Read the Adopted Case provided below to answer the questions that follow:

Firing McDonalds Easterbrook: What Could the Board Have Done Differently?

By James Heskett

A corporate boards most important decision is selecting the organizations CEO. By the same token, one could argue that a boards most distasteful decision concerns firing a CEO. Once directors agree to release the CEO, the next step is determining whether it should be for cause or not. Each situation is different. It may depend on the nature of the CEOs shortcomings and the terms of their contract. Was the problem merely poor company performance (rarely regarded as cause), poor judgment (a borderline case for cause), negligence oreven worsecriminal activity? As a board member, Ive unfortunately had to confront these issues.

The McDonalds board faced these issues in October 2019. The companys CEO at the time, Steve Easterbrook, was found to have engaged in a consensual relationship with an employee that violated company policy. It had to be disappointing to board members who witnessed the turnaround Easterbrook had led at the company since his promotion to CEO four years earlier.

The boards investigation found that Easterbrooks consensual relationship wasnt physical but involved inappropriate texting and video calls, which were confirmed by the employee. Easterbrook denied having had relationships with other employees. The board concluded that he had demonstrated poor judgment, but since he had cooperated in its investigation and agreed to issue a public apology, it decided to fire him without cause. That meant that he would be able to keep $64 million in proceeds from stock that he had sold while CEO and $41 million in stock and options to which he was entitled at the time.

Its quite likely that the board hoped to avoid a protracted legal dispute and negative publicity at a precarious time. Employee sexual harassment allegations at McDonalds were reaching the media along with efforts to get McDonalds and its franchisees to raise starting pay to $15 per hour. The boards dilemma? Pay now or pay later. McDonalds could pay off the offender and hope that he would apologize and go quietly, sparing the company bad publicity in the long run. Perhaps investors, employees, and others would forget the entire matter. Alternatively, the company could fire for cause and fight it out in court.

The verdict at McDonalds? The board decided to fire Easterbrook without cause and allow him to keep $105 million in stock and options. Easterbrook fulfilled his promise, saying publicly that he acknowledges his error in judgment and that he was deeply grateful for his time at McDonalds. The problem, however, didnt go away. In July 2020, an employee offered more details about Easterbrooks conduct. (Paraphrasing Warren Buffett, How often do you find just one cockroach?) As a result, dozens of nude, partially nude, or sexually explicit photographs and videos of various women were found in Easterbrooks emails, which he had transferred to a personal account from his corporate email account. The board also was able to allege that Easterbrook had actually had physical sexual relationships with three other McDonalds employees in 2018. In other words, Easterbrook had lied to the board.

Easterbrooks contract with the company prepared for such an event. It contained a provision that would let McDonalds recoup severance payments it if later determined the employee should have been fired for cause. After a year of legal wrangling, we recently learned how the case finally played out. But as we remind our students at Harvard Business School, the outcome doesn't mean the decision made was a good one. Knowing doesn't lessen the value of discussing the issues.

Required:

Citing issues of ethics and values, did the board act appropriately in firing Easterbrook without cause? (10 Marks)

Explain the individual factors and organizational factors that may influence ethical decision making in this business as exemplified in this case of McDonald. (10 Marks)

Describe how the ideal of fairness plays out in the Corporate sector. (10 Marks)