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Papa John's: The S in ESG

Updated: Mar 18

Papa John's CEO and Chairman John Schnatter was back in the headlines. During a November 2017 earnings call with Wall Street analysts, the founder, Chairman and CEO of the national pizza franchise had criticized National Football League leadership for not resolving what he considered a polarizing controversy, which started a year earlier when quarterback Colin Kaepernick began kneeling during the pre-game national anthem to protest racial inequities.

Viewership of NFL games was down significantly. And as one of the NFL's largest advertisers, Schnatter was blaming the ratings decline for cutting into growth of his national pizza franchise. Papa John's was spending nearly 25% of its advertising budget on televised NFL games. Even though same-store sales were up on the year, Schnatter wanted the NFL "debacle" to end.

“Now to the NFL, the NFL is hurting, and more importantly by not resolving the current debacle to the player and owner’s satisfaction, NFL leadership has hurt Papa John’s shareholders. Let me explain. The NFL has been a long and valued partner over the years, but we are certainly disappointed that the NFL leadership did not resolve the ongoing situation to the satisfaction of all parties long ago ... For good or bad, leadership starts at the top, and this is an example of poor leadership.”

-- John Schnatter, Papa John's Chairman and CEO

Read that quote again. Was Schnatter pinning blame for the "debacle" on the players, the owners or NFL executives? Some would say that's open for discussion. The word "leadership" is mentioned four times, though. There's a case to be made that Schnatter was looking to NFL executives to resolve an issue between the players and club owners.

The national press, for its part, widely interpreted Schnatter's remarks as criticism of NFL leadership and a comment on pizza sales. The USAToday headline was fairly straightforward: "Papa John's CEO blames NFL for declining sales due to mishandling of anthem protests," the paper reported. "Papa John’s claim that NFL protests are hurting pizza sales is a stretch. But the backlash won’t last," the Washington Post concluded.

The social media, though, took the ball and ran with it. "Better ingredients. More racism," comedian Nick Pappas Tweeted. Online news site Slate tied Schnatter's comments to his longtime support for Republican candidates. A White supremacist website declared Papa John's the official pizza restaurant of the alt-right movement, Newsweek reported.

Two weeks later, Papa John's PR weighed in. The company issued an apology for Schnatter's remarks, while expressing support for the players and the national anthem, and using an emoji to flip off neo-Nazis.

But what exactly was Papa John's apologizing for? And, by issuing a vague apology, was the company implicitly stating that Schnatter had, in fact, taken a stand against NFL players protesting police brutality and advocating for racial equity? That was the conclusion of a report prepared by former FBI director Louis Freeh. Hired by Schnatter's law firm to set the record straight, the Freeh Group conducted an FBI-level background investigation of both the statements that Schnatter made, and his personal and professional relationships, particularly with the Black community.

Freeh concluded that Schnatter's comments "were neither intended nor can be reasonably interpreted to reflect any racial bias, prejudice or disrespect for African Americans or people of color." The Freeh report did not lay blame for the social media spin, but was somewhat critical of the initial corporate response, which had been Tweeted out by Papa John's PR.

"This message was “too little too late” to counter the public relations “feeding frenzy,” which produced the false narrative that Mr. Schnatter, the public face of Papa John’s, had made negative comments against the players in the NFL. This lack of corporate effort to argue publicly the accurate, relevant “facts” which were critical to protect the Papa John's brand, and was indelibly intertwined with Mr. Schnatter as the founder of the Company, was either a significant public relations misstep, or some other motivated inaction."

-- Freeh Report

Purpose of a corporation

While few executives today would question that companies have responsibilities to customers, employees, vendors and their communities, this has not always been the case. Back in September 1970 – more than 50 years ago – economist Milton Friedman argued that business has only one social responsibility, and that is to increase profits. A company, according to Friedman, has no “social conscience,” and cannot be held responsible for “providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers.”

Companies, by extension, have no responsibility to spend money to reduce pollution “beyond the amount that is in the best interests of the corporation or that is required by law in order to contribute to the social objective of improving the environment.” At the time, General Motors was defending itself against Campaign G.M., which demanded the company address public concerns about safety and pollution. Friedman’s essay was in response to G.M.’s decision to form a five-member Public Policy committee on its governing board of directors to represent the public’s interests.

Friedman called corporate responses like this “pure and unadulterated socialism,” adding that “businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society.”

