A fascinating ruling was recently made on a shareholder lawsuit involving separate sexual misconduct allegations at McDonald’s by Steve Easterbrook, the former CEO, and David Fairhurst, former Chief People Officer (CPO). Both men were let go by the company in November, 2019.
The ruling made by a Delaware judge enables McDonald’s shareholders to sue Fairhurst for allegedly enabling a culture of sexual misconduct and not reporting improprieties, such as a sexual relationship Easterbrook reportedly had with an employee. The ruling is being closely followed because it gives senior executives “duty of oversight” for breaches of fiduciary duty (such as bad behavior), which previously was the board’s burden alone.
From a corporate culture perspective, the ruling allows Fairhurst to be held accountable by shareholders for ignoring and fostering a toxic work culture that condoned sexual harassment. Fairhurst had requested to no avail that the lawsuit be dismissed, arguing that shareholders failed to stake a proper claim.
Fairhurst “had an obligation to make a good faith effort to put in place reasonable information systems so that he obtained the information necessary to do his job and report to the CEO and the board, and he could not consciously ignore red flags indicating that the corporation was going to suffer harm,” wrote Travis Laster, Vice Chancellor of the Delaware Court of Chancery in the ruling.
Foregoing the particulars of what happened at McDonald’s, this raised an interesting question in my mind: Is the CPO really the keeper of the culture?
I’ve always contended that if there is one owner of culture, it’s the CEO. While the head of HR plays a huge role in helping to shape and improve culture, ultimately they are following the CEO’s lead on the purpose, values, etc. that the CEO lays out. The judge’s ruling, however, seems to place full responsibility on the CPO’s shoulders for reporting improprieties to the board (again, I’m intentionally not addressing what Fairhurst did as an individual). But what about other officers? Shouldn’t the Chief Counsel also be expected to share in these reporting duties? Or the CFO, COO, and other members of the senior team?
I suspect this, and what kind of specific liability a CPO should expect to have in their role, will be hotly discussed topics over the next few months. I’m sure I’ll even facilitate some. As this plays out, it will be important for top HR brass to huddle with their legal and compliance teams to discuss the internal warning and reporting systems, and make sure they can adequately inform the board of any potential issues. One other important task for CPOs: revisit just what the directors and officers (D&O) liability insurance covers. If this ruling holds, I expect senior teams will pay a lot more attention to those policies, and it’s a good bet that premiums will be increasing.
