Denny’s Restaurants: Creating a Diverse Corporate Culture 

A group of 21 uniformed U.S. Secret Service agents stopped at a Denny’s Restaurant not far from Andrews Air Force 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.   

Thirty minutes had past after ordering and the table of African-American agents had yet to be served, while the tables of white agents were already eating. One officer from the table asked the server twice about where their meals were, but was told to wait. Forty-five minutes passed and still no meals, while other white customers, who came into the restaurant after the agents, were already eating.

One of the African-American agents asked to speak to the restaurant manager, but the manager didn’t seem to understand much English and didn’t offer any help. Soon after the incident, the seven agents filed a class action race-discrimination lawsuit against Denny’s.

 Events That Followed

Three weeks after the lawsuit was filed, 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 incident, however, triggered a growing number of customer complaints and subsequent lawsuits.  

One law 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 the 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 the Secret Service incident had occurred.

Jerry Richardson, CEO of Flagstar (parent company of Denny’s), quickly settled both lawsuits.  Denny’s had paid $54 million to 294,000 customers and their lawyers, the largest public accommodations settlement to date. The U.S. Justice Department 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 restaurants nationwide for the next seven years. 

Flagstar Companies: Corporate History

 By 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 conglomerate, 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 non-food related investments and renamed itself TW Services.  The following year, TW Services purchased Denny’s restaurants, along with El Pollo Loco, and Richardson became president of the food service company.  In 1989, the company took on a huge debt as a result of a hostile takeover by a private equity firm. In 1992, Kohlberg, Kravis, Roberts & Co. (KKR) rescued the company by investing $300 million of equity to restructure its debt and gave them control that resulted in a new company name: Flagstar Companies.

Richardson, CEO of Flagstar, mishandled several financial and racial issues during his tenure. Before any racial issues were publicized, Richardson had hired a consulting firm Synetics, to help Flagstar develop a strategy to mold the company into a top-ranked food service organization.  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.”  When racial problems later arose, Richardson and his management team wrote them off as isolated incidents.

Racial issues were still common to Flagstar. Many communities in California had already begun to complain about the treatment they had received at Denny’s restaurants.  Further, the U.S. Department of Justice had begun looking into charges that Denny’s demonstrated a pattern of discrimination against customers who were African-American. Richardson had begun talking with local NAACP members to find ways to respond to the challenge of diversifying the company.

Although there had never been a deliberate corporate policy advocating discrimination, top executives of Flagstar didn’t pay much attention to what was happening in their restaurants.  Their ignorance allowed many restaurant managers to set their own racist policies.  Some managers asked African American diners to show identification before being served, requested that they pay before food arrived, and forced them to wait a huge amount of time to be served meals. Some restaurants were even known for having their employees lock out patrons from the restaurants.

Flagstar was insensitive to minority business people as well. One Flagstar executive claimed it was hard to find minority vendors. Minority vendors who called on Denny’s, however, claimed they were ignored by the company’s buyers.

Denny’s received relentless press coverage about the racial discrimination and it had an enormous negative effect on revenues and stock value. Groups such as the NAACP, People United to Save Humanity (PUSH), and the Southern Christian Leadership Conference (SCLC) were closely scrutinizing Denny’s.

 A Change in Leadership

After a 33-year career, Richardson resigned from Flagstar, and the majority owners, KKR, recruited Jim Adamson to replace him as the Chief Executive Officer.  Adamson’s personal history was a good fit for the job, growing up in the racially mixed environment of Army bases worldwide 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 tolerate them at Flagstar. He had developed a reputation as a calm, approachable leader.  A former boss once noted that because of his sincerity, Adamson’s team was devoted to him. 

Adamson had a daunting task in front of him as the new CEO. It would take an enormous amount of hard work, innovation, and commitment to turn this company around. Many stakeholders were involved. Could he satisfy each of their needs? What actions would Adamson need to make?

This was adapted from a case prepared by James S. O’Rourke, concurrent Associate Professor of Management, as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Personal identities have been disguised. 

Copyright ®1997. Eugene D. Fanning Center for Business Communication. Revised: 1998. All rights reserved No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means‑electronic, mechanical, photocopying, recording, or otherwise ‑ without permission.

Note:  BGSU's Legal Studies Department has received permission to use these case studies.