Fast-forward to August 2019. The Business Roundtable, a committee of top executives at leading U.S. companies, basically rejected Friedman’s highly influential treatise on the purpose of a corporation. While every company has a unique business purpose, the executives said, every company also has a social purpose, including a duty to its various stakeholders.

For customers, that means delivering value and exceeding expectations. Fairly compensating employees, and valuing diversity and inclusion in the workforce. Dealing fairly with suppliers, particularly in support of their employees. Supporting communities by respecting the people who live there, and protecting local environments and embracing sustainable practices. And finally, companies have a duty to generate long-term value for shareholders providing the capital used by companies to invest, grow and innovate in their businesses.

Today, companies are increasingly taking stands on social issues, and publicizing their efforts through annual corporate social responsibility reports. Patagonia, for example, is a pioneering B Corporation, a certification recognizing the company's commitments to delivering quality products while minimizing social harm, protecting the environment and running the company responsibly.

Target in its latest corporate social responsibility report outlined efforts to improve working conditions for garment makers and farmers supplying its stores, raise wages and improve benefits for store workers, increase the use of sustainable energy through rooftop solar installations, and take steps to improve the lives of its customers.

Hershey's has placed social responsibility "at the heart of what we do," promoting the company's sustainability initiatives in its annual report. Disney, which was front and center as travel restrictions kicked in at the start of the COVID-19 crisis, highlighted its pandemic response, along with diversity and inclusion initiatives and -- again -- sustainability. A common thread.

But when companies take stands on some hot-button social issues -- gun rights, gay rights, politics -- they also create risks of a social backlash.

Target, for example, became the, well, target of a national boycott movement after issuing a press release publicizing an inclusive policy welcoming transgender team members and customers to use the store restroom or fitting room facility corresponding with their personal gender identity. The company ultimately pledged to spend $20 million to install small unisex bathrooms in its stores nationwide.

Walmart also found itself in the corporate social responsibility cross-hairs after restricting ammunition sales and taking handguns off the shelves following a shooting that killed 24 people at its El Paso, Texas, store in 2019. The company immediately drew fire from the National Rifle Association, with 17% of U.S. consumers hearing something negative about the nation's leading retailer as Walmart reacted to the tragedy,

As we saw earlier, Chick-fil-A polarized U.S. consumers when CEO Dan Cathy's support for the "biblical definition of marriage" was characterized as opposition to gay unions. Three in ten Americans considered that news to be negative relative to Chick-fil-A. Four in ten reacted positively to the news. Clearly, social stands amplified in the social media and increasingly partisan press can be polarizing.

In late July, Ben Cohen and Jerry Greenfield -- yes, that Ben and Jerry -- penned an op-ed in the New York Times publicizing their support for a decision by the iconic ice cream brand to halt sales in the Israeli occupied territories. The Ben & Jerry's founders, who sold the company to Unilever in 2000, said the decision advanced justice and human rights, core tenets of their shared Jewish faith. Consumer reactions have been mixed.

"We believe business is among the most powerful entities in society. We believe that companies have a responsibility to use their power and influence to advance the wider common good. Over the years, we’ve also come to believe that there is a spiritual aspect to business, just as there is to the lives of individuals. As you give, you receive. We hope that for Ben & Jerry’s, that is at the heart of the business."

-- Bennett Cohen and Jerry Greenfield

Burnt pizza, man

Which brings us back to Papa John's. When a company -- or its founder or CEO -- takes a strong stand on a hot-button social issue, the PR team should brace for possible blowback. And for Papa John's, there were clear warning signs of the risks of its namesake CEO injecting himself into the simmering dispute between NFL owners and the poignant protests of players kneeling during the national anthem to show their support for racial equity, one of the most fundamental social issues facing this generation.

Back in 2012, with Obamacare rolling out, Schnatter was among a handful of corporate executives claiming the national health care plan would lead to rising prices for customers and curtailed pay and benefits for employees. During the 2012 presidential election, Schnatter, a vocal Republican donor, had warned shareholders that President Obama's healthcare plan would cut into earnings. The day after the election, Schnatter estimated Papa John's losses at up to $8 million, and predicted that employee's hours would be cut by franchisees to avoid having to subsidize their health care.

More than 20% of consumers in a national tracking survey -- that would be around 50 million people -- reacted negatively to Papa John's after Schnatter staked out his position on President Obama's signature social initiative. Schnatter's comments generated a brief news cycle, but inflicted longer-lasting brand damage, with reputational headwinds against Papa John's lasting about six months.

