Papa John’s Board Kept Calm and Carried On

March 5, 2019

Embattled founder John Schnatter reportedly plans to leave pizza chain's board.

By Jonathan Berr

Papa John’s founder John Schnatter continuously put his fellow board members of the pizza chain in awkward spots by fighting for control of the company. On Tuesday, he finally appeared to be letting go.

According to a Wall Street Journal report, Schnatter, has “agreed to leave the pizza chain’s board in exchange for helping name his replacement. He also agreed to withdraw a lawsuit in a Delaware court where he claimed the company failed to disclose documents he requested after resigning as chairman.”

Corporate governance experts see this as a victory for the company and shareholders, and give kudos to the board’s actions.

“It took a strong will” from the board to settle this issue “and move the company forward,” says Timothy Hubbard, assistant professor of management at the University of Notre Dame. “These types of shenanigans are a drag on the company.  It took almost a solid year (for the board) to do it.”

The latest news marks what could be the end of a rocky time for the pizza chain.

On February 4, Papa John’s announced an investment of as much as $250 million investment from New York-based Starboard Value, best known for its shareholder activism.

Two days earlier, a special committee of the board rejected an alternative plan proposed by Schnatter which he said would give the pizza chain the same amount of money on more favorable terms, according to an SEC filing.  Like other board members, Schnatter would have received advanced notification of the Starboard investment. An attorney for Schnatter declined to comment.

Adding to the upheaval, Schnatter sued the company after he was ousted last July as chairman on the heels of revelations that he used a racial slur during a conference call. Since then, he’s “gone rogue” and launched his own website to “save” the chain he founded in 1983. In a court filing, Schnatter questioned whether his fellow directors fulfilled their fiduciary duties by failing to defend him against unfair media attacks.

“Schnatter has been a drag on the company ever since his issues regarding comments about the NFL anthem protests in 2017 and using an offensive word last year on a marketing call,” says Notre Dame’s Hubbard. “As we’ve seen time and again, companies that have these ‘crises of CEOs’ are finding it harder to recover.”

In this case, he continues, “Schnatter’s presence on the board — and refusal to give up his seat — has been a stain on the company. I think that it’s probably best that he’s left the board. Now they can move on to trying to repair the damage that was sustained by his presence.”

The very public and ongoing battle undoubtedly caused some boardroom angst.

“If he’s suing them, it can’t make board meetings easy,” says Charles Elson, director of the University of Delaware’s Weinberg Center for Corporate Governance. “You have to remember that when you have a very strong and dominating CEO, a lot of those directors came on board because of their connection to him.”

Other boards have found themselves in similar situations.

Lululemon founder Chip Wilson was forced to resign as chairman of the yoga wear company in 2015 after making controversial comments about women’s bodies. He quit as CEO several years earlier after consumers complained that the company’s yoga pants were too sheer.

Last year, Wilson told Canada’s Financial Post that Lululemon had squandered its market leadership and mulling whether to seek his old seat on the company’s board.

In the case of Papa John’s, the independent directors fired back at Schnatter in an open letter released in August:

“The independent members of the Papa John’s board of directors take seriously our responsibility to serve and protect the best interests of Papa John’s and our stakeholders.

“John Schnatter is promoting his self-interest at the expense of all others in an attempt to regain control. John Schnatter is harming the company, not helping it, as evidenced by the negative impact his comments and actions have had on our business and that of our franchisees.

“Papa John’s is 120,000 [people] strong, and we have a solid foundation in place that reflects our talented team, quality heritage and premier franchise network.”

That focus by board members seems to be reflected in their ongoing oversight of the company’s operations. Directors back management’s plans to turn around Papa John's as does Wall Street, which has pushed up the price of Papa John’s stock nearly 5% since the start of the year, because of the Starboard connection.

“The agreement with Starboard represents a successful conclusion to a comprehensive strategic review process that began last September to maximize value for all shareholders and serve the best interest of the company’s stakeholders,” a company spokeswoman said in a statement to Boards & Directors

Starboard staged a successful hostile takeover of Darden Restaurants, the parent of The Olive Garden, in 2014. At the time, the food at Olive Garden was so bad that it was widely mocked. Under Starboard’s leadership, Olive Garden has improved and so has the company’s stock which surged nearly 150% over the past five years. 

Under terms of its investment in Papa John's, Starboard chairman Jeffrey Smith, will assume the same role at Papa Johns. Former Pinnacle Entertainment CEO Anthony Sanflippo also joined the board as an independent director.

Smith, according to a Restaurant Business article, “is known most in the restaurant space for engineering a remarkable takeover at the board of Olive Garden’s owner Darden — winning all 12 seats on the company’s board in 2014.”