Diversity on the Menu

    Inside, the booths are retro-’50s style, the benches covered in orange plastic with cloth backs adorned in vaguely Aztec patterns. Rachelle Hood, chief diversity officer of Denny’s Corp., sits in a booth, part of the daily lunch rush that includes patrons and workers of every imaginable color and nationality.

    The irony of the scene is not lost on her. In 1991, just a few miles south at a Denny’s in San Jose, a group of 18 African-American students who had stopped for a late-night snack were told they would have to pay a cover charge and prepay for their meals.

    They launched a discrimination suit and were soon joined by dozens and then hundreds of other African-Americans around the country who complained of unequal, shoddy and sometimes rough treatment by the company.

    The U.S. Justice Department investigated what would become the largest such case at the time under the public accommodations section of the 1964 Civil Rights Act.

    Denny’s, which is headquartered in Spartanburg, South Carolina, settled the lawsuits in 1994 for $54 million. But the incident generated such bad publicity that the chain became tagged as one of the most racist companies in America.

    What a difference a decade makes. Under Hood’s direction, the company spent millions on diversity initiatives that brought legions of new minority managers, franchisees and suppliers into a company run almost exclusively by white males. She was the nation’s first diversity officer to report directly to the CEO.

    An irrepressible optimist, Hood has used her position of authority to guide Denny’s through a remarkable turnaround.

    Women and minorities today make up half of Denny’s eight-member board of directors, and 45 percent of the 11-member senior management team. Minority owners hold 45 percent of Denny’s franchised restaurants.

    Denny’s has also recovered ground with minority customers. A 1996 company survey found that only a third of African-Americans gave Denny’s good marks on measures such as respectful service; today, satisfaction totals from African-Americans range from the mid-70s to more than 80 percent.

    About half of African-Americans linked Denny’s with discrimination in 1996; that has been whittled down to 14 percent today, and the company anticipates reaching 10 percent soon.

    The change has been so swift and complete that by 1998, the company came in second on Fortune’s list of the 50 best companies in America for minorities. In 2000, the company was No. 1.

    "What happened at Denny’s was a sea change," says Elizabeth A. Sanders, a current member of Denny’s corporate board.

    The tale of Denny’s diversity turnaround is a textbook example of how fast and far a company can progress with an aggressive strategy and strong leadership. But it also demonstrates the limits of what diversity can deliver. Denny’s may have conquered its discrimination demons, but it has yet to figure out how its diversified workforce can increase profits.

    Denny’s is the nation’s largest family-style full-service restaurant chain, a company with more than 1,600 restaurants, $2.2 billion in annual revenue chainwide and 70,000 employees, including those who work at more than 1,000 franchises.

    Groaning under hundreds of millions in debt and myriad operational problems, the company has been losing money for years. Although the losses have finally begun to decline and the company has begun reducing its debt, Denny’s still reported a net loss of $11.6 million for the first half of 2004.

    For advocates of diversity who argue that effective diversity programs produce profits, the Denny’s experience seems to provide contrary evidence.

    Company president and CEO Nelson Marchioli, who took over the job in 2001 and remains a strong proponent of diversity, says he has never been able to quantify the financial benefits from the millions of dollars and years of effort invested.

    "If you think diversity is going to sell one more pancake, you’re crazy," Marchioli declares.

Supporters and skeptics
    An effective diversity effort can prevent costly discrimination lawsuits, help a company understand and reach its market and improve a company’s image. But diversity can’t substitute for basic business execution, he says.

    Marchioli points out that when the discrimination complaints against the company first surfaced in the early 1990s, Denny’s weekly customer count was about 5,500 per store. Today it is 1,000 to 1,200 fewer.

    "As we were making these incredible strides in diversity, guess who was still having a declining guest count?" he notes.

    He says that Denny’s continues to invest in diversity because "it is the right thing to do," and because it helps the company understand and serve its diverse national customer base, which should make it easier for the company to attract customers.

    But Denny’s still has to do a better job of executing its business strategy to succeed.

    Financial analysts tend to agree with Marchioli. Ken Bann, an analyst with Jefferies and Co. who covers Denny’s, says the fact that its losses are lower this year than last year and its same-store sales, a key indicator of performance, are improving shows that Denny’s may finally be perking up.

    But, he adds, "it would be pretty difficult to say that diversity produces x amount of sales or earnings. You can’t say that gee, because they have this [diversity] program, sales have grown this amount over what they would have been."

    Hood argues that part of the reason it has taken so long for Denny’s to fix its operational problems is that the company had to devote so much energy to resolving its diversity problem and getting past the costly discrimination lawsuits.

    "The diversity issues had taken the company to its knees," Hood says. "The first thing we needed to do was get us out of the pit of a company that discriminates. The brand was badly broken, so it took a while."

    Hood points out that effective diversity programs ultimately can bring other benefits, particularly in terms of employee relations and customer service.

    Todd Campbell, diversity manager for the Society for Human Resource Management, says being good at diversity and also good at operations should put a company ahead of competition that understands only operations.

    "In an inclusive organization where employees feel valued, they tend to perform better," Campbell says. "Employee satisfaction equals customer loyalty, which equals profitability."

    Diversity proponents like Campbell have obviously been winning out over skeptics in the corporate arena. Prodded by the threat of discrimination lawsuits and the lure of potential benefits like those Campbell touts, companies across the country have embraced diversity programs. Denny’s crash course in the subject a decade ago remains one of the best examples of how diversity can be rapidly and effectively injected into a large organization long resistant to change.

    Hood, who previously served as vice president of human resources development and diversity at Burger King, was hired by Denny’s in 1995. She promptly found herself facing a torrent of ill will.

    "I had never had a job with more hate mail--from every group," Hood recalls of her early days at Denny’s. "I had no clue about the depth of the issues. I wonder if, had I known more, I would have come."

