GB590 Unit 4 Governance Failure Case Example

When the Culture Problem Reaches the Top: A Unit 4 Governance Failure Case on McDonald's, 2015 to 2023

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Purdue University Global

GB590: Ethics in Business and Society

Unit 4 Governance Failure Case

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[Date]

This case uses public records of a real company; the analysis and recommendations are the writer's own.

Timeline

2015. Steve Easterbrook becomes chief executive. The company's human resources function is led by a global chief people officer who reports to him.

2016 to 2018. Employees and advocacy groups file complaints alleging sexual harassment in company and franchised restaurants. In September 2018, McDonald's workers in several cities stage a one-day strike over harassment, the first multistate strike of its kind.

November 2019. The board dismisses Easterbrook for a consensual relationship with an employee, in violation of company policy. It treats the dismissal as without cause, so he keeps equity and severance valued at tens of millions of dollars. The head of human resources leaves the company the same month.

July to August 2020. After an anonymous tip, an internal investigation finds that Easterbrook had relationships with other employees, had approved a large stock grant for one of them, and had deleted evidence from his phone before the 2019 inquiry. The board sues him to recover his severance.

December 2021. Easterbrook agrees to return more than $105 million in cash and equity to the company.

January 2023. The Securities and Exchange Commission charges Easterbrook with misleading investors about the circumstances of his departure; he settles, paying a $400,000 penalty and accepting a five-year ban on public-company officer and board roles (U.S. Securities and Exchange Commission, 2023). The same month, the Delaware Court of Chancery holds that the company's former head of human resources owed a duty of oversight as an officer and allows shareholders' claims against him to proceed.

The Board as It Stood

McDonald's board was in several ways well constructed. Its chair was independent, not the chief executive, and most directors were independent. Yet three features left it poorly informed about workplace conduct.

Human resources reported to the chief executive. Complaints about harassment, and any concerns about senior executives' own behavior, flowed through a function whose leader answered to the person at the top. The board's information about the culture therefore passed through the people whose conduct might be in question.

No committee owned workplace conduct. The board's committees covered audit, compensation and governance, but none had a specific charge to review harassment complaints, investigations of senior executives or the culture at company-owned restaurants.

The 2019 inquiry relied on the chief executive's account. When the board investigated the relationship that led to his dismissal, it did not examine his company email or devices in depth, and it accepted his statement that there had been no other relationships. That decision is what allowed the departure to be treated as without cause.

The board learned the truth about its chief executive from an anonymous tip, a year after it had already paid him to leave.

The Legal Duty

Directors of Delaware corporations owe a duty of oversight first set out in the Caremark decision of 1996: they must make a good-faith effort to ensure that a reporting system exists and must not consciously ignore warning signs it produces (In re Caremark International Inc. Derivative Litigation, 1996). The 2023 McDonald's ruling extended that duty to officers within their areas of responsibility (In re McDonald's Corporation Stockholder Derivative Litigation, 2023). The court found that the head of human resources was responsible for overseeing the workplace culture and could be liable if he had ignored red flags about harassment, especially since he was alleged to have engaged in harassment himself.

The legal duty remains narrow. Directors and officers are not liable for failing to prevent misconduct, only for failing to try to know about it or for looking away once they do. That narrowness is deliberate: courts want boards to take business risks without fear that every bad outcome becomes a lawsuit. But it means the law sets a low bar for exactly the kind of problem at issue here, misconduct by senior people who control the information the board receives.

Duties Beyond the Legal Minimum

The ethical question is what the board owed beyond that minimum, and to whom.

A duty to employees who report. Employees who file harassment complaints take a risk, particularly when the alleged harasser is senior. They are owed a reporting channel that does not run through the people they are reporting about. A board that leaves that channel inside a function reporting to the chief executive has not met that duty, even if it is not legally liable.

A duty to investigate seriously at the top. When the conduct in question is the chief executive's, the board is the only body able to investigate independently. Accepting his word, without examining records the company could access, treated a governance decision as a personnel formality.

A duty to set an example. A company that asks restaurant managers to enforce harassment policies cannot credibly do so if senior leaders appear exempt. The 2019 decision to let the chief executive leave without cause told employees, at least for a year, that the rules applied differently at the top.

Structure That Would Surface Conduct Problems

Four changes would have given the board earlier and more accurate information.

A dual reporting line for human resources. The chief people officer should report to the board, or to a board committee, on conduct matters, as many chief audit executives already do for financial matters.

A committee charged with workplace conduct. A board committee, or an expanded compensation committee, should receive regular reports on harassment complaints by level and outcome, and on any allegation involving a senior executive.

Independent investigation of senior executives. Any allegation against the chief executive or a direct report should be investigated by outside counsel reporting to the independent directors, with access to company devices and email.

Clawback terms that assume information may be incomplete. Severance for a dismissed executive should be conditional on the accuracy of the executive's statements during any investigation, so the company can recover it without litigation if the account later proves false.

Conclusion

McDonald's board did not ignore a known problem, and it acted quickly once it learned the truth. Its failure was that the structure it oversaw let a conduct problem at the top be investigated through the executive involved and reported through a function he controlled. Paine (1994) argued that an organization's integrity depends on whether its systems support the values it states. The changes above would align McDonald's systems with its stated rules on conduct.

References

In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996).

In re McDonald's Corporation Stockholder Derivative Litigation, 289 A.3d 343 (Del. Ch. 2023).

Paine, L. S. (1994). Managing for organizational integrity. Harvard Business Review, 72(2), 106-117.

U.S. Securities and Exchange Commission. (2023, January 9). SEC charges McDonald's former CEO for misleading investors about his termination [Press release].