Sex, lies and McDonald's regulatory reckoning

By Beth Kowitt

Yesterday, the Securities and Exchange Commission charged Stephen Easterbrook, the company's former CEO, with making false and misleading statements about relationships with female employees that led to his firing in November 2019. Easterbrook agreed to a five-year ban on being an officer or director at a U.S. public company and a $400,000 civil penalty.

McDonald's, meanwhile, was charged for "shortcomings in its public disclosures." Translation: You didn't put something in your proxy that you should have.

Despite the charge, the company walked away with no financial penalty. The SEC justified the decision by pointing to the company's "substantial cooperation" and the "remedial measures" it had already taken. (In December 2021, Easterbrook agreed to pay McDonald's $105 million after the company sued him to claw back compensation.)

Maybe it's the lack of a monetary fine, its technical nature, or simply that it's not as juicy as the Easterbrook part of the narrative, but somehow the charge against McDonald's has ended up as a footnote in the whole ordeal. It should be the main attraction. The charge turns the sordid affair from a McDonald's story with leadership and management lessons into one with serious regulatory implications for corporate America about what it must disclose to investors.

Here's the backstory: When McDonald's fired Easterbrook in 2019 for sexting with an employee, it said he had violated company policy and demonstrated poor judgement. However, the board decided not to fire him for cause, allowing Easterbrook to walk away with more than $40 million in severance and compensation. Less than a year later, a whistleblower ignited a further investigation that discovered Easterbrook had in fact had multiple sexual relationships with employees in the year before his departure and allegedly attempted to cover them up during the initial investigation. McDonald's sued Easterbrook and subsequently said that had it known this information when it fired him, it wouldn't have terminated him without cause.

The with or without cause piece is what's critical in the SEC investigation of the company. The agency is saying that the "shortcomings" in McDonald's public disclosures stem not from deciding to fire Easterbrook without cause, but rather from its failure to disclose that the decision to do so was at the board's discretion.

This might seem like a technicality, but it's by no means a stretch to say that having the information is relevant to investors. Firing Easterbrook without cause casts a light on the board, revealing material information about its thinking and process. That decision has in fact made the company a target of a shareholder group, which has called for a refresh of the board - including Chairman Rick Hernandez, who is a longtime director. McDonald's has made some apparent concessions, adding four new board members since Easterbrook's departure. However, all but one of the directors who oversaw the Easterbrook investigation remain on the board.

The SEC's decision comes with its detractors. Two of the SEC's own commissioners dissented - something that historically was rare but has become far more common in the last decade - calling the order a "novel interpretation'' of the agency's disclosure rules. Their argument is that requiring a company to disclose the underlying reason for why it chose to terminate with or without cause is beyond the scope of the rules and has the potential to lead to confusion.

Neither McDonald's nor Easterbrook have denied or admitted to the SEC's findings.

The kind of deal McDonald's cut with Easterbrook is far from unusual. When facing a crisis in leadership, companies want to move on quickly and quietly, and both sides have powerful incentives to settle. McDonald's made just that claim in its suit against Easterbrook, saying that its decision to terminate without cause was an attempt to protect the company's interests and create as little disruption as possible. It was very likely part of the negotiation in Easterbrook's exit.The SEC's order now makes that point of negotiation less readily available for companies that are separating from an executive. What organizations say about a CEO's departure is not just a business decision but a clear regulatory issue. Boards will have to be more candid and transparent in their disclosures, further pulling back the curtain on their deliberations. The message from the SEC is very clear: be forthright, or risk deep scrutiny.

Beth Kowitt is a Bloomberg Opinion columnist covering corporate America. She was previously a senior writer and editor at Fortune Magazine.

WASHINGTON POST