tag:theconversation.com,2011:/us/topics/steve-easterbrook-78722/articlesSteve Easterbrook – The Conversation2021-09-17T12:10:21Ztag:theconversation.com,2011:article/1657962021-09-17T12:10:21Z2021-09-17T12:10:21ZAndrew Cuomo’s initial refusal to resign echoes executive harassment dilemmas for employers<figure><img src="https://images.theconversation.com/files/421431/original/file-20210915-28-1kovc1l.jpeg?ixlib=rb-1.1.0&rect=37%2C28%2C6253%2C4159&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">New York Gov. Andrew Cuomo stubbornly fought sexual harassment charges, as many executives do in business.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/demonstrators-call-on-new-york-gov-andrew-cuomo-to-resign-news-photo/1231480530?adppopup=true">Scott Heins/Getty Images</a></span></figcaption></figure><p><a href="https://www.forbes.com/sites/jemimamcevoy/2021/08/03/biden-calls-for-cuomo-to-resign-after-bombshell-report-details-pattern-of-sexual-harassment/?sh=5b8d4f1b3ff4">President Joe Biden</a> and many <a href="https://dailyorange.com/2021/08/ny-leaders-governor-andrew-cuomo-resign-sexual-harassment-report/">other public leaders</a> called for New York Gov. Andrew Cuomo to resign after an official <a href="https://ag.ny.gov/sites/default/files/2021.08.03_nyag_-_investigative_report.pdf">report</a> in August concluded that Cuomo had “engaged in conduct constituting sexual harassment under federal and state law.”</p>
<p>Even before the <a href="https://ag.ny.gov/sites/default/files/2021.08.03_nyag_-_investigative_report.pdf">report</a> was released, many New York politicians had called for Cuomo to resign after a growing number of women alleged the governor had engaged in “<a href="https://nymag.com/intelligencer/article/everyone-calling-for-cuomo-resign.html">inappropriate touching and comments.</a>” </p>
<p>Cuomo ignored those calls and challenged the charges. But after facing <a href="https://wbng.com/2021/08/09/judiciary-committee-sets-deadline-for-cuomo-legal-team-to-give-evidence/">possible impeachment proceedings by the New York Assembly</a>, he decided on Aug. 10, 2021, to resign from his position. His resignation became effective 14 days later.</p>
<p>From my <a href="https://works.bepress.com/michael_z_green/178/">research as a workplace law scholar</a>, I have found a number of executives who, like Cuomo, have attempted to defend their actions as mere misunderstandings after being charged with complaints of sexual misconduct or harassment.</p>
<p>Cuomo’s challenge of the charges against him – which he carried out over many months – is one more example of the difficult prospects organizations face when one of their top executives is charged with scandalous and harassing behavior, but decides to contest those allegations. </p>
<p>As an investigation proceeds, an executive’s alleged misdeeds can hurt companies’ reputations and internal workings and lead to <a href="https://theconversation.com/metoo-movement-finds-an-unlikely-champion-in-wall-street-with-the-new-weinstein-clause-100938">significant devaluing of stock or even bankruptcy</a>. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/421432/original/file-20210915-21-14vaapc.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="McDonald's golden arches sign in New York City." src="https://images.theconversation.com/files/421432/original/file-20210915-21-14vaapc.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/421432/original/file-20210915-21-14vaapc.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=372&fit=crop&dpr=1 600w, https://images.theconversation.com/files/421432/original/file-20210915-21-14vaapc.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=372&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/421432/original/file-20210915-21-14vaapc.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=372&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/421432/original/file-20210915-21-14vaapc.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=467&fit=crop&dpr=1 754w, https://images.theconversation.com/files/421432/original/file-20210915-21-14vaapc.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=467&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/421432/original/file-20210915-21-14vaapc.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=467&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">McDonald’s fired CEO Steve Easterbrook after he engaged in a consensual relationship with an employee that violated company policy.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/the-mcdonalds-logo-is-displayed-on-a-restaurant-following-news-photo/1179909312?adppopup=true">Kena Betancur/Getty Images</a></span>
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<h2>CEOs face #MeToo</h2>
