It was a brief dalliance, just a few weeks in length, over text and video only.
The end of the affair was nonetheless just the beginning for Stephen Easterbrook, the McDonald’s CEO who went from being hailed as the company’s “savior” by doubling its share price in less than five years to losing his job and getting banned from serving as an executive or director at any other company for five years.
This consensual workplace relationship—forbidden under the iconic fast-food chain’s fraternization policy because of potential conflicts of interest—stirred an already brewing scandal about the behemoth’s corporate culture as it collided with the #MeToo movement’s spotlight on sexual relationships and power in the workplace. And as new information about Easterbrook’s romantic relationship with other employees emerged, it became clear to the company’s board that, when it comes to the workplace dalliances of leaders, a kiss is never just a kiss.
“A board’s oversight over culture and respect in the workplace has become much more important than it was prior to #MeToo.”
A series of Harvard Business School case studies unfurls the details of this drama as it roiled through the McDonald’s boardroom in 2019, moved to the Delaware Court of Chancery in 2021, and ultimately led to a Securities and Exchange Commission sanction in 2023, which attracted HBS Baker Foundation Professor Lynn S. Paine to the tale.
An expert on corporate governance, Paine says how McDonald’s handled the Easterbrook scandal offers important lessons for all companies, the first being: It’s not OK to look the other way when a leader crosses ethical lines. In the wake of #MeToo, a global campaign against sexual abuse and harassment that started in 2017, the responsibilities of companies have grown, and boards are now expected to monitor corporate culture and take action if they learn that employees are being sexually harassed.
“A board’s oversight over culture and respect in the workplace has become much more important than it was prior to #MeToo,” says Paine. “Harassment is no longer seen as just an individual misdeed. It can have implications for the company’s reputation, brand, culture, and legal exposure. That’s why it has become an issue for boards.”
Paine, a Baker Foundation Professor and the John G. McLean Professor of Business Administration, Emerita, wrote the cases with HBS senior researcher Will Hurwitz.
McDonald’s emerges from a slump
With 40,000 mostly franchised restaurants across the world, McDonald’s serves some 63 million customers daily and employs more than 2 million workers. The brothers who founded the chain in 1937, Richard and Maurice McDonald, pioneered the idea of a drive-through restaurant with low prices that appealed to working-class families.
“The company has built its brand around family dining, so that is especially important to its culture,” explains Paine.
Despite its ubiquity, McDonald’s managed to inspire creative offerings, including the Big Mac and Egg McMuffin—as well as what has been called one of the most famous cross-sells of all time: “Would you like fries with that?”
Yet by 2015, McDonald’s found itself in what reporters called the worst slump in a decade, driven by rising competition, declining sales, and growing scrutiny of the health risks of fast food. Easterbrook, who had been a longtime McDonald’s branding executive from the UK, was tapped to take over as CEO. The case cites an interview with a former colleague, Richard Robinson, saying, “Steve knows every inch of how the restaurant works, having come up through the ranks. Above all, he’s someone we can all trust to always do the right thing.”
However, romantic entanglements were part of Easterbrook’s story from the start. When the board appointed him CEO, they knew he had a relationship with a third-party consultant who worked with McDonald’s. The board agreed to make the appointment if the consultant was removed from the McDonald’s account, and the deal was sealed.
Easterbrook restructured the organization, increased the number of franchises, boosted pay for employees, and introduced all-day breakfast, which was wildly successful. By the end of his first year, sales were up and earnings were beating analysts’ expectations.
The #MeToo movement changes everything
At the same time, the company’s new management allegedly encouraged a party culture that made some employees—especially women—uncomfortable, according to a legal complaint filed later. Easterbrook held open bar happy hours with David Fairhurst, a personal friend he had promoted to oversee human resources, and the two men developed reputations for “flirting with female employees.” HR allegedly didn’t intervene despite knowledge of the behavior, according to the legal documents cited by the case studies.
In 2016, 15 McDonald’s employees filed complaints with the U.S. Equal Employment Opportunity Commission alleging that they had been sexually harassed. And then the #MeToo movement emerged in 2017, raising awareness of sexual misconduct in the workplace and raising the stakes for how companies handle such situations. Ten more McDonald’s employee complaints were filed in 2018, and employees in 10 U.S. cities staged a one-day strike to call for improved policies to address sexual harassment.
“Boards today recognize that a CEO is the face of the company and its brands, and steward of its culture.”
In October 2019, after the McDonald’s board learned that Easterbrook was accused of having a consensual relationship with a company employee, the board immediately asked outside counsel to investigate. Their finding: The affair involved only texts and video calls, ended after a few weeks, and was an isolated incident.
The board then weighed an important decision that turned on their view of the CEO’s role and the company’s compensation policies: Would a sanction be enough, or should the board force Easterbrook out? And if the board fired him, should it do so with cause, revoking his eligibility for a severance package valued at $47 million?
“In the old days, your personal behavior was not seen as relevant to your role as a corporate leader, but now, if you’re a candidate for CEO of a large company, your personal behavior will typically be carefully scrutinized. Boards today recognize that a CEO is the face of the company and its brands, and steward of its culture,” says Paine.
The board ousts Easterbrook, lawsuits follow
The board decided to fire Easterbrook without cause—since establishing cause would have required proving “dishonesty, fraud, illegality, or moral turpitude,” a challenging legal standard to meet.
The second case in the series takes the story forward. “Our cases often treat individual decisions in isolation. This case series provides an opportunity to see how one board decision leads to another and another and another,” says Paine.
