A Delaware court on Wednesday dismissed a shareholder lawsuit filed against McDonald’s Corp. and its board of directors, finding that the plaintiffs failed to show that the directors ignored red flags of widespread sexual harassment.
Chancellor of the Court J. Travis Luster, Vice Chancellor noted in his opinion that the board fired CEO Steve Easterbrook and HR director David Fairhurst after complaints were filed against them. The fact that more sexual harassment complaints were filed later doesn’t give investors a reason to sue, he said.
“Whether the answer fixed the problem is not the test,” Luster wrote. “Proxies cannot guarantee success, especially in dealing with such a recurrent and infamous problem as sexual harassment. What they have to do is make a good effort.”
McDonald’s began to resemble a boys’ club after the board of directors hired Easterbrook as CEO in 2015, Luster said. Easterbrook brought Fairhurst with him to the company’s Chicago headquarters, appointing him as global director of human resources. The two men became friends while working together in the London office of McDonald’s.
They allegedly flirted with employees, urged recruiters to hire “young, pretty” women, and drank alcohol at corporate events. Executives met weekly for happy hour at the “open bar” on the eighth floor of the Chicago office.
The party soon came to an end.
In 2016, more than a dozen restaurant employees nationwide filed sexual harassment complaints with the Equal Employment Opportunity Commission. In 2018, more sexual harassment complaints were filed. In September of that year, workers in 10 cities organized a one-day strike to protest sexual harassment. US Senator Tammy Duckworth (D-Illinois) demanded answers from the company.
The board of directors punished Fairhurst after 30 employees of the company witnessed how he sat an employee on his lap during an event for employees of the personnel department. But the board didn’t fire Fairhurst, despite a “zero tolerance” policy for sexual harassment.
In late 2019, the board of directors learned that Easterbrook had a prohibited relationship with an employee. The board decided to fire Easterbrook for no reason and granted him a $125.8 million severance package. The board also fired Fairhurst for good reason, but did not disclose the reason.
A coalition of union pension funds that owned shares in the company protested the decision to fire Easterbrook without cause and eventually filed a class action lawsuit. Activist investors tried to block the re-election of several board members.
In July 2020, the board learned that Easterbrook had a sexual relationship with another employee in addition to the relationship that led to him being fired. The investigation revealed a third sexual relationship and the fact that Easterbook had used his company’s email to transfer nude photos of himself and his lovers.
McDonald’s is suing for severance pay. Easterbrook settled the case, agreeing to forfeit $105 million in cash and shares.
Two local driver unions that owned shares in McDonald’s filed a derivative lawsuit in 2020. They argued that the company’s decision to hire Easterbrook for the first time for no reason demonstrated bad faith and a waste of corporate resources. The lawsuit alleges that the directors ignored red flags indicating a corporate culture that condone sexual harassment.
There were definitely red flags, Luster said, but the records show that the board of directors responded to them. The company updated its anti-harassment policy, hired consultants to advise and develop new training programs, created a hotline for franchised restaurant employees, and eliminated a policy that required harassment and discrimination complaints to be adjudicated in arbitration.
“Because of their efforts, it is impossible to conclude that the directors of the defendants were in bad faith,” the conclusion says.
Gail Weinstein, a lawyer for Fried, Frank, Harris, Shriver & Jacobson in New York who advises on corporate governance, said insurance company directors and officers may be comforted by the decision, but there are also reasons for concern.
“While people can argue about whether they did enough or made the right decisions, the fact that they acted means that the court cannot reasonably conclude that they ignored their supervisory duties in bad faith,” she said. “Their response, as soon as they found out, was not so far from the truth as to suggest bad faith.
On the other hand, Luster’s decision states that the board’s oversight responsibilities extend beyond “critical” risks “as some thought.”
In addition, the opinion states that sexual harassment and worker safety in general are critical risks. She said some lawyers argued that these were employment issues, not fiduciary obligations, which entail corporate liability.
“So, this is an issue that insurers are likely to focus on now,” Weinstein said.
Ron Olson, an attorney for Ross, Aronstam & Moritz who represented McDonald’s and its directors, welcomed the decision.
“The court rightly dismissed the case based on what happened here: under the leadership of the board of directors, the company immediately investigated when it became aware of the extent of Easterbrook’s misconduct in 2020, upholding the company’s values and returning the award in the form of shares and cash in the amount of 105 million US dollars. time,” Olson said in an email. “Documents show that the board of directors actively followed the company’s policies and commitment to providing safe, respectful and inclusive workplaces.”