<p><a href="https://www.npr.org/2019/05/20/725108825/top-reason-for-ceo-departures-among-largest-companies-is-now-misconduct-study-fi">“Scores of CEOs were knocked down after allegations of sexual misconduct in 2018,”</a> reported NPR. The <a href="https://metoomvmt.org/">#MeToo movement’s</a> efforts to uncover executive harassment also contributed in part to the departure of high-ranking executives who were among <a href="https://www.usnews.com/news/economy/articles/2020-01-08/metoo-contributes-to-2019s-staggering-ceo-departures">the more than 1,600 business leaders</a> who left their jobs in 2019, according to U.S. News & World Report. Most of these 2019 departures included resignations, retirements and terminations due to routine business changes. Some of the specific exits were due to alleged wrongdoing of corporate leaders, including 20 departures after business scandals, 15 following allegations of professional misconduct and three <a href="https://35e5308vr2q35dq3y1cuvrbs-wpengine.netdna-ssl.com/wp-content/uploads/2020/10/Dec19-CEO-Report.pdf">specific instances of sexual misconduct</a>. </p>
<p>A recent <a href="https://corpgov.law.harvard.edu/2021/04/19/anticipating-harassment-metoo-and-the-changing-norms-of-executive-contracts/">analysis of CEO executive employment agreements</a> demonstrates how organizations may suffer when their leaders exit. </p>
<p>The study’s researchers say that “CEOs are protected by written contracts that … limit the companies’ ability to terminate CEOs without paying significant severance pay. These provisions typically contain a handful of narrowly drafted grounds on which a company can fire a CEO ‘for cause’ (thereby avoiding financial liability),” but those grounds rarely include sex-based misconduct.</p>
<p>In the face of such damaging charges, executives may legitimately want to protect their reputations by fighting to deny the validity of the charges. Or they may want to exit with financial benefits in place – even while pressure mounts on the organization to terminate the executive.</p>
<p>The <a href="https://corpgov.law.harvard.edu/2021/04/19/anticipating-harassment-metoo-and-the-changing-norms-of-executive-contracts/">empirical study’s authors</a> found that companies have responded to the #MeToo movement by adding language into contracts to allow them to fire executives immediately without waiting for an investigation to be completed when related to sex-based misconduct.</p>
<h2>New rules</h2>
<p>Companies have also started to strengthen their policies to prohibit even consensual sexual behavior between a subordinate and an executive. These actions recognize the power differentials that muddle the question of consent in such relationships.</p>
<p>As an example of these company policy changes, McDonald’s <a href="https://www.nytimes.com/2019/11/03/business/mcdonalds-ceo-fired-steve-easterbrook.html">terminated its CEO</a> in 2019 after discovering his consensual relationship with a subordinate. His actions violated a newly developed policy. The CEO agreed with the board’s termination decision and acknowledged that he had exercised “<a href="https://www.nytimes.com/2019/11/03/business/mcdonalds-ceo-fired-steve-easterbrook.html">poor judgment</a>.” </p>
<p>McDonald’s gave the CEO stock options and other payouts of up to an estimated $40 million at the time of termination. After later discovering emails allegedly reflecting additional sexual misconduct with subordinates, <a href="https://www.wsj.com/articles/mcdonalds-sues-to-recover-severance-from-fired-ceo-claiming-he-lied-about-affairs-with-employees-11597064924">McDonald’s sued the CEO seeking return of the payouts due to claims of fraud</a> and concealment of information. </p>
<h2>Prolonging the harm</h2>
<p>Because <a href="https://knowledge.wharton.upenn.edu/article/mcdonalds-ceo-fired/">an organization’s brand</a> can be severely damaged by the misconduct of its executive, organizations do not want to prolong the harm in situations in which the executive stays in the position and attempts to deny and challenge the charges. </p>
<p>Once the executive admits to, or cannot deny, some of the behavior, but still wants to contest the charges as being a misunderstanding, as in Cuomo’s case, employers have to decide whether to face the costs incurred by a long investigation versus the costs of a premature removal of an executive. </p>
<p>In the McDonald’s situation, quickly removing the CEO rather than conducting a long investigation prevented the company from damaging its reputation. </p>
<p>But discovering additional misconduct only afterward that may have justified firing the CEO without any compensation was costly. On the other hand, if an investigation ends up vindicating the executive, the company may have to pay the executive for any harm created by rushing to judgment in deciding to terminate.</p>
