The Question No Board Wants to Have to Answer

August 17, 2020 LRN Corporation

Former McDonald’s chief executive, Steve Easterbrook, who was fired in November 2019 due to an inappropriate relationship with an employee, is being sued by McDonald’s following an anonymous whistleblower’s tip Easterbrook had inappropriate relationships with other employees, as well.

While the relationship causing Easterbrook’s termination was consensual, it did violate company policies and raised questions about his corporate conduct and personal affairs. McDonald’s board of directors took Easterbrook’s word it was his only relationship with an employee and fired him without cause, allowing him to collect a severance package reportedly worth more than $40 million.

Following the latest developments, McDonald’s filed a lawsuit accusing Easterbrook of lying, concealing evidence, and fraud. According to the lawsuit, “had Easterbrook been candid with McDonald’s investigators and not concealed evidence, McDonald’s would have known that it had legal cause to terminate him in 2019.”

McDonald’s has received a mixed response to how it handled the situation. Some praise the company for listening to the whistleblower and taking immediate and decisive action. The current CEO, Chris Kempczinski, sent a letter to all employees that reinforced McDonald’s commitment to its values and culture, while emphasizing the importance of an environment where employees can feel free to speak out and report misconduct.

Critics questioned the board’s oversight, noting a more thorough investigation at the time of Easterbrook’s termination might have brought his other misconduct to light. Union-affiliated fund CtW Investment Group, an institutional investor in McDonald’s, is calling for the resignation of the board’s chairman and compensation committee head.

LRN research shows boards often pay short shrift to ethics and compliance, the function which, in essence, is designed to help companies meet their legal and ethical responsibilities and protect their reputations.

Over the course of 26 in-depth conversations with 26 chief ethics and compliance officers of large companies, LRN in 2018 found:

  • 40% of CECOs said that their boards of directors are willing to hold senior executives accountable for misconduct;
  • about 40% reported their boards have metrics in place for measuring E&C effectiveness; and
  • about 40% said their boards haven't done a “deep dive” on compliance failures and scandals, despite Department of Justice regulations requiring one.

E&C oversight is a requirement, and boards would be well advised to take a hands-on approach. Smart boards do, as they recognize that organizational values and an ethical culture comes from the top down. They know one of the first questions that comes up when a compliance failure happens is, “Where was the board?”

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