(iStockphoto/tofumax)A corporate board’s most important decision is selecting the organization’s CEO. By the same token, one could argue that a board’s most distasteful decision concerns firing a CEO.
Once directors agree to release the CEO, the next step is determining whether it should be for cause or not. Each situation is different. It may depend on the nature of the CEO’s shortcomings and the terms of their contract. Was the problem merely poor company performance (rarely regarded as “cause”), poor judgment (a borderline case for “cause”), negligence or—even worse—criminal activity? As a board member, I’ve unfortunately had to confront these issues.
The McDonald’s board faced these issues in October 2019. The company’s CEO at the time, Steve Easterbrook, was found to have “engaged in a consensual relationship with an employee that violated company policy.” It had to be disappointing to board members who witnessed the turnaround Easterbrook had led at the company since his promotion to CEO four years earlier.
The board’s investigation found that Easterbrook’s “consensual relationship” wasn’t physical but involved inappropriate texting and video calls, which were confirmed by the employee. Easterbrook denied having had relationships with other employees.
The board concluded that he had “demonstrated poor judgment,” but since he had cooperated in its investigation and agreed to issue a public apology, it decided to fire him without cause. That meant that he would be able to keep $64 million in proceeds from stock that he had sold while CEO and $41 million in stock and options to which he was entitled at the time.
"Did the board act appropriately in firing Easterbrook without cause in the first place?"
It’s quite likely that the board hoped to avoid a protracted legal dispute and negative publicity at a precarious time. Employee sexual harassment allegations at McDonald’s were reaching the media along with efforts to get McDonald’s and its franchisees to raise starting pay to $15 per hour.
The board’s dilemma? Pay now or pay later. McDonald’s could pay off the offender and hope that he would apologize and go quietly, sparing the company bad publicity in the long run. Perhaps investors, employees, and others would forget the entire matter. Alternatively, the company could fire for cause and fight it out in court.
The verdict at McDonald’s? The board decided to fire Easterbrook without cause and allow him to keep $105 million in stock and options. Easterbrook fulfilled his promise, saying publicly that he “acknowledges his error in judgment” and that he was “deeply grateful” for his time at McDonald’s.
The problem, however, didn’t go away. In July 2020, an employee offered more details about Easterbrook’s conduct. (Paraphrasing Warren Buffett, “How often do you find just one cockroach?”) As a result, “dozens of nude, partially nude, or sexually explicit photographs and videos of various women” were found in Easterbrook’s emails, which he had transferred to a personal account from his corporate email account.
The board also was able to allege that Easterbrook had actually had physical sexual relationships with three other McDonald’s employees in 2018. In other words, Easterbrook had lied to the board.
Easterbrook’s contract with the company prepared for such an event. It “contained a provision that would let McDonald’s recoup severance payments it if later determined the employee should have been fired for cause.”
After a year of legal wrangling, we recently learned how the case finally played out. But as we remind our students at Harvard Business School, the outcome doesn't mean the decision made was a good one. Knowing doesn't lessen the value of discussing the issues.
"Executives fired for cause rarely go quietly. They usually sue to keep the money they received—and they often win."
And the issues here are interesting. For example, did the board act appropriately in firing Easterbrook without cause in the first place? As a board member, would you support a decision to reopen the case to seek termination with cause? If so, how much would you seek to recoup?
Executives fired for cause rarely go quietly. They usually sue to keep the money they received—and they often win. Situations in which a board changes its decision from firing “without cause” to “with cause” are relatively rare. The odds of winning such a case are uncertain. And it would guarantee that the McDonald’s name would be dragged through the media and the court of public opinion again.
If you were a McDonald’s board member, what would you have done differently? Why? What do you think?
Share your thoughts in the comments below.
Editor's note: Heskett explores the leader's role in his upcoming book, Win From Within: Build Organizational Culture for Competitive Advantage, available in January 2022.
References:
- Hannah Denham, McDonald’s sues fired CEO to recoup severance, alleges he lied about affairs with workers, The Washington Post, August 10, 2020.
- David Yaffe-Bellany, McDonald’s Fires C.E.O. Steve Easterbrook After Relationship With Employee, The New York Times, November 3, 2019.
Your feedback to last month’s column
How Will the Metaverse Affect Productivity?
I’d like to think that the tentative nature of the few responses to this column suggest the early stages of interest and limited knowledge of the so-called metaverse (or “new age internet,” as Avinash Umesh Rao calls it) rather than an assessment of its long-term importance.
Umesh Rao was somewhat skeptical of the metaverse’s effect on productivity: “Productivity at the end of the day will continue to remain a measure of efficiency and effectiveness, and the metaverse might score low on both … because business success requires a working amalgamation between technological prowess and end-user delight, and not all generations within an organization will be quick to adapt or appreciate (the metaverse).”
Dianawudavid was more hopeful: “Some of the metaverse will have business utility … akin to Zoom, but the early stages will be dominated by gamers.”
Charles Morrissey saw a practical use now, saying that “the virtual university will finally deliver an alternative, low-cost substitute.”
David Wittenberg, who has contributed thoughtful comments in response to columns in the past, offered some thoughts that should get us thinking: “Today, for the first time, I heard some midcareer professionals expressing the hope that they would have the chance to complete some of their work in the metaverse sometime soon. This got me thinking… I can easily imagine marketing taking place there … I predict that the metaverse will soon be used to achieve business ends. It will be interesting to see what unforeseen applications arise in management for this fascinating new entertainment medium.”
Do you agree? What do you think?