Having weathered the Obamacare storm and the NFL earnings call debacle, Papa John's in early 2018 hired a marketing communications firm to come up with new creative ideas for the company's ad campaigns. For years, Schnatter had embodied Papa John's in a literal sense. His was the face of the company, on pizza boxes, store signage and nationally televised commercials. But, unable to deflect criticisms about remarks characterized as critical of NFL players calling for racial equity, Schnatter in December 2017 had stepped down as CEO, signaling a new direction for Papa John's.

In May 2018, the new marketing creative team, Laundry Service, lined up a call with Schnatter to get to work. While Schnatter said he thought they would be discussing marketing ideas, the outside firm instead planned to conduct a diversity training session, with role-playing exercises to raise the former CEO's awareness of diversity and inclusion. Reportedly, the agency was seeking to help Papa John's founder avoid any future "public relations snafus."

Asked on the call -- which was being secretly recorded by the outside firm -- how he would distance himself from racist groups online, Schnatter recalled how he and his family were shocked by instances of racial violence near his Indiana hometown when he was growing up. According to the Freeh report, Schnatter expressed "disdain" for racism and prejudice.

As the impromptu diversity training session wound down, Schnatter voiced personal frustration at what he perceived to be shifting social standards. At this point in the conversation, Schnatter noted in passing, for example, that a racial slur -- and he admitted to using the "n-word" here -- was a part of Kentucky Fried Chicken founder Colonel Sanders' vocabulary back in the day. It was, he said on the call, a word he never used personally.

“…what bothers me is Colonel Sanders called blacks, n-----s. I’m like, I never used that word. And they get away with it. And we use the word “debacle” and we get framed in the same genre.”

-- John Schnatter, Papa John's Chairman

Two months later, details of the call -- and claims that Schnatter had used the word as a racial slur -- were leaked to a Forbes reporter. "Papa John's Founder Used N-Word on Conference Call," the online news outlet reported. Sources for the Forbes story included unnamed participants on the call, and unnamed people "close to the company." When Forbes called Papa John's for their response, the company's general counsel informed Schnatter of the news leak and pending coverage, indicating the legal team was managing the media response.

"News reports attributing the use of inappropriate and hurtful language to me during a media training session regarding race are true," Schnatter said in what Freeh later characterized as a poorly worded statement drafted by company representatives. "Regardless of the context, I apologize. Simply stated, racism has no place in our society."

Having stepped down as CEO months earlier, Schnatter was out as founding chairman. He was denied access to corporate headquarters, and no longer served as the face of the company he founded years earlier in the back of his father's tavern. Schnatter's name was removed from the University of Louisville business school. The Papa John's name was pulled off the school's Cardinal Stadium.

All that was left now were the recriminations and the litigation. Schnatter filed a breach of contract and malicious interference civil lawsuit in a state district court against Laundry Services. As it turns out, someone at Laundry Services was recording the call with Schnatter, and left the microphone open after the call ended. According to the amended civil lawsuit, members of the Laundry Service account team immediatedly began discussing ways to turn the press on Schnatter.

The plan, according to court filings, was for Laundry Service to line up an hour-long interview between Schnatter and a "hostile media personality," in hopes Schnatter would repeat comments that would then go viral. The firm hired to repair Schnatter's image and revive Papa John's brand had a new mission -- to "bury the founder." The Forbes leak effectively did just that.

Better, delivered

Over the past year plus, corporate social responsibility took on an added dimension as the COVID-19 pandemic triggered social lockdowns. Unprecedented became the norm, and the service industries -- restaurants, travel, leisure -- were particularly hard hit during the crisis. For Papa John's, the social restrictions actually fueled a 12% increase in sales as pizza delivery emerged early on in the pandemic as a safe alternative to dining out.

In the company's 2020 Corporate Responsibility Highlights Report, new President and CEO Rob Lynch outlines the company's core values: People first. Everyone belongs. Do the right thing. Innovate to win. Have fun. Every Papa John's executive last year received personal diversity, equity and inclusion assessments. The company was named a 2021 best place to work for LGBTQ equality.

Papa John's in 2020 also hired its first director of corporate affairs and sustainability. In this new role, Jenn Garner's initial priorities include developing a long-term corporate responsibility strategy, setting accountability goals and accelerating progress toward better, and creating ongoing communications to drive stakeholder engagement.

Better PR, better pizza. Papa John's.

For our in-class discussion ...

Should CEOs take positions on social issues?

Which issues? And why or why not?

Does the CEO of your company take social stands?

Start the discussion by posting your comments below.

Fact-based, as always.

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