The Papa John’s International Inc. board of directors took a drastic step when it moved forward with a “poison pill” stockholder rights plan aimed at preventing former CEO, chairman and company founder John Schnatter from gaining control more of the company, but the reputational damage to the brand caused by Schnatter’s recent headline-grabbing actions made it a necessary move.
Schnatter stepped down as CEO earlier this year after criticizing NFL leadership and as chairman this month when it was revealed he had used a racial epithet on a conference call, and the company’s stock has taken a beating as a result. In the days following his resignation as chair, the company removed him as the public face of its advertising campaigns.
TK Kerstetter, CEO of Board Resources LLC, and editor at large of Corporate Board Member says the board likely went the poison pill route to buy itself some time while it figures out a long-term solution.
“The board is in a very difficult position. This is not the first incident they’ve had [with Schnatter], the share price is down significantly and I’m sure people on the outside are questioning leadership,” Kerstetter told Corporate Board Member. “The board decided it wanted to make sure it had enough runway and time to think this through, and that’s one of the things a poison pill does. It gives you time, typically, and if their former CEO decides to go rogue, I think that the board is just trying to be responsible and to do the right thing over the long term.”
While the poison pill tactic is usually reserved for boards dealing with activist investors who may be trying to forcefully gain control of an organization, that isn’t the case here, as it’s the company founder who’s considered a possible threat to the organization.
“I think it takes courage to take a step like this.” – TK Kerstetter
“I don’t think that this is a typical activism case where the board is trying to be entrenched, I think it’s just trying to make sure it has the time to make the right decision for the company,” Kerstetter says. “After the two incidences [involving Schnatter’s behavior] they’re just trying to steady the ship, but it shows you what can happen with reputational risk, which I consider very challenging for a board of directors.”
The damage to Papa John’s brand in the wake of Schnatter-related headlines has resulted in negative impact in both public opinion and in stock valuation, so the board needs to make sure that the situation doesn’t spiral out of control, causing further damage to the company.
“I think it takes courage to take a step like this,” Kerstetter says. “None of us know the true inside workings, but I think they’re probably doing the right thing at this point to steady the ship and give them the opportunity to decide what’s right going forward.”
The unique situation Papa John’s directors are dealing with is that Schnatter was not only the founder/CEO/chairman of the company before the negative headlines started piling up—he was also the focal point of its very public marketing and advertising campaigns.
“He was the face of the organization, and the founder isn’t always the public face, so I’m sympathetic of a board that’s put in such a challenging position as Papa John’s board has been,” Kerstetter says.