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McDonald’s sues former CEO, accusing him of lying and fraud

The lawsuit, filed in state court in Delaware, claims that Easterbrook carried on sexual relationships with three McDonald’s employees in the year before his ouster and that he awarded a lucrative batch of shares to one of those employees.

By: New York Times |
Updated: August 11, 2020 2:10:20 pm
McDonald’s sues former CEO, McDonald news, Steve Easterbrook, Business new,s world news, Indian expressThen McDonald's CEO Steve Easterbrook at the New York Stock Exchange in New York, on Nov. 12, 2015, was fired in 2019. McDonald’s filed a lawsuit against Easterbrook, on Aug. 10, 2020, accusing him of lying, concealing evidence and fraud. (Bryan Thomas/The New York Times)

Written by David Enrich and Rachel Abrams

Eight months had passed since McDonald’s fired its chief executive, Steve Easterbrook, for sexting with a subordinate. Easterbrook had apologized and walked away with tens of millions in compensation, and the fast food chain had moved on under a new chief executive.

Then, last month, a McDonald’s employee made a fresh allegation: Easterbrook had a sexual relationship with another subordinate while he was running the company.

That accusation has now ignited a rare public war between a major company and its former leader: McDonald’s filed a lawsuit on Monday against Easterbrook, accusing him of lying, concealing evidence and fraud.

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The lawsuit, filed in state court in Delaware, claims that Easterbrook carried on sexual relationships with three McDonald’s employees in the year before his ouster and that he awarded a lucrative batch of shares to one of those employees. McDonald’s said it was seeking to recoup stock options and other compensation that the company last fall allowed Easterbrook to keep — a package worth more than $40 million, according to Equilar, a compensation consulting firm.

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 following allegations of sexual or other misconduct, but for the most part they have departed quietly and the companies have not 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. Easterbrook’s successor at McDonald’s, Chris Kempczinski, has called for a new corporate emphasis on integrity, inclusion and supporting local communities.

“McDonald’s does not tolerate behavior from any employee that does not reflect our values,” Kempczinski wrote in an internal memo reviewed by The New York Times. He added, “As we recommit to our values, now, more than ever, is the time to lean in to what we stand for and act as a positive force for change.”

McDonald’s is extremely rare among major companies in going after a former chief executive so publicly — and with such unconcealed anger. Several corporate governance experts, when asked for an example of a company suing a former chief executive to claw back compensation, could not think of one. The closest comparison they came up with was Michael Ovitz, who left Disney in 1996 with $140 million in severance after just 14 months on the job. Shareholders sued, although a judge ultimately ruled in 2005 that while Disney’s board had displayed poor judgment, the company was within its rights to send Ovitz off with such a generous payday.

CBS’ firing of Leslie Moonves, in which the television company accused him of obstructing an internal investigation, is one of the few other recent instances of a company in a very public dispute with its former leader. (In that case, Moonves claims he is entitled to a $120 million severance package. The dispute is now in arbitration.)

A lawyer for Easterbrook didn’t respond to requests for comment on Monday.

McDonald’s lawsuit also raises new questions, however, about how diligent it was in looking into Easterbrook’s conduct before dismissing him with a generous compensation package. It acknowledges, for instance, that the initial review did not include a thorough search of the executive’s email account.

“One would think that it would be internal investigation 101 to look at all electronic records right away,” said Brandon L. Garrett, a professor who specializes in corporate criminal law at Duke University School of Law. “The concern, if an investigation doesn’t look at emails, is that it was a halfhearted investigation.”

Until last fall, Easterbrook, a native of Watford, England, was regarded as something of a savior at McDonald’s. He had worked at the company for nearly two decades before taking its helm in March 2015. The fast-food chain was in a financial slump. Easterbrook streamlined its businesses, introduced technological innovations like touch-screen ordering and delighted customers by offering all-day breakfasts. The company’s shares roughly doubled during his tenure.

But in October 2019, a McDonald’s employee notified the company that she was engaged in an inappropriate relationship with Easterbrook, according to a person familiar with the company’s investigation. The employee told the company that she was worried that she would end up getting punished for the monthlong consensual relationship, which consisted of sexually explicit text messages, photographs and at least one FaceTime call with him, but was not physical.

Outside lawyers for McDonald’s interviewed Easterbrook, who confirmed the employee’s account. He assured the investigators that he had never engaged in a sexual relationship with an employee.

The lawyers examined Easterbrook’s company-issued iPhone 10 and his iCloud account, but did not find evidence of additional misconduct, according to the person familiar with the investigation. They did not review his electronic communications that were stored on McDonald’s computer servers.

The board of directors decided to fire him. The question that the directors considered was whether he would be fired “for cause” — in other words, for an offense such as dishonesty or committing a crime. It was a crucial determination. If Easterbrook was fired for cause, he would have to relinquish previously awarded compensation, including stock options that he was not yet eligible to cash in.

McDonald’s said in its lawsuit Monday that its board had feared that trying to fire Easterbrook for cause would be “certain to embroil the company in a lengthy dispute with him.” Instead, the board opted to ease Easterbrook out “with as little disruption as possible.”

The company allowed Easterbrook to keep his stock options and other compensation.

But McDonald’s severance plan, which the company said applied to Easterbrook, contained an important clause: If, in the future, McDonald’s determined that an employee was dishonest and actually deserved to be fired for cause, the company had the right to recoup the severance payouts.

Early last month, an employee told McDonald’s that another employee had been telling colleagues about her sexual relationship with Easterbrook when he was chief executive, according to the person familiar with the internal investigation. McDonald’s opened a new inquiry.

This time, investigators for the company searched for the woman’s name in Easterbrook’s emails, which were backed up on corporate servers. They quickly found an email from October 2019, in which Easterbrook had sent pictures of the woman and two other McDonald’s employees to his personal Hotmail account in Britain, the person said.

In its lawsuit, McDonald’s said it ultimately found “ dozens of nude, partially nude, or sexually explicit photographs and videos of various women, including photographs of these company employees, that Easterbrook had sent as attachments to messages from his company email account to his personal email account.”

The company said the photographs constituted “undisputable evidence” that Easterbrook violated the company’s prohibition on having sexual relationships with subordinates and that he had lied to the investigators last fall.

McDonald’s lawyers hadn’t found the emails during the initial investigation because Easterbrook had deleted them from his phone, the company said.

While Easterbrook was having a sexual relationship with one of the employees, he awarded her hundreds of thousands of dollars’ worth of shares, the company said in its lawsuit. The person familiar with the investigation said the stock was in the form of a “special retention grant” that certain senior executives are authorized to dispense to top-performing employees. Such awards don’t need to be approved by the company’s board.

“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,” the company said in its lawsuit.

In that case, Easterbrook would not have been entitled to retain his previously awarded compensation.

McDonald’s said it was taking action to prevent Easterbrook from cashing in his stock options or selling his shares.

The person familiar with the investigation said that McDonald’s board of directors and Kempczinski quickly decided that the company needed to make public the new information about Easterbrook. Keeping it under wraps, the person said, would have run counter to the new chief executive’s emphasis on fostering a transparent and welcoming corporate culture.

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