The US decision reminds UK companies and their officers to identify and report red flags about misconduct in the workplace.
Certain shareholders of McDonald’s Corporation (the Company) sued David Fairhurst, the Company’s former executive vice president and global chief people officer, on behalf of the Company for allegedly breaching his duty of oversight “by allowing a corporate culture to develop that condoned sexual harassment and misconduct” and for “consciously ignoring related red flags”.
In the recent ruling in the matter of In Re McDonalds Corporation Stockholder Derivative Litigation, the Delaware Court of Chancery denied Fairhurst’s motion to dismiss the lawsuit. The court held that corporate officers, like directors, owe shareholders a fiduciary duty of oversight to report upward to more senior officers or to the board credible information that a company may be violating the law, and to not consciously ignore red flags. (Read this Latham Client Alert for more on the decision.)
This decision was the first in Delaware (a leading court on corporate matters, as many US companies are incorporated under Delaware law) expressly to conclude that corporate officers, like corporate directors, have a fiduciary duty of oversight. While fiduciary duties under UK company law only apply to corporate directors (including de facto directors), the McDonald’s decision has lessons for UK companies about corporate officers’ evolving responsibilities and emphasises that UK companies should identify red flags and take meaningful action in response to misconduct allegations.
Lessons for UK Companies
Evolving Expectations for Corporate Officers
Under Delaware law, corporate directors have a duty of loyalty, which they would breach if a stockholder plaintiff can demonstrate the director’s “lack of good faith as evidenced by sustained or systematic failure of a director to exercise reasonable oversight”. The Delaware Supreme Court has explained that claims for improper oversight generally fall into two buckets:
- claims that the board “utterly fail[ed]” to implement any kind of reporting or information system or controls; and
- claims that the board failed to respond to “red flags indicating wrongdoing”.
In McDonald’s, the court acknowledged that no Delaware judge had expressly extended directors’ oversight duties to corporate officers. However, it concluded that those “responsible for managing the day-to-day affairs of the corporate enterprise” may in fact be better positioned than “part-time directors who meet a handful of times a year” to watch for and address red flags at the corporation. The court also explained that officers are essential within the corporate oversight structure.
In extending oversight duties to officers, the court found the duty of oversight is “constrained [to that officer’s] area of responsibility”, though sufficiently prominent red flags outside of the officer’s area may invoke the duty to report upward. The court found that corporate officers with credible information “indicating that the corporation is violating the law cannot turn a blind eye”. The court clarified that a violation of the duty of oversight requires a showing of “bad faith”, meaning that the officer must “consciously fail to make a good faith effort to establish information systems [or] consciously ignore red flags”.
In McDonald’s, the court found that the plaintiffs had adequately pled at the preliminary pleadings stage that Fairhurst ignored red flags and acted in bad faith. The court explained that as the global chief people officer, Fairhurst had “day-to-day responsibility” over human resources matters, including the obligation to promote a “safe and respectful environment”, and was “supposed to have his ear to the ground and be knowledgeable about the Company’s employees”. The court identified several factors evidencing that Fairhurst had consciously ignored red flags, indicating which flags relate to “toxic culture” and workplace misconduct that officers and directors of UK companies should focus on. The red flags included the following:
- Under Fairhurst’s oversight, over a dozen employees filed complaints with the Equal Employment Opportunity Commission in 2016 about sexual harassment and misconduct at the Company, and in 2018 employees in over 30 cities in the US staged walkouts to protest the Company’s failure to address sexual harassment and retaliation. The court held that Fairhurst should have recognised these incidents as “massive red flags” given his position as global chief people officer.
- The human resources department allegedly ignored a number of complaints of sexual harassment.
- No evidence showed that Fairhurst took any action to report sexual harassment issues upwards to the board.
- Fairhurst himself allegedly committed multiple acts of sexual harassment, even after being disciplined. The alleged misconduct included that he promoted a “party atmosphere” at the Company by “frequenting local bars and [drinking] with staffers”, as well as making inappropriate physical contact with a female employee during a holiday party.
The court acknowledged that the Company belatedly took a number of steps to address sexual harassment. These steps indicate what remedial actions companies should consider as soon as misconduct issues arise, including:
- Comprehensively reviewing the Company’s anti-harassment policy;
- Engaging an anti-sexual violence organisation to advise the Company;
- Reviewing the Company’s training programs with outside counsel and providing training on harassment, unconscious bias, and workplace safety for employees;
- Establishing a third-party managed hotline for employees at franchise restaurants to report complaints;
- Developing a franchisee guide containing best practices and recommendations on establishing and maintaining a safe and respectful workplace; and
- Conducting a culture assessment, including listening sessions, to promote continuous improvement.
The McDonald’s decision reinforces the importance for all companies — whether located in the US or elsewhere — of implementing effective systems to monitor workplace conduct issues. Corporate officers should stay attuned to red flags — including data suggesting trends that require further root cause analysis — and take effective action to investigate and remediate workplace misconduct.