and wanted to see a series of changes made around the lead asset which it believes will result in an increase shareholder value. Starboard's slide deck critiques management's strategy, performance and governance practices and can be found here: 

http://www.sec.gov/Archives/edgar/data/940944/000092189514000699/ex991dfan14a06297125_033114.pdf.   

The features that Starboard Value raise includes an array of corporate governance issues, including:

1. Directors with lengthy tenors, 
2. The lack of majority vote standards for director election, 
3. The lack of separation of the CEO and chairman roles (with numbers 1, 2 and 3 resulting in a high ISS governance risk Quickscore), 
4. A poison pill scheme with acquiring person provision at a15% common share threshold, and
5. A management compensation scheme failing to link performance to pay effectively.

Management's self-interested behaviour and disregard to shareholders' interests argued by Starboard in its report fall squarely within established agency theory of corporate governance.  Such theories, argued by Fama, Jensen-Meckling (JM), Alchian-Meckling (AM), and others indicate that diffuse shareholders (principals) hire professional management teams (agents) to act on their behalf to manage the firm. These agents will act in a self-interested and opportunistic fashion within available constraints, consistent with neo-classical economic theory. Thus to keep these agents in check, a board of directors is used to monitor management for the principals resulting in agency costs (the costs of a board of directors and related governance processes, for example).  If this monitoring function is no longer functioning properly lacks legitimacy, the board itself may find itself replaced.

This raises in my mind the question: Are engagement investors simple opportunists working on behalf of their fund investors and only interested in a fast buck?  Or are the principals and its friends in the boardroom actually the opportunists at work?  If the later is true, then engagement investors are actually an effective catalyst for an overdue change?  

I have been thinking a lot about about the relationship between engagement investors and agency theory as it applies to corporate governance, especially following the close of a fund offering this month in Europe by Bill Ackman's Pershing Square Holdings.  Is Europe ready for some action in this space?