Papa John's Needs to Fire Founder Schnatter (Update)

Update: Schnatter made a public apology for his comments.

Founder and former Papa John’s International Inc. (NASDAQ: PZZA) CEO John Schnatter is costing the company’s shareholders more money, this time for allegedly using racial slurs and graphic descriptions of violence against minorities in a May conference call with the firm’s media agency. Schnatter resigned in December as CEO but retained his position as the company’s board chair following similar statements made last December related to the controversy over NFL players kneeling during the playing of the national anthem.

The company’s stock dropped nearly 6% Wednesday morning following a report from Bloomberg that the agency involved, Laundry Service, ended its relationship with Papa John’s following the May phone call. Papa John’s shares are trading at their lowest level since February of 2016.

The board’s lead independent director, Olivia F. Kirtley, failed to send Schnatter packing in December, and she should be replaced as well for failing to do what clearly needed doing months ago.

Schnatter’s comments last year about kneeling NFL players were whines about how the league’s ratings had dropped due to players’ protests and how lower ratings were costing Papa John’s money because fewer fans were watching the games and ordering his company’s heavily advertised pizza. They were also aimed squarely at the predominantly black players who were protesting.

Kirtley, in addition to being the lead independent director, serves as chair of the compensation committee. She is also on the boards of U.S. Bancorp and Delta Dental, both of which do business with Papa John’s. In the company’s latest proxy statement, both of Kirtley’s relationships with the other companies were reviewed by the board and determined to have no impact on her independence or her business judgment. She was named to Papa John’s board in 2003.

If that faith in her judgment was not impaired last December, it should be now. Schnatter’s statements then were nothing but a preview of coming attractions, and the first episode happened in May. If Schnatter doesn’t go, Papa John’s investors will get to watch more episodes. It’s Kirtley’s job to see that that doesn’t happen.

But—and there’s always a but—Schnatter appointed Kirtley to the board and has kept her on board for 15 years. That kind of loyalty needs to be repaid.

During 2017, Kirtley was paid $117,000 in cash for her services as a director and received a restricted stock award valued at $87,513 and an option award valued at $85,507, for total annual compensation of $292,020.

Schnatter was paid $2.75 million in total compensation last year, of which $900,000 was his salary. The company also paid his wholly owned airline, Hampton Airways, $445,600 for charter aircraft services for company business travel.

Schnatter owns about 30% of Papa John’s outstanding stock and is the company’s largest shareholder, with about 9.9 million shares. Kirtley is the second-largest shareholder with 193,110 shares.

Papa John CEO Steve Ritchie had these words for company employees regarding Schnatter’s latest rant:

The past six months we’ve had to take a hard look in the mirror and acknowledge that we’ve lost a bit of focus on the core values that this brand was built on and that delivered success for so many years. We’ve got to own up and take the hit for our missteps and refocus on the constant pursuit of better that is the DNA of our brand.

The board can start by booting Schnatter, followed soon after that with an offer for Kirtley to spend more time with her family.

Papa John’s shares traded down about 3.2% Tuesday afternoon, at $49.17 in a 52-week range of $47.80 to $81.09. The low was posted this morning, and the stock’s consensus price target is 59.80.

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