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<a href="https://images.theconversation.com/files/421434/original/file-20210915-24-u1fwmh.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="The entrance to New York City's Eataly food market." src="https://images.theconversation.com/files/421434/original/file-20210915-24-u1fwmh.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/421434/original/file-20210915-24-u1fwmh.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/421434/original/file-20210915-24-u1fwmh.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/421434/original/file-20210915-24-u1fwmh.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/421434/original/file-20210915-24-u1fwmh.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/421434/original/file-20210915-24-u1fwmh.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/421434/original/file-20210915-24-u1fwmh.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Famed chef Mario Batali gave up his restaurants and his stake in Eataly Markets a year after multiple sexual harassment allegations surfaced against him.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/customers-exit-eataly-a-50-000-square-foot-emporium-devoted-news-photo/1128860766?adppopup=true">Drew Angerer/Getty Images</a></span>
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<h1>Tainted interactions</h1>
<p>Legal scholar Charlotte Alexander has <a href="https://theconversation.com/power-imbalances-are-at-the-root-of-sexual-harassment-but-statements-like-andrew-cuomos-dont-acknowledge-that-inconvenient-fact-158401">explained</a> how an alleged harasser with significant power over subordinates such as Cuomo should look at his behavior from the perspective of the subordinate – not what the powerful harasser thought he was doing. </p>
<p>Instead, Cuomo spent months continuing to deny any wrongdoing. He forced a costly investigation to be undertaken by the state instead of acknowledging that some of his behavior might be viewed differently from the perspective of the subordinates involved, as he did when he <a href="https://www.nytimes.com/2021/08/10/nyregion/cuomo-resignation-speech-transcript.html">gave his resignation</a>. </p>
<p><a href="https://works.bepress.com/michael_z_green/178/">In my research</a>, I found many executives want the chance to defend themselves against the accusations. They try to circumvent any organizational concerns. This approach might work when a powerful executive is initially charged and the inappropriate behavior has not become widespread. </p>
<p>But Cuomo’s story and similar stories of executives I studied show a pattern of behavior involving many women that taints interactions with all other current and future subordinates. Those tainted interactions include perceptions of favoritism whenever an executive with a history of misconduct offers any form of benefits or work privileges to a co-worker. Staff can be hesitant to get involved in necessary mentoring relationships out of a fear that misconduct by the executive might ensue.</p>
<p>With #MeToo expectations changing the dynamics, a major takeaway from the Cuomo situation is that employers, whether in the private or public sector, may need to establish more immediate procedures to remove executives to prevent workplace harms. The <a href="https://www.wgrz.com/article/news/local/new-york-state-assembly-impeachment-investigation-costs-into-governor-cuomo-are-capped/71-9b25355e-e8f1-4e26-b8da-abf2953410ad">costly</a> Cuomo investigation further demonstrates this point, even though it involved the Legislature’s procedures for impeachment of a government official.</p>
<p>Employers may need to respond more quickly when an executive admittedly engages in misconduct with subordinates that affects the overall organization – even if the executive does not resign immediately or believes no misconduct occurred.</p>
<p>[<em><a href="https://theconversation.com/us/newsletters/politics-weekly-74/?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=politics-important">Get The Conversation’s most important politics headlines, in our Politics Weekly newsletter</a>.</em>]</p><img src="https://counter.theconversation.com/content/165796/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Z. Green does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>CEOs in private industry who have been accused of sexual harassment can cost their companies if they do as New York Gov. Andrew Cuomo did and fight the charges.Michael Z. Green, Professor of Law and Director, Workplace Law Program, Texas A&M UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1458262020-09-23T17:24:55Z2020-09-23T17:24:55ZHow good governance can stop toxic ‘bro behaviour’ at companies<figure><img src="https://images.theconversation.com/files/359161/original/file-20200921-14-mrogpr.jpg?ixlib=rb-1.1.0&rect=0%2C154%2C4493%2C2782&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">In this 2019 promotional photo from McDonald's, then CEO Steve Easterbrook, fourth from the left, celebrates the 50th anniversary of the Big Mac with family members of the McDonald's employee who invented the popular sandwich. Easterbrook has since been dismissed from McDonald's for inappropriate behaviour.
