The Securities and Exchange Commission (SEC) has determined that McDonald's broke the law when it partially withheld information that was relevant to the termination of former CEO Stephen Easterbrook in 2019.
The business "failed to disclose that it used discretion in treating Easterbrook’s termination as ‘without cause’ under the relevant compensation plan documents," according to the SEC, and that by doing so, Easterbrook was given $44 million in compensation that would have otherwise been forfeited. The court's ruling also called attention to errors in the company's press releases about firing Easterbrook.
Easterbrook was accused by the SEC of deceiving investors by neglecting to reveal to the company's internal investigation that, throughout his four years at McDonald's, he had sexual encounters with more than one female employee, information that would have led to his termination with justification.
Easterbrook agreed to pay a $400,000 fine to resolve SEC allegations that he misled investors about the events that led to his firing in 2019 without admitting or disputing any wrongdoing. Additionally, he consented to a stop-and-desist order with a five-year officer and director bar.
"When corporate officers corrupt internal processes to manage their personal reputations or line their own pockets, they breach their fundamental duties to shareholders who are entitled to transparency and fair dealing from executives," Gurbir Grewal, director of the SEC's Division of Enforcement, said in a press release on Monday. "By allegedly concealing the extent of his misconduct during the company’s internal investigation, Easterbrook broke that trust with—and ultimately misled—shareholders."
The SEC said in a ruling issued on Monday that McDonald's failed to disclose all significant terms of its severance package with Easterbrook, but the firm was not penalized since it cooperated with the investigation of the agency. The order stated that this cooperation included "voluntarily providing relevant documents and testimonial information that was otherwise not required to be produced in response to the staff’s requests; providing briefings to the staff that highlighted critical facts and key documents; and promptly making the company’s officers, directors, and other senior managers available for interviews and testimony." Additionally, McDonald's took "affirmative remedial steps" to recoup the money it had given Easterbrook in compensation.
According to Mark Cave, associate director of the Division of Enforcement, "today's order finds that McDonald's failed to disclose that the company exercised discretion in treating Easterbrook's termination as without cause in conjunction with the execution of a separation agreement valued at more than $40 million."
In November 2019, McDonald's fired Easterbrook for engaging in a consensual, platonic relationship with a female employee, which the company's board of directors deemed to be against the company's code of conduct. An internal investigation came to the conclusion that all communication throughout the brief relationship took place via text and video. It was the sole accusation of its kind made against Easterbrook at the time. Easterbrook had been the company's CEO for four years when the board made the decision to terminate him "without cause" for breaking the regulations.
Later, the business learned that Easterbrook had improper sexual encounters with three McDonalds staff members, thanks in part to a corporate whistleblower. McDonalds later filed a lawsuit, saying that if it had known about the other unlawful interactions with McDonald's employees, it would have deemed Easterbrook's termination to be "with cause" and would not have provided him with a severance package. The litigation between the business and Easterbrook was settled in December 2021, with Easterbrook agreeing to pay back the $105 million in cash and equity he received from the business when he was sacked.
Hester Peirce and Mark Uyeda, two SEC commissioners, stated in a dissenting statement on Monday that the SEC's action creates a "slippery slope" addressing executive compensation disclosure obligations into "unintended areas." They claimed that the information mandated by Item 402(b) of Regulation S-K did not cover the question of whether McDonald's fired Easterbrook for good reason or without good reason.
According to them, "industry practice for complying with Item 402 has developed over many years, so to spring a novel interpretation through an enforcement action is not a reasonable regulatory approach." They said that the commission should deal with the matter by issuing regulations or official instructions.
The SEC "recognized both the company's substantial cooperation and action taken by the company to recover value for its shareholders and imposed no monetary penalty on McDonald's," the fast food chain said in a statement released on Monday.
The statement read, "The company continues to ensure our values are part of everything we do, and we are proud of our strong ‘speak-up’ culture that encourages employees to report conduct by any employee, including the CEO, that falls short of our expectations." By fLEXI tEAM