EC

CASE STUDY: Denny’s Restaurants: Creating a Diverse

Corporate Culture (A)

On the morning of February 5, 1995, Jim Adamson walked into the corporate headquarters of Flagstar Companies (renamed Advantica Restaurant Group in 1998) in Spartanburg, South Carolina. As Flagstar’s newly hired CEO, he was responsible for the future of the firm—a future he knew would be difficult. After a series of recent events, Adamson knew that Flagstar was in need of serious change. His predecessor, Jerry Richardson, struggled to keep the company alive with $2.3 billion in debt from a series of restructuring attempts in the 1980s. Despite his attempts, the company lost money for five consecutive years from 1989 to 1994.

Adamson also had to consider the issue of discrimination. Flagstar was the parent com-

pany of Denny’s restaurants, a chain that had become a symbol for racism in the United States. He also had some serious questions about the firm he had just taken charge of. Would he be able to improve the financial performance of the firm? Could he begin to change the pervasive cul- ture throughout the firm that had allowed these events to take place? As he sat at his new desk, Adamson began reviewing the challenges he faced.

April Fool’s Day

On April 1, 1993, a group of 21 uniformed United States Secret Service agents stopped at a Denny’s Restaurant not far from the Andrews Air Porce Base in Annapolis, Maryland. They had a free hour before their detail would assemble and had decided to stop for breakfast. Of the 21 men, seven were African American. Six of them—Alfonso Dyson, Melvin Fowlkes, Merrill Hodge, Joseph James, Leroy Snyder, and Robin Thompson—sat at a table together. The other 15 agents sat elsewhere.

Many of the agents ordered the All-You-Can-Eat breakfast, a menu feature allowing a cus- tomer to choose five it“ems from the menu and eat all he wanted for one price. After 30 minutes, however, the table of black officers had still not been served any food, while the other officers were already eating. Robin Thompson asked their server twice about their meals, but was told to wait. William Winans, a white officer who was sitting nearby, noticed that the server had made a face and rolled her eyes as she left the table. After 45 minutes had passed, the black officers noticed that customers who entered half an hour after they had arrived were already served their meals. Further, their fellow officers were being served second helpings. At this point, Thompson asked to see the restaurant manager.

Given that the group was on a tight schedule, James Sobers, the agents’ supervisor, advised that they should file a complaint against the restaurant. When the restaurant manager approached them, the agents asked for his name and the address of the Denny’s regional management office. The manager, who did not seem to understand English, only provided them with the address of the restaurant itself.

Alfonso Dyson stated later, “I didn’t want to believe it was discrimination. But I couldn’t think of what else it would be. ' 3' The six Secret Service agents, soon after the incident, filed a class-action race-discrimination lawsuit against Denny’s.

Events That Followed

5ome three weeks later, on April 24, 1993, the company released a statement from corporate headquarters regarding the event, stating that after an on-site investigation of the incident, the manager involved was terminated. They also stated their commitment to further investigation of the incident and the elimination of any possible racial discrimination.

The incident involving the Secret Service agents was far from a one-time occurrence. Rather, discrimination against minorities was pervasive throughout the Denny’s culture. Discrimination had been previously reported, even before any lawsuits were filed. This inci- dent, however, triggered a growing number of customer complaints and subsequent lawsuits. Denny’s had become, in the words of Jim Adamson, “a poster child for racism. " 2 One law

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148 Part 2 • Managing and Mismanaging

firm, Saperstein Mayeda, even ran advertisements targeted at minorities, inviting those who thought they had been discriminated against at any Denny’s restaurant to contact the firm for information. This led to a strong, negative public image for Denny’s and more plaintiffs. Also contributing to negative publicity was the fact that another, similar class-action lawsuit had been filed by a group of young African Americans who were asked to prepay at a Denny’s restaurant in California. Ironically, the lawsuit had been settled the same day that this incident had occurred. Jerry Richardson, CEO of Flagstar companies at the time, quickly settled both lawsuits.

By December 1995, Denny’s had paid $54 million to 294,000 customers and their lawyers, the largest public accommodations settlement ever."3 Denny’s was forced to sign a consent decree with the United States Justice Department, which mandated that Denny’s restaurants publicize its nondiscriminatory policies and train employees about diversity issues. Further, a civil rights monitor was assigned to keep tabs on all 1,721 existing restaurants, as well as any future restau- rants, for the next seven years.