    The approach Hood used was fairly unusual at the time. Instead of working through a human resources department, as would have been typical for most diversity officials at the time, she operated from a position of authority equal to that of division heads. She used that authority to coax and push diversity initiatives throughout the organization in a hurry.

    "What we did was very different from what all the other companies were doing at the time," Hood says.

    Other companies had diversity training similar to Denny’s, but few made participation as widespread. Denny’s made all employees--from senior executives to dishwashers--attend classes. These ranged from a quick session for line workers that taught the basics of equality and respect for heritage to two-day courses for store managers that included details about diversity in hiring and the basics of antidiscrimination law.

    Hood, who had launched diversity training at Burger King, got the company to hire more than 100 diversity trainers. From 1995 to 2000, when Denny’s won its first-place position on the Fortune list, the company spent $3 million annually on diversity training.

    Hood counseled the company’s marketing arm on how to target advertising to minorities and hunted up advertising agencies that specialized in that field. Previously, the company had done no targeted marketing.

    From 1995 to 2000, Denny’s redirected 14 percent to 15 percent of its marketing budget to campaigns aimed at minority customers. The company spent as much as $14 million in one year on the effort.

    Denny’s had no minority suppliers or contractors in 1995. Hood pushed its buyers to dole out business to minority-owned companies and hunted up contacts to help advance the effort. As a result, between 1995 and 2000, Denny’s spent $616 million with minority suppliers.

    Denny’s had never directed charitable contributions to minority-related organizations. That changed in 1995, when the company gave $1.3 million to civil- and human-rights causes. And recruitment of college graduates, which had been aimed largely at top national business schools, was revised to include smaller, less well-known schools that more minorities attended, particularly historically black colleges.

    Similar strategies were employed to boost minority representation in franchises, supply contractors and management. Hood recalls sitting down with various company managers in those early days and hammering out goals. Just about every department and division in the company drew up diversity strategies and plans to carry them out.

Managers adopt diversity
    John Relman, a Washington, D.C., attorney on one of the discrimination lawsuits, recalls that Hood was an effective diversity advocate who was easy to work with despite the contentious nature of the lawsuits. Relman represented six African-American U.S. Secret Service agents who had sued after they went to a Denny’s in Virginia for breakfast and were denied service for an hour while white agents seated nearby got their meals.

    "My experience working with Ray was an extremely positive one," Relman says. "She is tremendously energetic, very open to new and different ideas, and very fast to implement new ideas."

    What made managers stick to their goals was partly Hood’s hectoring. But managers also knew that failure meant dealing with then-CEO Jim Adamson, who made it clear that diversifying Denny’s was one of his top goals and that Hood had his unstinting support.

    He revised management bonuses for the first few years of Hood’s tenure, tying 25 percent to meeting diversity goals. Hood had instituted sophisticated tracking of diversity results, and Adamson relied on that data to make his management bonus awards.

    "What made her work so vital to our success was that before she came, we had no consistent way of tracking our workforce," Adamson wrote in his book, The Denny’s Story: How a Company in Crisis Resurrected Its Good Name.

    Once the diversity initiative got under way, it developed its own momentum as managers adopted diversity as an essential component of their jobs. Denny’s ended up surpassing the diversity goals in the consent decree.

    One of the surprising aspects of what Hood accomplished is how few resources she used. Hood’s office today (she moved from Spartanburg to Memphis to be near an airport with better connections to accommodate her frequent trips) is set up essentially as it was a decade ago.

     She has two staff members and an annual budget of about $1 million, plus another million in corporate charitable donations that she doles out to minority and human-rights causes.

    The small size of her staff and budget was intentional, Hood says. Her aim was to avoid creating a large bureaucracy that would carry out all diversity tasks. She wanted to push responsibility for diversity through the entire Denny’s organization, and one way to ensure that it happened was to keep her own office from building an organization capable of doing all the diversity work.

    "The beauty of the Denny’s program is that it is not a program, it is not an initiative," Hood says. "It is a project, a holistic approach to organizational change. We have institutionalized it. When you begin to see diversity factored into all the lines, everybody has a piece of the rock."

    The result of Hood’s efforts was that Denny’s went from diversity laggard to leader. Other companies took notice. In recent years, she says, she has advised more than 100 companies on diversity issues.

    Many of the strategies that Hood pursued at Denny’s are now considered essential to a diversity effort. A special report by The Diversity Officer, published by Diversity Best Practices of Washington, D.C., lists most of the techniques adopted by Denny’s as key elements in a successful corporate diversity operation.

    Denny’s continues to show up on lists of top companies for minorities and women, an indication that it has maintained its determined focus on diversity. Marchioli says that despite his doubts about the direct financial gains of diversity, he has no intention of backing off.

    "The reason she reports to me," Marchioli says, "is that people have to understand that this is important. When Ray speaks, as sweet and as nice as she is, she speaks with authority. I think the reason why Denny’s has been so successful in getting over its past is that Ray has been able to have the support from the CEO--uncompromising, unquestionable support."

    Despite the focus on diversity and its awards, Denny’s still hasn’t won back some minority customers.

    Shawn Coker, assistant vice president of diversity for Tyson Foods, acknowledges that Denny’s is a recognized leader in corporate diversity. But Coker, who is African-American, says he can’t bring himself to forgive Denny’s for its past transgressions.

    "My hat’s off to Denny’s in terms of the work they have done and the progress they have made," Coker says. "But I can tell you, to this day I rarely go to Denny’s."

    Hood sees hard cases like Coker not as a lost cause but rather as an opportunity. If she can just push the right button, she may be able to get him to reconsider.

    "I’m always a glass-is-half-full person," she says. "Just a dreamer and believer."