On the surface, it's just a little embarrassing. McDonald's (NYSE:MCD) is suing former CEO Steve Easterbrook to retract the generous severance package it offered him upon his exit after learning that he may have lied during the investigation leading up to his removal.
As the old saying goes, though, there's more to the story. That lawsuit -- revealed on Monday -- is arguably only a symptom of a much bigger corporate culture problem. Plenty of other evidence is coming to light that underscores the idea.
If we knew then what we know now...
Steve Easterbrook, hired as CEO in 2015, amicably stepped down in November of last year after he "violated company policy and demonstrated poor judgment" by entering a consensual but non-physical relationship with an employee. Given what was then believed to be an isolated incident, the board of directors decided to release him "without cause," which would allow the board to grant Easterbrook an exit package of stock options that could be worth as much as $40 million.
Between then and now, it's come to light that Easterbrook may have not only been in actual physical relationships with three other employees, but he knowingly deceived the company's board of directors about the matter. That information could have altered the board's decision to grant Easterbrook the aforementioned stock options.
Board-shareholder power struggle
The rest of the story? The board's move to claw back that stock options package may have only been acting under pressure from certain shareholders.
It was news largely buried by coronavirus headlines at the time, but in April, activist investor outfit CtW Investment Group encouraged shareholders to vote for the removal of Enrique Hernandez Jr. as chairman of McDonald's board of directors. The firm's argument: Hernandez is ultimately responsible for "failing to disincentive violations of its code of conduct."
It's well within CtW's rights to make its case directly to shareholders. It's just unusual. In most instances, social pressure for change would be on a CEO. In some ways, this alternate path could be even more effective, though, as directors' roles may be even less secure now -- in the current social/political/cultural environment -- than an executive's.
Moreover, CtW's effort bolsters a budding concept sphere of corporate accountability at the same time it raises a question about who's really in charge at McDonald's.
The fresh concept is that a board of directors isn't in place just to hold company leadership accountable. It may also be subject to the same accountability. That's a new one for McDonald's.
And the question? Who's really in charge of the fast-food chain anyway? Activists can clearly apply pressure to board members, but their primary agenda may not be profits. Board members can put pressure on executives, but those directors may have been rushed to find a quick and merely palatable replacement for Easterbrook with Chris Kempczinski. Kempczinski was president of McDonald's U.S. arm before being named chief, but the company's franchisees (more on them in a moment) aren't convinced he's truly on their side. See, he's not a grassroots kind of industry veteran. Nevertheless, the company still needs those frustrated franchisees to remain on board.
In short, all of these interested parties aren't on the same page.
Add it to the list of problems
Were this McDonald's only instance of internal strife, it might be dismissed as the embarrassing stumble every company occasionally suffers. However, McDonald's seems to be surrounded by challenges that are in direct conflict with many of the societal norms that have materialized in recent years.
Case in point: In January, two Black executives filed a race discrimination lawsuit against the company, arguing McDonald's acted in a systemically racist manner by firing or demoting Black employees at a disproportionate rate, and preventing Black franchisees from acquiring more productive locations. The company denies the allegation, but similar developments at the very least raise questions. Late last year, the National Black McDonald's Operators Association noted that Black franchisees as a whole don't earn as much as their white counterparts. Last month, three Black McDonald's employees near Tampa, Florida, filed a discrimination lawsuit, claiming their manager made disparaging comments, and that the company failed to respond to their complaint.
In the meantime, many franchisees of all skin colors are unhappy with the franchise working arrangement, particularly in the wake of COVID-19.
Franchisees are subject to rules and standards established by the parent company, but adhering to them has been tough for some. For example, the parent company has agreed to pay about half the costs of doing so, but McDonald's is effectively forcing franchisees to pay for the other half of recently mandated remodels. It's just the latest in a string of heavy-handed mandates that have ultimately crimped cash flows of restaurant operators. Indeed, resistance to the franchiser's ever-rising requirements ultimately led to the creation of the National Owners Association in 2018, as a means of collectively pushing back against measures that made it overwhelmingly difficult for McDonald's franchisees to remain profitable.
That same National Owners Association was at a new impasse with corporate offices in March, saying McDonald's wasn't doing enough to provide much-needed support in the wake of COVID-19 shutdowns that barred consumers from visiting restaurants.
The bottom line
None of these developments took shape by the company's design; most of them would have been difficult to foresee. The organization is made up of 36,000 restaurants, managed by hundreds of franchisees and a few hundred thousand workers who aren't actually employees of McDonald's. Rather, most work for franchisees and are out of the purview of the parent organization. Conversely, the company's board of directors and executives generally remain out of the public's and employees' eyes. It's a situation where disappointing things can and will happen. Until now, McDonald's has avoided any major public gaffes.
Time appears to have caught up with the king of the fast-food business, though, simultaneously exposing several culture problems. McDonald's can't ignore this, and can't just give it lip service. The thing is, the cultural changes that need to be made could prove sweeping, lengthy, and disruptive.