McDonalds – Shareholder groups question differential treatment for McDonald’s former CEO
Photograph by Jonathan Maze
McDonald’s gave former CEO Steve Easterbrook better treatment in firing him in late 2019 than it did former Chief People Officer David Fairhurst over roughly similar allegations—proving that the company should not have led Easterbrook walk away with millions, a group of investors seeking to oust McDonald’s chairman argued on Monday.
The group, including CtW Investment Group and the California Public Employees Retirement System (CalPERS), has been pushing shareholders to vote against the company’s chairman, Enrique Hernandez, along with Director Richard Lenny, over Easterbrook’s severance.
McDonald’s fired Easterbrook in November 2019 over a consensual relationship with an employee but let him keep stock and other awards now valued at well over $50 million. The day after he was fired, Fairhurst was dismissed and the company later revealed that he was fired. McDonald’s has since sued Easterbrook to recover that severance after discovering he had other relationships that he did not disclose to the board.
“There is a little bit of disconnect in why he was treated differently,” Michael Varner, director of executive compensation research with CtW, said in a webinar on Monday. “Both had fraternization issues or fraternization allegations so both could have been treated the same.”
“Favoritism might be a strong word,” he added. “But it was clear Easterbrook was a superstar and [the board] wanted to give him a golden goodbye.”
McDonald’s would not comment for this story.
Meanwhile, proxy advisory firms gave mixed signals on where shareholders should vote on the topic. Glass Lewis last week recommended voting against the two directors. Glass Lewis agreed with CtW that Hernandez should be held “responsible for the board’s inadequate response and its decisions with regard to Mr. Easterbrook’s termination.” It also agreed that shareholders should vote against Lenny, who is leader of the board’s compensation committee.
But Institutional Shareholder Services recommended that both directors keep their positions. “When viewed on a holistic basis, the board’s actions do not constitute risk oversight failures.” ISS also gave the board credit for “not sweeping these issues under the rug” and for taking legal action against Easterbrook to recoup his severance payments …”
Proxy advisory firms make recommendations on shareholder votes at public companies. Institutional shareholders that hold much of the stock in such companies often go by their recommendations.
The group of shareholders have ties to organized labor—which has been pushing McDonald’s and other restaurant companies to allow unions and raise pay to $15 an hour. That pay rate is increasingly common at many restaurants these days amid intense demand for labor.
But the groups also argue that companies need to pay closer attention to “human capital” and that treatment of employees benefits companies and their shareholders in the long term.
“What is driving the U.S. economy these days is human capital,” said Anne Simpson, managing investment director with CalPERS. “But we don’t have information on the status of employees, contracts, we don’t have information on health and safety, diversity, pay, terms and conditions of employees. We don’t have a picture of the condition of human capital in a company.”
The groups argue that McDonald’s was wrong in not firing Easterbrook for cause immediately—they note that the board made a “scant” investigation early on and ended up paying the price down the road.
“They engaged in a hasty, scant investigation,” Varner said. “They terminated him and gave him all this money. They made a bad call.
“Had they made the right call in the beginning, which was to terminate him for cause, they would not be in the position they are now. That is one of [the board’s] main functions. If they cannot make good decisions that’s going to be in the best interest of the company and save company money and not be in this debacle a year later, they should not be on the board.”