Earlier this week, McDonald’s filed a Form 8-K to announce that it had filed this complaint in the Delaware Court of Chancery against its former CEO, Steve Easterbrook, who was terminated without cause last year following a board investigation of a consensual relationship with an employee in violation of the company’s Standards of Business Conduct. The complaint seeks to claw back severance payments – and to prevent the exercise of stock options and sale of stock issuable under outstanding equity awards. The collective value of that compensation is estimated at $57.3 million, according to this WSJ article.
The complaint alleges that Mr. Easterbrook acted fraudulently in negotiating his termination, in claiming that he did not have physical relationships with any company employees. In July, McDonald’s received an anonymous employee tip that caused the board to reopen its internal investigation. During the new investigation, the board uncovered photographic evidence of prohibited physical relationships with multiple employees in Easterbrook’s company emails. According to the complaint:
The Company was not aware of these photographs before July 2020, when it discovered them in the course of investigating the allegations regarding Easterbrook and Employee-2. Neither these photographs, nor the e-mails to which they were attached, were present on Easterbrook’s Company-issued phone when it was searched by independent outside counsel in late October 2019 because Easterbrook, with the intention of concealing their existence from the Company, had deleted them from his phone. Unbeknownst to Easterbrook, however, the deletion of the e-mails from the mail application on his Company-issued phone did not also trigger the deletion of those e-mails from his Company e-mail account stored on the Company’s servers.
The Board would not have agreed to the terms of the Separation Agreement had it then been aware of Easterbrook’s physical sexual relationships with three McDonald’s employees, his approval of a discretionary stock grant for Employee-2 while they were in a sexual relationship, and the falsity of his representation to outside counsel that he had never engaged in a physical sexual relationship with a Company employee. That conduct constituted a clear legal basis to terminate Easterbrook for cause.
The complaint references “cause” because Easterbrook’s separation agreement incorporates clawback provisions from the company’s standard severance plan, which require repayment if the plan administrator determines that the recipient committed an act that would constitute “cause” while employed. This case highlights that boards may want the “cause” definition to do more work in this day & age – and why revisiting narrowly-formulated versions on a clear day could afford the board with some additional room to maneuver if it comes to light that an executive has engaged in conduct causing reputational harm. This NYT article observes:
The lawsuit represents an extraordinary departure from the traditional disclose-it-and-move-on decorum that American corporations have often embraced when confronted with allegations of wrongdoing by senior executives. More than a few chief executives in recent years have lost their jobs after allegations of sexual or other misconduct, but for the most part they have departed quietly and the companies haven’t aired the ugly details.
In the #MeToo and Black Lives Matter eras, however, more companies are striving to position themselves as good corporate citizens, responsible not only to shareholders but also to customers, employees and society at large. Mr. Easterbrook’s successor at McDonald’s, Chris Kempczinski, has called for a new corporate emphasis on integrity, inclusion and supporting local communities.
The company launched its lawsuit just before a books & records action that Bloomberg reported was brought against the company by a group of Teamsters pension funds on Wednesday, alleging “a pervasive sexual harassment & gender discrimination problem.” This follows a class action suit filed last fall and other complaints.
The McDonald’s board is taking some heat for relying on Easterbrook’s representation that he had only one affair and not digging deeper in the initial investigation. The anonymous tip came to light last month after McDonald’s held a town hall meeting in which employees were encouraged to come forward with concerns, and the board immediately investigated the complaint. After the board & comp committee chair weathered a “vote no” campaign at this year’s meeting, they now have many months to engage with shareholders and resolve this issue. It’s probably good that the town hall wasn’t in April or May.
On a related note, this CFO.com article reports that the former COO of Pinterest is suing the company for gender discrimination and wrongful termination. Boards are busy right now – and they need to continue to pay attention to #MeToo risks as well as risks arising from the social movement for equity & inclusion. For guidance on navigating potential landmines, visit our checklist on board oversight of sexual harassment policies.
SEC Preparing Proposals to Regulate Chinese Audits
Late last week, the “President’s Working Group on Financial Markets” released a report to address the ongoing issue of the PCAOB being unable to review the work papers for audits of US-listed companies who use Chinese accounting firms – who say, according to this Bloomberg article, that “Chinese law bars them from sharing those documents on the grounds that the documents may contain state secrets.” Because of this stance, China is known as a “Non-Cooperating Jurisdiction.”
The report makes 5 recommendations – but the upshot, as explained in this WSJ article, would be to ban Chinese companies from listing on US exchanges unless they comply with US audit requirements. Here’s more detail from the report:
The PWG recommends enhanced listing standards to require,as a condition to initial and continued exchange listing in the United States, PCAOB access to audit work papers of the principal audit firm for the audit of the listed company.
Companies that are unable to satisfy this standard as a result of governmental restrictions on access to audit work papers and practices in NCJs may satisfy this standard by providing a co-audit from an audit firm with comparable resources and experience where the PCAOB determines it has sufficient access to audit work papers and practices to conduct an appropriate inspection of the co-audit firm.
The PWG recommends that,as a specific listing standard, a more specific disclosure requirement or both, requiring enhanced and prominent issuer disclosures of the risks of investing in issuers from NCJs. These actions could include rulemaking and/or issuing interpretive guidance to clarify the disclosure requirements to increase investor awareness, and more general awareness of the risks of investing in such companies.
John blogged a few months ago about a statement from SEC & PCAOB officials on this topic. The Senate has also passed legislation that would amend Sarbanes-Oxley to prohibit the trading of securities – on an exchange or over the counter – for companies that retain an auditor whose reports cannot be inspected completely (and similar legislation has passed the House).
Now, in light of the Administration’s report, SEC Chair Jay Clayton and five other senior SEC officials, including Corp Fin Director Bill Hinman, have issued a statement to say that the SEC will prepare proposals in response to the report’s recommendations. The statement also says that the SEC staff stands ready to assist Congress with technical assistance in connection with any potential legislation regarding these matters.
These tensions don’t appear to be deterring Chinese companies from pursuing US listings – this WSJ article notes that more than 20 companies from China have gone public so far this year on Nasdaq or the NYSE, raising $4 billion in total.
Podcasts: More “Women Governance Gurus” With Courtney Kamlet & Liz
I continue to team up with Courtney Kamlet of Vontier to interview leaders in the corporate governance field about their career paths – and what they see on the horizon. Check out our latest episodes:
– Darla Stuckey, President & CEO, Society for Corporate Governance
– Jurgita Ashley, Partner, Thompson Hine
– Susan Permut, Adjunct Professor, Boston University School of Law, and Founder & Principal Consultant, Royce Road Advisors
– Courtney Kamlet, Associate GC & Corporate Secretary, Vontier
– Liz Dunshee