Flagstar Companies: Corporate History

In 1961, Jerry Richardson, former wide receiver for the Baltimore Colts, and Charles Bradshaw, his college football teammate, bought the first Hardee’s franchise in Spartanburg, South Carolina. By 1969, they grew their franchise into Spartan Food Systems and went public. In 1979, a con- glomerate, TransWorld Corporation, acquired the company. Bradshaw chose to leave the company while Richardson decided to stay on and run his division..In 1986, TransWorld spun off many of its nonfood-related investments and renamed itself TW Services. The following year, TW Services purchased Denny’s restaurants, along with El Polio Loco, a chain of grilled-chicken restaurants, and Richardson became president of the food service company. (In an effort to centralize over- all company operations, Denny’s corporate headquarters was moved from Irvine, California, to Spartanburg in 1991.) In 1989, the company took on a huge debt as a result of a hostile takeover by the private equity firm of Gollust, Tiemey, & Oliver. In 1992, Kohlberg, Kravis, Roberts & Co. (KKR), rescued the company by investing $300 million of equity to restructure its debt. This investment gave them control of the company, and a new name in 1993: Flagstar Companies.

Flagstar Companies: Key Leaders

Jerry Richardson, CEO of Flagstar, had mishandled several financial and racial issues during his tenure. In 1990, before any racial issues were publicized, Richardson had hired a consulting firm, Synetics, to help Flagstar devise a strategy to mold the company into a top-rank food service or- ganization. Following a series of employee focus groups, Synetics’ initial observations focused on a lack of diversity within the company. Despite being warned that the firm was in a dangerous position, Richardson saw no urgency to make any changes. His response to Synetics was, “I’m sure you’re right about our being behind on diversity, but I never thought about it. 134 When racial problems first arose, Richardson and his management team wrote them off as isolated incidents.

Despite such neglect, Richardson grew Flagstar under his leadership into a $3 billion com- pany, and made Denny’s restaurants the nation’s largest, best-known family restaurant chain. His goal was to make Flagstar the best food service company in the world by the year 2000. After a thirty-three-year career in the restaurant business, however, Richardson resigned as Chairman of the Board and Director of Flagstar Companies. After relinquishing his chief executive title, Richardson turned his attention to the Carolina Panthers, a National Football League team that he owned. The majority owner of the Flagstar Companies, KKR, recruited Jim Adamson from Burger King to replace Richardson as CEO of Denny’s parent company. Within months after the

Chapter 6 • Race and National Origin J49

Secret Service agent incident, Adamson hired Ron Petty, former head of Burger King USA, as CEO of Denny’s to manage the chain’s transformation."'

Jim Adamson’s personal history was a good fit for the job as Flagstar’s new CEO. After growing up in the racially mixed environment of army bases around the world and in the neighborhoods of Washington, D.C., and Oahu, Hawaii, Adamson was sensitive to acts of racial discrimination. Because of that background, Adamson would be certain not to tol- erate discrimination at Flagstar. He had developed a reputation as a calm and approachable leader. A former boss once noted that because of his sincerity, Adamson’s team was devoted to him.

Racism within Flagstar

By the early 1990s, racial issues were still common to Flagstar. Many communities in Califo r a had already begun to complain about the treatment they had received at Denny’s restaurants. Further, the United States. Department of Justice had begun looking into charges that Denny’s demonstrated a pattern of discrimination against customers who were African Amerlcan. In fact, Richardson, who was chairman of Flagstar at the time, had begun talking with local NAACP

members as early as January of 1992 to find ways to respond to the challenge of diversifying the company. 36

Although there had never been a deliberate corporate policy advocating discrimination, top executives of Flagstar did not pay much attention to what was happening in their restau- rants. Their ignorance allowed many restaurant managers to set their own racist policies. Some managers asked African American miners to show identification before being served, requested that they pay before food arrived„ arid forced them to wait inteiminably for their meals.13* Some

were even known for ordering “blackouts,” a situation in which employees were directed to lock patrons out of the restaurant.