</span> <span class="attribution"><span class="source">(Peter Wynn Thompson/AP Images for McDonald's)</span></span></figcaption></figure><p>In 2019, the board of directors of McDonald’s Corp. took the unusual but bold and moral decision <a href="https://www.bbc.com/news/business-50283720">to dismiss its CEO Steve Easterbrook</a> after he revealed he’d had a consensual relationship with a co-worker.</p>
<p>McDonald’s had a policy forbidding managers from having “intimate interactions” with direct or indirect employees. Easterbrook readily admitted the relationship and cited his desire to adhere to the company’s code of conduct as motivating his admission.</p>
<p>In an email to all employees after the board announced his dismissal, <a href="https://www.nytimes.com/2019/11/03/business/mcdonalds-ceo-fired-steve-easterbrook.html">he wrote</a>: “This was a mistake. Given the values of the company, I agree with the board that it is time for me to move on.”</p>
<p>The dismissal of a CEO is never something that boards take lightly, especially when it is sudden — and when the CEO is wildly successful.</p>
<p>Under Easterbrook’s leadership, McDonald’s updated its menus and restaurants to reflect contemporary tastes, expanded delivery and mobile payments and otherwise evolved into a more modern organization. The market rewarded these efforts by doubling the share price during his tenure. Easterbrook was also rewarded with compensation in the tens of millions of dollars annually.</p>
<h2>Impacts shareholder wealth</h2>
<p>Easterbrook’s dismissal was seen by some as a triumph of morality and judgment — albeit at the expense of shareholder wealth. <a href="https://markets.businessinsider.com/news/stocks/mcdonalds-stock-price-billions-wiped-from-value-on-fired-ceo-easterbrook-2019-11-1028654817">McDonald’s shares went down by as much as three per cent</a> (US$4 billion value) shortly after the announcement.</p>
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<img alt="The McDonald's golden arches logo is pictured on a brick wall at one of the fast food chain's restaurants." src="https://images.theconversation.com/files/359163/original/file-20200921-14-1v1n4fw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/359163/original/file-20200921-14-1v1n4fw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/359163/original/file-20200921-14-1v1n4fw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/359163/original/file-20200921-14-1v1n4fw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/359163/original/file-20200921-14-1v1n4fw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/359163/original/file-20200921-14-1v1n4fw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/359163/original/file-20200921-14-1v1n4fw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">McDonald’s share prices took a hit in the fallout of the departure of CEO Steve Easterbrook.</span>
<span class="attribution"><span class="source">(AP Photo/Gerry Broome)</span></span>
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<p>The board’s dismissal without cause was deemed appropriate by media and investors under the circumstances and Easterbrook <a href="https://www.foodbusinessnews.net/articles/16592-mcdonalds-sues-former-ceo-to-recover-severance#:%7E:text=fired%20Stephen%20Easterbrook%2C%20then%20chief,executive%20compensation%20experts%20at%20Equilar">walked away with a severance package</a> worth about US$42 million.</p>
<p>Fast forward to 2020. <a href="https://www.businessinsider.com/mcdonalds-slams-ex-ceo-steve-easterbrook-motion-to-dismiss-lawsuit-2020-8">The board’s ongoing investigation</a> has revealed, among other things, that Easterbrook sent explicit photos from his McDonald’s email account, purportedly lied about other sexual relationships with co-workers and approved an extraordinary stock grant worth hundreds of thousands of dollars to one McDonald’s employee “… shortly after their first sexual encounter and within days of their second.”</p>
<p>As a result, the board belatedly filed a lawsuit against Easterbrook seeking to claw back the severance it had awarded eight months earlier, maintaining the CEO should have been dismissed for cause. Easterbrook responded in a court filing that the company and board already had all of this information — and had his entire email account and history stored on its company servers when it negotiated his severance package.</p>
<h2>‘Bro’ behaviour is infectious</h2>
<p>So, once again, toxic “bro” behaviour, <a href="https://www.businessinsider.com/bro-culture-harassment-discrimination-uber-business-2017-6#:%7E:text=Now%20Uber%20CEO%20Travis%20Kalanick,has%20gone%20to%20the%20bros.">as we have seen at Uber</a> and other organizations, infects an iconic organization, leaving the courts to decide.</p>
