McDonald’s Directors Beat Sexual Misconduct Oversight Lawsuit

McDonald’s Corp. board members didn’t violate their duty to shareholders in the handling of sexual harassment and misconduct allegations, a Delaware court said, ruling that the directors’ response was legally sufficient.

The decision throws out shareholders’ claims against nine individuals who sat on McDonald’s board during a period in which sexual misconduct claims at the company drew widespread public scrutiny.

Though there were “vibrant” red flags about problems with sexual harassment and misconduct at McDonald’s, the board took action, Vice Chancellor J. Travis Laster of the Delaware Chancery Court said in a decision issued Wednesday.

“The pled facts do not support a reasonably conceivable claim against [the directors] for breach of the duty of oversight,” he wrote.

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The lawsuit against the board members has been closely watched, and not only because it offers a window into an alleged party culture at the headquarters of one of the world’s leading restaurant brands. The court’s rulings could clarify expectations for how company leadership is expected to respond to failures of corporate compliance.

A lawyer for McDonald’s and the directors who were sued hailed the outcome.

“The record shows that the board actively enforced the company’s policies and commitment to maintaining safe, respectful, and inclusive workplaces,” said Ron Olson, a partner at the firm Munger Tolles & Olson LLP.

A lawyer representing the suing shareholders didn’t respond to a request for comment.

The claims center on what shareholders alleged was a boys’ club-type atmosphere at McDonald’s, complete with frequent gatherings at an open bar on the eighth floor of the company’s Chicago headquarters and alleged encouragement to hire young, attractive women to work in administrative roles there. 

Delaware law allows shareholders to sue directors over alleged oversight failures, including the failure to ensure there were compliance processes in place to address mission-critical risks. While some of the directors named in the suit have since left their roles, several remain on the board.

In 2019, McDonald’s fired Chief Executive Stephen Easterbrook because of a consensual relationship with an employee, which violated company policy. Shareholders later sued McDonald’s board of directors, as well as Mr. Easterbrook and the company’s former chief human resources officer, David Fairhurst, for allegedly violating their fiduciary duties to the company.

The judge previously threw out shareholder claims against Mr. Easterbrook. Mr. Easterbrook’s legal team declined to comment.

After his termination, Mr. Easterbrook was accused of having undisclosed sexual relationships with other employees. McDonald’s ultimately settled a lawsuit against Mr. Easterbrook, clawing back some of his compensation. Mr. Easterbrook also paid a fine in a settlement with the U.S. Securities and Exchange Commission, without admitting or denying the SEC’s claims that he made misleading statements about relationships with employees.

The shareholders alleged in their lawsuit that Mr. Fairhurst failed to appropriately respond to systemic issues of sexual misconduct at the company, a problem in which he was implicated. At the time of his termination in 2019, Mr. Fairhurst had been the subject of multiple reports of sexual harassment during his tenure, according to the Delaware ruling.

In an important decision issued in January, Vice Chancellor Laster allowed the claims against Mr. Fairhurst to proceed. The legal impact of Wednesday’s decision on the case against Mr. Fairhurst wasn’t immediately clear. A lawyer for Mr. Fairhurst didn’t respond to a request for comment.

The alleged sexual harassment issues at McDonald’s led to a wave of complaints with the U.S. Equal Employment Opportunity Commission, a 10-city strike by workers and an inquiry by a U.S. senator. But Vice Chancellor Laster said McDonald’s directors “engaged with the problem” and can’t be held liable. Their response included hiring outside consultants, revising company policies and implementing new training programs, he said.

The judge also dismissed claims that the company’s directors had breached their duty to shareholders by terminating Mr. Easterbrook without a finding of fault, instead of firing him for cause. Reasonable minds can disagree on whether that was the right decision, but directors were entitled to make that decision under a rule protecting the exercise of business judgment, Vice Chancellor Laster said.

Write to Richard Vanderford at Richard.Vanderford@wsj.com

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