In a shareholder lawsuit challenging the handling of sexual harassment by former CEO Steve Easterbrook and the company’s former top human resources executive, a Delaware judge dismissed claims against McDonald’s directors.
The judge ruled on Wednesday that the lawsuit does not support the conclusion that the board failed to respond to allegations involving Easterbrook and former Chief People Officer David Fairhurst, both of whom were accused of promoting and participating in a “party atmosphere” at the company’s Chicago headquarters.
The allegations date back to 2018, when the board was informed that Fairhurst had dragged a female employee onto his lap during a company party. Easterbrook told a board committee that Fairhurst was involved in an unreported sexual harassment incident in 2016, and that he had been warned about excessive drinking at company events.
“When the head of the human resources function has engaged in sexual harassment on multiple occasions, that is the most vivid of red flags regarding a potential problem with sexual harassment and misconduct,” Vice Chancellor J. Travis Laster said.
Nonetheless, Easterbrook recommended that Fairhurst be punished by forfeiting half of his 2018 bonus payment and signing a “last chance” letter, deviating from the company’s no-tolerance policy. The board also launched a broader effort to address sexual harassment and misconduct issues, which sparked protests by restaurant workers across the country and drew the attention of several U.S. senators.
However, the board discovered in October 2019 that Easterbrook was involved in a prohibited relationship with a female subordinate that included sexually explicit private messages and video calls. Easterbrook was fired “without cause” two weeks later, allowing him to keep tens of millions of dollars in stock-based benefits and other compensation, while Fairhurst was fired “for cause.”
“The confluence of events in 2018, including the revelations about the global chief people officer, led to action,” Laster explained, adding that there was no evidence that the defendants acted in bad faith or breached their duty of oversight.
The lawsuit also claimed that the directors breached their fiduciary duties by firing Easterbrook without cause, claiming that they feared “ugly litigation that would expose their own failures to address the company’s problems with sexual harassment and misconduct.”
Laster rejected that argument, noting that Delaware’s “business judgment rule” protects corporate directors’ decision-making absent a showing of bad faith.
“It is not conceivable that the director defendants sought a no-fault termination for the CEO out of self-interest,” Laster wrote. “It is also implausible that the director defendants breached their duty of care.”
“Reasonable minds can differ on whether the director defendants made the correct decision in terminating the CEO without cause,” the judge added. “Even if the defendant directors made an objectively incorrect decision, the business judgment rule shields them from liability for a mistake made in good faith.”
According to Laster, the board’s decision to hire Easterbrook and give Fairhurst “one last chance” is also protected by the business judgment rule.
At the time of his firing, Easterbrook told the company there were no other similar instances of misconduct. However, in July 2020, the company received an anonymous tip alleging that Easterbrook had a sexual relationship with another employee. An investigation revealed that, in addition to the relationship that led to Easterbrook’s dismissal, he had sexual relationships with at least three other employees. He also used his company email account to send dozens of naked and sexually explicit photos and videos, including images of the three employees.
The board sued Easterbrook, claiming that if it had known the extent of his misconduct, it would not have fired him without cause. The company demanded the return of equity awards he received in 2018 and 2019. It announced in 2021 that the lawsuit had been settled and that Easterbrook had returned more than $105 million in equity awards and cash.