In 2020, the board learned of another alleged relationship between Easterbrook and an employee. This time, its investigation turned up three additional workplace relationships and sexually explicit photos and videos. Plus, the board discovered that Easterbrook had granted restricted stock units worth hundreds of thousands of dollars to one of the employees. There were also suggestions of a coverup: Easterbrook had allegedly deleted material from his phone.
The board made the complicated decision to try to claw back Easterbrook’s severance, resulting in a lengthy legal battle and ultimately a settlement in which Easterbrook forfeited cash and stock worth $105 million. Shareholders sued the board for breach of its fiduciary duties, including its oversight duty, but the Delaware Court of Chancery dismissed the suit, saying the board acted appropriately when it learned of the harassment claims and that its decisions to hire Easterbrook and then to fire him without cause were matters of business judgment that the court would not second guess.
However, the SEC charged McDonald’s and Easterbrook with providing false and misleading public statements related to Easterbrook’s termination. As part of a settlement, Easterbrook was fined $400,000 and barred from serving as a public company officer or director for five years. The SEC didn’t impose a financial penalty on McDonald’s, citing its cooperation in the investigation, though the company did consent to a cease-and-desist order.
The outcome sent a strong message to all businesses, Paine says: Even though the claims against the board were ultimately dismissed, the saga underscored the importance of the board’s role in fostering a safe and respectful organizational culture through its oversight activities and, perhaps more important, its selection of a CEO. Choosing a CEO is arguably the board’s most important function, and boards need to pay attention to candidates’ ethical fit as well as their business and technical skills.
The case is also a reminder that society’s expectations for leaders’ behavior can change quickly. The #MeToo movement effected a dramatic shift in the norms of acceptable behavior in the workplace. Easterbrook was just one of a number of CEOs to get caught in the reversal and be shown the door over harassment or relationship issues. Boards and business leaders need to stay attuned to these changes.
The complicated responsibility of managing corporate culture
The McDonald’s ordeal should prompt leaders and board members to ask themselves several important questions, Paine says:
1. What is our policy on workplace relationships?
McDonald’s had an explicit written policy prohibiting dating and romantic relationships between employees who report to one another either directly or indirectly. Some companies just require disclosure of these relationships. But many companies do not have a policy at all, making it even messier for the board to deal with situations like this.
It’s a good idea to have a policy, says Paine. “Policies have to be interpreted and can mean different things to different people, but having one at least provides a starting point for the discussion.”
2. How do we monitor culture?
When making hiring decisions, particularly for leadership roles, companies today need to do more due diligence than ever before, says Paine. And boards now have the responsibility of continuously monitoring the culture and staying ahead of problems.
“If you’re on a board, you should be asking: ‘Do we have adequate mechanisms in place to understand the company’s culture and how it’s evolving and how to identify problem areas?’” Paine says. “Pay attention to your leader’s personal behavior.”
3. Do we know what our employees saying?
With company culture now considered the board’s domain, it’s important for directors to take in a variety of perspectives across the company. They should consider spending time at worksites and offices, and developing processes for monitoring social media and conducting meaningful employee surveys, Paine suggests. They should also make sure the company has whistleblower hotlines that are closely monitored and keep tabs on what issues are bubbling up.
“Get a window into the culture,” Paine says. “It’s a really hard area for a boards to monitor, especially in a huge, far-flung organization like McDonald’s. The board did eventually take action to address the harassment issue, but ideally, they would have become aware of the issue earlier.”
4. Does the company investigate allegations thoroughly?
The first investigation the McDonald’s board conducted into Easterbrook’s workplace affairs didn’t go deep enough and left issues uncovered, Paine says.
“If you do have an allegation against your leader, it’s important to do a thorough investigation as quickly as you can,” she says.
5. Are we holding everyone to the same standard?
Easterbrook had been hailed as a messiah after doubling McDonald’s share price, which raised uncomfortable questions about whether his business acumen led the board to brush off complaints about his behavior, at least initially.
“It’s only natural to give someone who has done really well the benefit of the doubt, but giving them a pass on outright misconduct will erode the culture very quickly,” Paine says.
“It’s very important to differentiate between a miscalculation—an investment that doesn’t pan out—and a misdeed, which is illegal or unethical in a serious way,” Paine says. Miscalculations are forgivable or maybe even desirable, but misdeeds are something else altogether.”
6. Is a succession plan in place?
One thing McDonald’s had going for it was a clear successor in Chris Kempczinski, who had been president of McDonald’s USA. Having a succession plan allowed the board to take quick action when complaints against Easterbrook began piling up, without having to worry about who would run the business.
“You’re not stuck keeping a person too long,” Paine says. “For McDonald’s, one of the things you saw was a slight dip in stock price when Easterbrook was first removed, but 30 days later it was back to pre-termination levels.”
7. Do we understand what rights victims of harassment have today?
A huge firm with an internationally recognized name and publicly traded status, McDonald’s was held to a high standard, Paine says. But the #MeToo movement has expanded awareness of sexual harassment in the workplace, regardless of a company’s size or status. In fact, after #MeToo, many companies saw a spike in the percentage of calls about sexual harassment coming in on their whistleblower lines, says Paine. #MeToo also led to federal legislation ending forced arbitration of sexual harassment claims, previously a common practice at many companies. Now, victims can choose whether to take their claims to arbitration or to court, raising the stakes for companies that get caught up in harassment allegations.
“The more general lessons of #MeToo about power dynamics and changing norms of behavior apply across society,” she says. “At a small company, you might not have the same tools to address harassment, and your options might feel more limited, but companies need to recognize that today, harassed employees have more power.”
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