<p>Certainly, Easterbrook is to blame for, by his own admission, breaking the company’s code of conduct and, more importantly, the values it set for behaviour. However, the board shares responsibility for its singular failure to observe, recognize and act on what emerged as an ongoing, long-term, cultural and possibly legal fiasco.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/mcdonalds-upheaval-is-a-stern-reminder-to-ceos-about-ethics-127009">McDonald's upheaval is a stern reminder to CEOs about ethics</a>
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<p>In 2020, the business world is regrettably replete with examples of poor CEO behaviour, and the #MeToo movement is both widespread and widely known. So why do these situations persist? More to the point, why do boards seem to be constantly surprised by such egregious conduct?</p>
<p>Corporate governance focuses a lot on “tone at the top.” Boards and directors are told and aware that they are under constant and unremitting scrutiny. Their acts — tacit and explicit — filter throughout their organizations, shareholders and stakeholders. They are the instigators, nurturers and custodians of one of an organization’s most critical and enduring assets: its culture.</p>
<p>So how can a board best ensure it discharges its responsibilities to corporate culture in an ethical, responsible and credible manner? How can boards best ensure, observe and embody the culture they desire for their organization?</p>
<p>We suggest three key strategies:</p>
<p><strong>1. CEO selection</strong></p>
<p>The board sets culture through its selection of the CEO. Boards are fascinating organisms inasmuch as they are a group that has only one employee — the CEO. Finding, recruiting, retaining and eventually replacing the organization’s chief executive is the board’s solemn function.</p>
<p>The CEO defines and leads the organization’s strategy. Through their behaviour and expressed beliefs, they come to define and perpetuate the organization’s culture. As such, when considering the organization’s succession plan, the board needs to be explicit about the values they’re seeking in a CEO — and test for those values not only through interviews with candidates, but through interviews with people they have worked with, as well as with clients and suppliers.</p>
<p>It also goes without saying that vetting includes a thorough background check. Past behaviour is one of the best predictors of future behaviour. If an aspiring CEO has inappropriate behaviour in their past, a thorough, confidential investigation before they are hired will likely reveal some of it.</p>
<figure class="align-center ">
<img alt="A picture of people sitting around a desk." src="https://images.theconversation.com/files/359165/original/file-20200921-20-j005xo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/359165/original/file-20200921-20-j005xo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/359165/original/file-20200921-20-j005xo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/359165/original/file-20200921-20-j005xo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/359165/original/file-20200921-20-j005xo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/359165/original/file-20200921-20-j005xo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/359165/original/file-20200921-20-j005xo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">One strategy that board members should employ is getting to know the companies they oversee.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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</figure>
<p><strong>2. Compensation schemes</strong></p>
<p>Once the CEO has been selected, the board negotiates a comprehensive compensation package. This package is based on a number of short, medium and long-term incentives and composed of both cash and shares or options.</p>
<p><a href="https://www.jstor.org/stable/256656">Compensation research</a> is clear in concluding that executives are remarkable in their ability to discern which behaviour is being compensated, and in turn, engaging in that very behaviour.</p>
<p>In developing compensation schemes, boards should include behaviour targets (such as employee engagement and <a href="https://hbr.org/2003/12/the-one-number-you-need-to-grow">net promoter scores</a>) in addition to more traditional performance-based metrics. They may even include a morals clause.</p>
<p>In evaluating the CEO’s performance annually, the board should keep checking on the CEO’s behaviour through both interviews and observation. The board should also anticipate and plan for involuntary dismissal of the CEO and include clawback mechanisms or even phased payouts in severance provisions.</p>
<p><strong>3. Get out of the boardroom</strong></p>
<p>Many boards hold at least one meeting per year offsite. This has the effect of familiarizing directors with the organization’s operations, as well as signalling to the organization’s employees and other stakeholders the board’s engagement with the entire organization, no matter where. Unfortunately, these off-site meetings are all too often highly scripted and co-ordinated affairs, more reminiscent of a theatre performance than a genuine pulse check.</p>
