By Heather Haddon and Suzanne Vranica
McDonald's Corp.'s board is coming under scrutiny from some
investors and corporate-governance groups for failing to fully
uncover the extent of former Chief Executive Officer Steve
Easterbrook's inappropriate relationships with employees when
concerns first emerged last year.
The fast-food giant Monday sued Mr. Easterbrook, accusing the
CEO of lying to investigators to cover up relationships with
employees to protect his multimillion-dollar severance package. The
suit, a rare airing of corporate dirty laundry, follows the board's
decision to fire Mr. Easterbrook without cause last November after
he acknowledged a consensual sexting relationship with an
Outside counsel conducted an investigation into Mr. Easterbrook
last fall and shared results with the board, which accepted Mr.
Easterbrook's word that it was his only relationship with a
McDonald's employee, according to the complaint. Because the board
fired the CEO without cause, he was able to walk away from the
company with a severance package valued at tens of millions of
McDonald's now says that Mr. Easterbrook allegedly engaged in
sexual relationships with three additional employees in the year
before his firing, relationships that it says came to light in a
wider review of Mr. Easterbrook's texts and emails after McDonald's
received an anonymous tip in July. The company now says he should
have been fired for cause, and it is suing to reclaim his
severance, now estimated to be worth $57.3 million, according to
the executive-pay firm Equilar.
Representatives for Mr. Easterbrook couldn't be reached for
Some investors and corporate-governance groups say the board
must now defend its initial investigation and stewardship of the
company to shareholders.
New York City Comptroller Scott Stringer, custodian of the
city's pension system, said that while he is encouraged that
McDonald's is seeking to claw back Mr. Easterbrook's severance, the
company's investigation appears to have been flawed.
"McDonald's must go further by overhauling its sexual-harassment
prevention policies and setting a strong tone at the top," he said
in a statement Tuesday.
Chris Kempczinski, who succeeded Mr. Easterbrook as CEO in
November, pledged to overhaul the company's culture after assuming
the job and outlined his plans to renew company values late last
CtW Investment Group, a union-affiliated fund that advanced an
unsuccessful shareholder proposal to block Mr. Easterbrook's
severance package at McDonald's annual meeting in May, said the
company's suit shows the board's investigation was insufficient.
CtW had urged investors to vote against long-tenured board chairman
Rick Hernandez and compensation committee head Richard Lenny
earlier this year. This week it called for their resignations.
"McDonald's current board of directors is simply not up to the
task of overseeing the company for the long term," said Dieter
Waizenegger, CtW's executive director.
Mr. Hernandez said that the board immediately investigated both
complaints against Mr. Easterbrook with outside counsel. The second
investigation made clear that Mr. Easterbrook had lied and
destroyed evidence regarding the extent of his behavior, and when
that came to light, the board unanimously moved to take legal
action, he said.
"His misconduct, which clearly deviated from McDonald's values,
must not be ignored," Mr. Hernandez said in a statement to The Wall
McDonald's board includes Ancestry.com LLC Chief Executive
Margaret Georgiadis, Target Corp. Chief Operating Officer John
Mulligan, Abbott Laboratories Executive Chairman Miles White and
Paul Walsh, chairman of Compass Group PLC.
Those board members couldn't be reached for comment.
After learning of the July complaint from an employee, the board
immediately called for a new investigation, according to a person
familiar with the matter. The board also advised management to
further highlight ways for employees to report company
McDonald's sales and profit rose during Mr. Easterbrook's four
years as CEO. He cut costs, pushed to update restaurants and added
new menu items including fresh-beef patties and all-day
Under Mr. Easterbrook's watch, a party culture flourished among
some senior managers at the company, former employees and others
connected to the company said. Those people said the former CEO
frequently socialized at Chicago bars and sporting events with
employees, and flirted with some female employees. Rumors about Mr.
Easterbrook's alleged conduct had reached some other company
leaders in the year leading up to the first investigation, one
The allegation of further relationships "calls into question the
vibrancy of the first investigation," said Charles Elson, a
corporate-governance professor at the University of Delaware.
Outside counsel working for McDonald's last fall reviewed backup
data for Mr. Easterbrook's company-issued phone and iPad but found
no evidence of improper relationships with other employees,
according to the complaint and a person familiar with the
investigation. Investigators looked thoroughly through those
devices, but records of dozens of nude photos discovered later had
been destroyed on that equipment, the person said.
Mr. Elson said directors serving on multiple boards can be
distracted from an internal investigation into an executive. Seven
out of McDonald's 11 nonexecutive members serve on other boards;
average tenure for board members is about nine years, with its
longest-serving member, Mr. Hernandez, at 24 years.
Mr. Hernandez said in a letter to shareholders earlier this year
that the company was committed to bringing new members to the
board, and that half of its directors had joined in the last five
In the wake of the #MeToo movement, companies created policies
and procedures including compliance hot lines and "warm lines" for
employees to raise concerns about situations inside their
companies, though some human-resources professionals say meaningful
change remains a ways off.
Laurie Ruettimann, a human-resources consultant who works with
Fortune 500 companies, said the board should have conducted a
more-thorough investigation in response to Mr. Easterbrook's
breaking of company rules on relationships with employees. The
fast-food giant has a longstanding policy against employees' having
relationships with direct and indirect reports at all levels, which
the company has said extends to the CEO.
Given how much companies can find out about their employees
nowadays, it is surprising the initial investigation failed to
discover the other alleged relationships, she said.
McDonald's has long maintained hot lines for employees to report
complaints. The employee who made the complaint in July did so
after a town hall meeting in which executives encouraged workers to
come forward with concerns, the person familiar with the matter
said. McDonald's sent out a company message Monday telling
employees that they wouldn't face retaliation for reporting any
McDonald's had told investors ahead of its annual meeting in May
that the board's decision to negotiate a settlement with Mr.
Easterbrook and fire him without cause was the best route to an
orderly transition, according to a report by proxy-advisory firm
Institutional Shareholder Services.
ISS also met with CtW, the union-affiliated fund, before making
a recommendation to shareholders in May. ISS recommended that
shareholders vote against CtW's proposal because it said there
wasn't sufficient evidence that the board had acted in poor
judgment. Shareholders approved the pay package and the board
"The company really lobbied investors hard that they had gotten
to the bottom of this and fixed it up," said Patrick McGurn, ISS
McDonald's now will have to make a stronger case that its board
members were right to offer the initial severance, Mr. McGurn
"People were willing to give the board the benefit of the doubt,
but there may be repercussions going forward," he said.
Write to Heather Haddon at firstname.lastname@example.org and Suzanne
Vranica at email@example.com
(END) Dow Jones Newswires
August 11, 2020 20:43 ET (00:43 GMT)
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