That McDonalds clawback from fallen CEO Easterbrook is huge — but still unusual despite #MeToo era – CNBC

Steve Easterbrook, president and chief executive officer of McDonald’s Corp., walks the grounds after a morning session during the Allen & Co. Media and Technology conference in Sun Valley, Idaho, U.S., on Wednesday, July 12, 2017.

David Paul Morris | Bloomberg | Getty Images

The $105 million clawback that McDonald’s is getting from the severance paid to its ex-CEO Steve Easterbook stands out for its massive size. It’s also notable for the fact that such efforts to recoup payouts from misbehaving corporate chiefs remain unusual despite the #MeToo Era.

“This type of outcome is rare,” said David Larcker, a Stanford University business professor who co-authored a 2016 paper titled “Scoundrels in the C-Suite,” which examined how corporate boards should respond to CEO misconduct.

But Larcker added that such outcomes are becoming less rare” as boards of directors see that a CEO’s bad behavior, such as Easterbrook’s inappropriate sexual relationships, is “going to have an impact on shareholders, and customers, and everything” else related to a company.

“These are things that are going to have an impact on the bottom line, and that’s going to be serious,” he said.

Larcker also said the prevalence of social media sharing information about allegations against executives, is, among other factors, going to lead to “a lot more pressure” on companies to resist paying out CEOs who are fired or pressured to resign because of misconduct.

Easterbrook’s settlement with McDonald’s, which was announced Thursday, came two years after the fast-food giant’s board fired him on the heels of an investigation that found he had a consensual relationship with a subordinate that violated company policy. Despite getting the boot, Easterbrook also was handed a severance package valued at $42 million.

In August 2020, McDonald’s sued Easterbrook seeking to recoup that payout, claiming he lied and committed fraud, after a whistleblower said he had a sexual relationship with an employee.

A subsequent probe allegedly revealed that Easterbrook had destroyed information regarding his inappropriate behavior, including three alleged additional sexual relationships with employees before his firing. Easterbrook fought the lawsuit before agreeing to the payback and apologizing in a statement Thursday for failing “at times to uphold McDonald’s values.”

Dieter Waizenegger, executive director of the pension fund adviser CTW Group, said the McDonald’s case is “probably the third-largest clawback we’ve seen” by a corporation for an individual.

“It’s probably the largest around sexual harassment,” said Waizenegger. His firm, along with the New York City Comptroller’s office that it advises, had called for McDonald’s Chairman Enrique Hernandez Jr. to be replaced on the board because of the company’s failure to conduct a probe in 2019 that would have uncovered the full extent of Easterbook’s conduct.

In recent years, the biggest clawbacks involved ones against former Wells Fargo CEO John Stumpf, and Carrie Tolstedt, who had led the company’s community banking division. The pair presided at a time when Wells Fargo employees created up to two million bank and credit card accounts without customers’ consent. Stumpf had to return $69 million, while Tolstedt surrendered $67 million.

John Stumpf, CEO, Wells Fargo

Scott Mlyn | CNBC

Before that, in 2007, former UnitedHealth Group CEO William McGuire agreed to give up a total of $618 million to settle claims by company shareholders and the Securities and Exchange Commission over the backdating of stock options.

Waizenegger noted that Wells Fargo was able to claw back money from the former executives because then-New York City Comptroller John Liu, who was responsible for overseeing city pension fund investments, in 2013 got the company to expand its clawback policy to include executives whose conduct caused reputational harm, instead of only harm that led to a restatement of financial statements.

Liu’s successor, Comptroller Scott Stringer, in 2016 successfully asked Wells Fargo to claw back payments to Stumpf and Tolstedt after Wells Fargo paid nearly $200 million to settle probes of the account scandal.

Waizenegger said other companies should adopt such a policy to make it easier to recoup payouts to executives.

But he also said that corporate boards should take steps to get rid of what are effectively “no-fault severance” agreements in CEO contracts, which allow them to get paid in the first place even if they are fired or pressured to resign after violating a company’s internal code of conduct.

“You just need to stand your ground, when you hire a new CEO there’s going to be a zero-tolerance” provision that bars such payouts in the first place, Waizenegger said.

Waizenegger said that “it’s taken the #MeToo movement and other scandals [for corporations] to say, ‘We need to take a much stiffer look at what we’re willing to tolerate” by a CEO.

”The zero reward for code of conduct violations should just become the norm,” he said.

But Waizenegge also called for a shakeup of the membership of corporate boards to get newer members, and to replace directors who often have spent more than a decade in the positions.

“I think you really basically have a glacial turnover rate in boards,” he said.

The #MeToo movement exploded in October 2017 when articles in The New York Times and The New Yorker detailed accusations by multiple women of sexual misconduct, including claims of rape, against Hollywood movie producer Harvey Weinstein.

The articles were followed by a cascade of accusations of misconduct by hundreds of powerful men in business, media, entertainment and politics, many of whom lost their jobs.

One of those men, CBS CEO Les Moonves, resigned in 2018 after being accused of sexual harassment and assault. He denied the claims.

CBS’s board later refused to pay Moonves $120 million in severance that he claimed to be owed.

The board said in a statement at the time that, “With regard to Mr. Moonves, we have determined that there are grounds to terminate for cause, including his willful and material misfeasance, violation of Company policies and breach of his employment contract, as well as his willful failure to cooperate fully with the Company’s investigation.”

Moonves then filed an arbitration action seeking to get the money.

The dispute was settled earlier this year with an agreement that saw Moonves drop his claim to the severance.

This month, CNN President Jeff Zucker reportedly told employees that the cable-news network will not pay the fired prime-time anchor Chris Cuomo severance.

Cuomo was fired after disclosure of documents that revealed he had been much more involved than previously known in counseling his brother, then-New York Gov. Andrew Cuomo, when Andrew was accused of sexually harassing multiple women.

The attorney Debra Katz has said she notified CNN shortly before it fired Chris Cuomo of an allegation that he had committed sexual misconduct against a client of Katz.

Chris Cuomo’s spokesman has denied the allegations.

– Additional reporting by CNBC’s Amelia Lucas

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