Compliance Case II: In re: to McDonald's Corporation Stockholder Derivative Litigation, Del. 289 A.3d 343 (2023)

Defendant David Fairhurst served as Executive Vice President and Global Chief People Officer of McDonald's Corporation...from 2015 until his termination with cause in 2019. In that position, Fairhurst was the executive officer with day-to-day responsibility for ensuring that one of the largest employers in the world provided its employees with a safe and respectful workplace....

The plaintiffs' oversight claim asserts that a culture of sexual misconduct and sexual harassment was allowed to develop at the Company....

In this case, the plaintiffs describe their oversight claim as resting on Fairhurst knowing about evidence of sexual misconduct and acting in bad faith by consciously disregarding his duty to address the misconduct. In other words, the plaintiffs have asserted a Red-Flags Claim....

1. The Existence of Red Flags

The plaintiffs' Red-Flags Claim asserts that Fairhurst permitted a toxic culture to develop at the Company that turned a blind eye to sexual harassment and misconduct. As the red flags evidencing that growing culture, the plaintiffs cite a series of events, with the following pertinent to the claim against Fairhurst:

• ....
• Easterbrook and Fairhurst promoted a party atmosphere at the Company that emphasized drinking.
• The human resources department ignored complaints about the conduct of co-workers and executives.
• Employees feared retaliation for reporting complaints to the human resources department.
• In October 2016, over a dozen Company employees filed complaints with the EEOC about sexual harassment and misconduct at the Company.
• Later that month, employees in over thirty cities across the United States staged a one-day walkout to protest problems with sexual harassment and misconduct at the Company.
• In December 2016, Fairhurst engaged in an act of sexual harassment that was not reported to the Company's Compliance Department and did not reach the Audit Committee or the Board.
• In May 2018, over a dozen Company employees filed coordinated complaints with the EEOC.
• In September 2018, Company workers from ten cities organized a one-day strike to protest the Company's culture of sexual harassment.
• In November 2018, Fairhurst engaged in an act of sexual harassment at a party for the human resources staff. Over thirty Company employees witnessed the incident, and several reported it to the Company's Compliance Department. The Compliance Department concluded that Fairhurst violated the Company's Standards of Business Conduct.
• In December 2018, the Audit Committee reviewed the incident involving Fairhurst and chose to discipline him and require that he execute the Last Chance Letter.
• Also in December 2018, Senator Duckworth wrote a letter to the Company about sexual harassment complaints against the Company.
• In June 2019, Senator Duckworth joined with seven other United States Senators in writing to the Company and asking specific questions about sexual harassment and workplace safety.
• In October 2019, the Board learned that Easterbrook was engaging in a prohibited relationship with a Company employee.
• In November 2019, after investigating Easterbrook's misconduct, the Board terminated Easterbrook without cause.
• Also in November 2019, the Board terminated Fairhurst with cause, inferably because he had violated the terms of his Last Chance Letter and engaged in an additional act of sexual harassment.
• ....

....These allegations support Fairhurst's knowledge of red flags. As Global Chief People Officer, he was the executive officer with day-to-day responsibility for overseeing the human resources function and promoting a safe and respectful environment. He was supposed to have his ear to the ground and be knowledgeable about the Company's employees. For someone in Fairhurst's position, the coordinated EEOC complaints in October 2016, followed by a thirty-city walkout, were massive red flags. He should have been figuring out whether something was seriously wrong and either addressing it or reporting upward to the CEO and the directors. For someone in Fairhurst's position, the second round of coordinated EEOC complaints in May 2018, followed by a second one-day strike in ten cities in September 2018, was another set of red flags. He again should have been figuring out whether something was seriously wrong and either addressing it or reporting upward to the CEO and the directors....

2. The Response To The Red Flags

Pleading red flags is not enough. The plaintiffs also must plead facts supporting an inference that Fairhurst acted in bad faith by consciously ignoring red flags.

....First, there are the allegations about Fairhurst's own participation in multiple acts of sexual harassment. He committed an act of sexual harassment in December 2016, shortly after the first set of EEOC complaints and the associated thirty-city walkout. He committed another act of sexual harassment in November 2018, after the second round of EEOC complaints and the ten-city strike. He committed a third act of sexual harassment in November 2019, after spending the prior year focusing with the rest of the management team on ways to address the Company's problems with sexual harassment and misconduct. When considering whether a defendant consciously ignored red flags regarding a culture of sexual harassment and misconduct, it is reasonable to give weight to the fact that the defendant himself committed multiple acts of sexual harassment, including repeating the behavior after being disciplined and given a last chance. It is reasonable to infer that such an individual could consciously turn a blind eye to red flags about similar conduct by others.

Second, the complaint alleges that under Fairhurst's watch, the human resources department ignored complaints about the conduct of co-workers and executives. The complaint also alleges that employees feared retaliation for reporting complaints to the human resources department. Those allegations support the inference that as a serial harasser, Fairhurst was consciously failing to do what he should have done to address problems with sexual harassment and misconduct. Instead, he and Easterbrook were promoting and enjoying the party atmosphere at headquarters....

To be sure, there is record evidence indicating that during 2019, Fairhurst was part of the effort by Company management to address the problem of sexual harassment and misconduct. Most notably, he co-authored a memorandum for the Strategy Committee's meeting in June 2019 that described what action the Company was taking in response to the red flags about sexual harassment. He also gave presentations to the Strategy Committee in June and September. The actions that Company management took, such as adopting an updated anti-sexual harassment policy and creating new employee training programs, would have involved the human resources department that Fairhurst led.

Beginning in 2019, therefore, it is not possible to draw an inference that Fairhurst consciously ignored the Company's problems with sexual harassment and misconduct. But it is also fair to note that Fairhurst had been disciplined for sexual harassment in November 2018. He was part of the problem, and he was caught, so he had to be part of the solution. Of course, he also engaged in a third act of sexual harassment in November 2019 and was terminated for it. It is reasonable to infer that Fairhurst's acts of sexual harassment constituted knowing misconduct....

Questions

Identify two (2) compliance failures and for each identified failure answer the following questions:

Describe one (1) policy and related procedures for each of the compliance failures that you would recommend to avoid that type of compliance failure in the future.

Discuss one (1) audit procedure for each of the compliance failures that you would recommend to avoid that type of compliance failures in the future.

For each Compliance Case, please:

Identify and discuss at least two (2) failures that occurred after the companies' major compliance failures had been identified ("post-failure failures")

For each post-failure failure, identify one (1) post-failure mechanism that you would recommend to ensure that the board of directors has all of the relevant information so that they can act in a timely fashion.

Answer rating: 100% (QA)

Compliance Failure 1 Permitting a toxic culture to develop that turned a blind eye to sexual harassment and misconduct Policy and Related Procedures To address this compliance failure and prevent the ... View the full answer