Flagstar was insensitive to minority business people, as well. Samuel Maw, Flagstar’s executive vice president and chief procurement officer, claimed that it was extremely difficult to find minority vendors. Minority vendors who called on Denny’s, however, claimed they were ignored by the company’s buyers.

Key External Factors

Because of the nature of race relations in the United States, any organization that participates or is accused of discriminatory practices will face a number of external challenges, includ- ing unwanted press attention, lawsuits, and scrutiny from organizations such as the National ASSoclation for the Advancement of Colored People (NAACP) and People United to Save Humanity (PUSH). Denny’s faced such a situation on April 1, 1993. The same day that the firm settled a federal discrimination lawsuit, a Denny’s restaurant in Maryland refused to serve six African American Secret Service agents while their white counterparts were served. Because of this incident and the company’s checkered past, Adamson knew that Denny’s was at a cross- roads. He had to fix this or risk losing the company.

During this latest crisis, Denny’s endured relentless press coverage of not only the current

racial incident involving the six Secret Service agents but also its history of nationwide discrimi- nation. The media coverage included a press conference with the six agents, interviews with dis- gruntled employees, and other angry former customers. Closely following the media coverage was a class-action lawsuit and additional scrutiny from organizations such as the NAACP, PUSH, and the Southern Christian Leadership Conference (SCLC). The class-action lawsuit helped prolong

150 Part 2 • Managing and Mismanaging

damage from the racial problems at Denny’s and its parent company. Additionally, these activist groups began using Denny’s to help promote their own agendas and organize boycotts of the res- taurants. Adamson knew those groups, well intentioned though they may have been, would have the potential to damage to the long-term growth of a firm more than any lawsuit.

Can Denny’s Hit a Grand Slam? It would take an enormous amount of hard work, innovation, and commitment to turn this company around. Many stakeholders were involved. Could Adamson satisfy each of their needs? Denny’s current strategy was somewhat low-key and focused principally on internal change. Would this strategy work to resurrect Denny’s name?

Discussion Questions

1. As Jim Adamson, what would your managerial approach be in this sensitive situation?

2. List key issues for Jim Adamson to address at this point.

3. How does a company categorize discrimination in order to create pan effective corporate policy for diversity in the workplace? “/ '

4. How can Adamson and Flagstar Companies effect change and sustain tfiarchange in the corporate culture?

5. How can they manage diversity throughout the organization†

6. Is a strong communication campaign needed to ensure the public;1ofâ@¿enny’s commitment to diver-

sity or is a more subtle approach needed? />s y,i

7. How can Flagstar Companies go about reaching the pubhyy{ ss;3ge.o.f diversity?

8. How should Adamson respond to the special interest groups ¿-,

Source: This case was written by Research Assistants M. Jennifer Ab . Brent Chism, d Thomas F. Sheeran under the direction of James S. O’Rourke, Concurrent Prof,essor of Management, as the basis for class discussion rather than to illustrate either effective or in effective ha d1ihg'of an administrative situation. Information was gathered from corporate as well as public sources.

Eugene D. Fanning Center for Business Coy munication 00-07(A), Mendoza College of Business, University of Notre Dame. Copyright 0 2000. Eugene D. Fanning Center for Business Communication. All rights reserved. Reprinted with permission No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form by any means—electronic, mechanical, photocopying, recording, or otherwise—without permission.

CASE STUDY: Denny’s Restaurants: Creating a Diverse Corporate Culture (B)

Diversity Initiatives

Under Jim Adamson’s leadership, the new management team wasted no time re-educating the

entire family of Flagstar restaurants on the importance of making the company, “a better place for women and minorities. ' 3' Adamson reinforced this re-education initiative in November of 1995 by promising, “If you discriminate, I’m going to fire you. 13 9 Under this new philosophy,

nine out of the twelve top managers at Flagstar chose to leave the company. Of the nine replace-

ments, one was an Hispanic man and the other an African American woman.

In addition to new hiring practices, the management team devised a four-part strategy to introduce cultural diversity to the company. The new strategy included steps designed, “to loosen up the hierarchical environment; make diversity a performance criterion for all managers;

Chapter 6 • Race and National Origin

require the entire staff to attend workshops on racial sensitivity; and never miss an opportunity to preach the gospel of diversity. " 0 Aside from the personnel and policy changes, Adamson used other methods to symbolize the changes at Flagstar by declaring Martin Luther King’s birthday a company holiday. Although this additional holiday was met with anger and resistance by some within the organization, it sent a strong message to the headquarters about diversity.”1 These new policies were constantly reinforced through open and honest communication between man- agement and the entire organization.