<p>Directors, individually and collectively, must make it a priority to see the organization’s operations from all perspectives. They should interact with employees, suppliers, customers and all stakeholders on a regular, unscripted and perhaps even unplanned basis. Only by doing so will they get a thorough idea of the company’s culture.</p>
<p>One highly successful director we know bases their decision to join a board partly by trying the organization’s products or services as a customer and witnessing first-hand how frontline employees perform. Another CEO provides every director with an all-access security pass and keycard to all of the organization’s workplaces, encouraging these directors to drop in unannounced to see operations firsthand.</p>
<p>The situation at McDonald’s did not arise spontaneously or suddenly. There are suggestions that it also extends beyond the CEO. Easterbrook’s personality did not undergo a radical transformation when he became the CEO at McDonald’s.</p>
<p>There is an old adage that says “the fish rots from the head down.” McDonald’s board failed in its duty to create, nurture, monitor and sustain a positive, healthy organizational culture. Easterbrook’s behaviour — and the ensuing impact on the entire company — was the result.</p><img src="https://counter.theconversation.com/content/145826/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Bad behaviour and toxic culture at a company can be corrected if the organization’s board of directors states clearly the values they are looking for in a CEO.Michael Parent, Professor of Management Information Systems / Fellow - David and Sharon Johnston Centre for Corporate Governance, Rotman School of Management, University of Toronto, Simon Fraser UniversityRichard Powers, Associate Professor, Rotman School of Management, University of TorontoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1270092019-11-17T13:13:07Z2019-11-17T13:13:07ZMcDonald’s upheaval is a stern reminder to CEOs about ethics<figure><img src="https://images.theconversation.com/files/302046/original/file-20191117-66973-1x0jyoj.jpg?ixlib=rb-1.1.0&rect=0%2C145%2C5913%2C3960&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">McDonald’s CEO Steve Easterbrook was terminated by his board after admitting to a consensual relationship with another company employee. </span> <span class="attribution"><span class="source">(Alyssa Schukar/AP Images for McDonald's)</span></span></figcaption></figure><p>The board of directors of McDonald’s recently <a href="https://www.bbc.com/news/business-50283720">announced it was terminating the employment of chief executive officer Steve Easterbrook</a> because he “demonstrated poor judgment” involving a consensual relationship with another company employee. </p>
<p>The process followed by the board in arriving at their decision appears impeccable. Once made aware of the situation by their general counsel, a highly reputable outside law firm was retained to investigate. </p>
<p>Following a three-week investigation, the board held what are described as “lengthy discussions and meetings” to consider the independent inquiry and ultimately voted unanimously to remove the CEO.</p>
<p>The factors underlying the board’s decision were described as a combination of a violation of a longstanding company policy forbidding employees having relationships with direct or indirect reports at all levels, as well as concerns that the CEO had demonstrated poor judgment regarding personal affairs and corporate conduct.</p>
<p>Following his termination, <a href="https://time.com/5717218/mcdonalds-ceo-leaves-relationship/">Easterbrook stated in an email</a> to employees: </p>
<blockquote>
<p>“Given the values of the company, I agree with the board that it is time for me to move on.”</p>
</blockquote>
<h2>CEOs are powerful</h2>
<p>The role of CEO is very powerful, and it should be. The CEO is expected to articulate strategic direction, build a strong leadership team, manage significant risks and deliver results that fulfil the expectations of many powerful stakeholders, including investors, customers, employees, communities and regulators.</p>
<p><a href="https://hbr.org/2017/05/what-sets-successful-ceos-apart">The job of a CEO at a major corporation like McDonald’s is extraordinarily demanding</a> — few people have the combination of intelligence, insight, leadership skills and stamina to fulfil it effectively.</p>
<p>At the same time, the CEO only possesses authority and influence to the extent that these have been delegated by the board. For corporations in both Canada and the United States, the authority to “manage the affairs of the corporation” is legally invested in the board. </p>
