Papa John's had 'toxic' frat culture led by Schnatter, report says

  • Forbes interviewed 37 current and former Papa John's employees, unearthing deep-rooted issues that run much deeper than its founder John Schnatter using a racially charged slur on a conference call.
  • The report details a fraternity-like culture led by Schnatter that disparaged women and encouraged employees to spy on their colleagues.
  • Schnatter's lawyer said "the story contains numerous inaccuracies and misrepresentations."

It seems that Papa John's has a number of deep-rooted issues that run much deeper than its founder using a racially charged slur on a conference call, according to new and damning report by Forbes.

The news organization said it interviewed 37 current and former Papa John's employees, uncovering inappropriate behavior and scandalous conduct that paints a dark portrait of John Schnatter and the pizza empire he has built.

In the wake of the report, Papa John's shares sold off nearly 5 percent Thursday. The stock has been whipsawing as new revelations about Schnatter have surfaced in recent days. With Thursday's selloff, shares are down less than 1 percent since the scandal broke.

“The story contains numerous inaccuracies and misrepresentations," Patricia Glaser, Schnatter's attorney, told CNBC. "It’s easy to make false statements when one hides behind the cloak of anonymity. The Board and now the special committee have repeatedly acted without an investigation of the facts and contrary to their fiduciary duties to the shareholders. It’s a perfect example of ready, shoot, aim.”

Forbes' report details a toxic, fraternity-like culture led by Schnatter that disparaged women and encouraged employees to spy on their colleagues. The article goes on to allege a number of sexual harassment incidences involving Schnatter that resulted in at least two confidential settlements.

“As previously announced, a special committee of the Board of Directors, comprised solely of independent directors, has retained an outside firm to oversee an audit and investigation of the culture at the company and to make recommendations for whatever changes may be necessary," Papa John's said in a statement. "We take this matter seriously. If anything is found to be wrong, we are determined to take appropriate action.”

To protect himself, Schnatter allegedly hired and promoted loyal employees to the company's top ranks, including international president Tim O'Hern and current CEO Steve Ritchie, Forbes said.

O'Hern, described as a close friend of Schnatter's from high school, has been a franchisee since 1993 and has worn a number of different hats at the company since 1995. Ritchie, who was promoted to CEO in January when Schnatter stepped down after making comments about the National Football League leadership, is a long-time Papa John's staffer and former president of the brand.

“John got Steve to where he is. Steve is not going to do anything to turn on John,” a former senior executive told Forbes.

Forbes said that six former Papa John's executives questioned Ritchie's qualifications for his promotion to president and then CEO, suggesting that it was his loyalty to Schnatter that got him the gig.

A former executive told the news organization that Ritchie began promoting people based on his personal relationships with them. The executive said that the inner circle included O'Hern; Tim Newton, vice president of global technology operations; Edmond Heelan, senior vice president of North America operations; and Dustin Couts, regional vice president.

"If even a fraction of Forbes’ piece is accurate is describes an enterprise run amuck by a founder who wanted the best of both worlds: king of the sandbox he built, while also being a publicly traded company," Dan Hill, CEO of Hill Impact, told CNBC. "It is the right move to bring in an outside firm to conduct a top to bottom investigation."

"The challenge, following recent damning news, will be for the leadership, namely Ritchie, to convince internal and external stakeholders that this is a meaningful exercise that will lead to change and not just a PR stunt," he said. "If I were advising them I would suggest that they move quickly and unearth all the bad stuff now, disclose it, and address the changes they’re making. A slow-dribble of bad news is enough to do-in any brand, even Papa John’s."