To further convince the public of Denny’s turnaround, top management required all Denny’s locations to display a toll-free number (1-800-827-9315) so that customers could re-

151

port incidents if they felt they an image-polishing campaign

been discriminated against. The company also developed

ments, and purchased television time for a documentary titled, “The Denny’s Turnaround.” The company began to sponsor miqprity-related events, such as the Soul Train 25th Anniversary Special, as well as national eliat1t{pes, such as Save the Children.

Adamson could not have imps ented these policies and achieved necessary change by him- self. He knew that in order iñ*'change the company’s policies and culture he would have to change the leadership at the var ous Flagstar divisions. He also needed an internal champion to oversee the entire dived €y ñ o ,and help make the changes in company policies into real- ity. Adamson selected a fog o ague from Burger King, Ray Hood-Phillips. Based on her success in helping Burger. ng ecome a more diverse company, Adamson knew she would be well suited to the job, o g’ pointed her to be the company’s chief diversity officer. Hood-Phillips worked on di;ve ytpaining, new purchasing contracts, marketing, franchising, and performance evaluations;›Madison gave credit to her dedication and tenacity in helping to implement the new policiesJa,JyEl,agstar, and believed it would be her continued dedication that would change the culture éa›‹

Results

The result of these internal changes atDenny’s has been a drastic change in the company’s image (see Exhibit 6.6, “Advantica Restaurant Group Under Adamson’.s Leadership”). Following the

changes, Adamson received the 1996 CEO of the Year Award from the NAACP for his work at Flagstar. These positive results ’continued with a CBS 60 Minutes story in 1998 and Denny’s being named number one on Fortune’s “50 Best Companies for Minorities” in 2000.

Next Steps

Even after all of the praise and awards that the new Advantica Restaurant Group and Denny’s had received, the management team’s job was not yet done. Adamson also had to fix the firm’s financial problems. Company profits had been lagging due to increased pressures in the family dining segment of the industry, arising principally from competition with traditional fast-food restaurants on one end and casual dining chains on the other.

Additionally, the firm had to contend with a large debt load, placing a severe burden on cash flow."2 Further, the fight against racial discrimination was not over. Adamson and his management team would have to continue their work to make changes within the corporate

culture permanent.

152 Part 2 • Managing and Mismanagirig

Discussion Questions

1. Has Jim Adamson been successful in changing the corporate culture at Advantica?

2. How effective is the diversity strategy Advantica has put in place?

3. Do their efforts get to the core problems at Advantica?

4. What are the other major challenges facing the financial future of Advantica?

5. What other avenues of communication could be used to demonstrate the new corporate culture of diversity?

Source: This case was written by Research Assistants M. Jennifer Abes, W. Brent Chism, and Thomas F. Sheeran i under the direction of James S. O’Rourke, Concurrent Professor of Management, as the basis for class discussion rather than to illustrate either effective or in effective handling of an administrative situation. Information was

gathered from corporate as well as public sources.

( DIVERSITY CASE UPDATE: DENNY‘S DIVERSITY PROGRESS Today Denny’s is known as a diversity powerhouse. In 2011, minorities constituted 61 percent of Denny’s total workforce and 38 percent of overall management. In addition, Denny’s Board of Directors impressively consists of ten directors of whom 40 percent are minorities and women. Denny’s external diversity relationships are expansive. Denny’s has spent oyer $1.4 billion with minority- and women-owned businesses. Further, they support non-profit organizations, specifically those focused on raising money for cancer, children’s hospitals, and veterans. Source: See Denny’s Diversity Report: www.dennysdiversity.com/report/DennysDiversityReport.pdf ) Sottrce: Eugene D. Fanning Center for Business Communication 00-07(A), Mendoza College of Business, University of Notre Dame. Copyright O 2000. Eugene D. Fanning Center for Business Communication. All rights reserved, Reprinted with permission No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form by any means—electronic, mechanical, photocopying, recording, or other wise-without permission.