<p>Many corporate governance experts view the most important task of the board as the <a href="https://www.mckinsey.com/featured-insights/leadership/the-ceo-guide-to-boards">selection and oversight of the CEO</a>. Boards that get that right are highly likely to be successful. Those that get it wrong are usually doomed to substandard performance if not outright failure.</p>
<h2>‘Imperial’ CEOs</h2>
<p>There always is, and always has been, a risk of the board allowing and enabling the emergence of an “imperial” CEO. The risk of this occurring was greater in the past, when the norm was for the roles of CEO and board chair to be filled by the same person. </p>
<p>Today in Canada, that practice is virtually extinct among major publicly traded corporations. Interestingly, the transition away from the practice has been notably slower in the U.S., where <a href="https://www.cnbc.com/2019/11/05/its-not-just-boeing-more-companies-are-splitting-ceo-and-chairman-roles.html">47 per cent S&P 500 companies</a> still have a joint CEO/board chair. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/301867/original/file-20191114-26259-1lycicu.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C7951%2C5304&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/301867/original/file-20191114-26259-1lycicu.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C7951%2C5304&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/301867/original/file-20191114-26259-1lycicu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/301867/original/file-20191114-26259-1lycicu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/301867/original/file-20191114-26259-1lycicu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/301867/original/file-20191114-26259-1lycicu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/301867/original/file-20191114-26259-1lycicu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/301867/original/file-20191114-26259-1lycicu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">CEOs are brand ambassadors.</span>
<span class="attribution"><span class="source">Andre Hunter/Unsplash</span></span>
</figcaption>
</figure>
<p>However, that can’t explain the situation at McDonald’s, where the roles have been separated for some time.</p>
<p>The McDonald’s policy forbidding personal relationships with direct or indirect employees at any level has a very sound rationale (and for the CEO, that means all employees).</p>
<p>When one party to a relationship is in a position of direct or indirect authority over the other, it’s impossible to know with certainty the extent to which the subordinate engaging in the relationship is either consciously or unconsciously acting out of deference or fear. And what if the subordinate partner in the relationship begins getting preferential treatment at work?</p>
<p>There are also <a href="https://www.bloomberg.com/graphics/2018-me-too-anniversary/">many examples</a> of situations where people in positions of authority have used the power and authority of their positions to coerce subordinates into sexual relationships. </p>
<p>That does not appear to be an issue in this case, where both parties described the relationship as consensual. There have been no allegations of sexual harassment.</p>
<h2>A question of judgment</h2>
<p>And that brings us back to the issue of judgment. Easterbrook should have known better. As <a href="https://corpgov.law.harvard.edu/2019/01/23/purpose-profit/">CEO, he was the embodiment of the corporation to all stakeholders</a>, including employees. As such he was the most potent role model for the values of the organization and the person whose actions had the greatest impact on the culture of the organization. </p>
<p>The attitudes and behaviour of employees are impacted much more strongly by the actions of their bosses than by their words. And the CEO is the most visible and powerful role model of all.</p>
<p>CEOs are the literal and symbolic heads of their organizations. They are the ambassador for the values their organizations espouse and view as fundamental to their success. </p>
<p>They cannot afford to jeopardize their ability to fulfil the trust placed in them by the many stakeholders impacted by their behaviour and performance by engaging in activities inconsistent with those values.</p>
<p>[ <em>Like what you’ve read? Want more?</em> <a href="https://theconversation.com/ca/newsletters?utm_source=TCCA&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=likethis">Sign up for The Conversation’s daily newsletter</a>. ]</p><img src="https://counter.theconversation.com/content/127009/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Hugh Arnold does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The attitudes and behaviour of employees are impacted much more strongly by the actions of their bosses than by their words. And the CEO is the most visible and powerful role model of all.Hugh Arnold, Adjunct Professor of Organizational Behaviour, University of TorontoLicensed as Creative Commons – attribution, no derivatives.