A recent judge's decision to allow shareholders to file a lawsuit against a former McDonald’s human resources officer is forcing organizations and their corporate executives to revisit the issue of personal liability when dealing with corporate compliance.
The recent ruling by Vice Chancellor J. TravisLaster highlights a long-standing issue with McDonald’s that began with the firing of the company’s former CEO Steve Easterbrook after he was found guilty of violating company policy by having a consensual relationship with an employee.
The most recent shareholder lawsuit is focused on the company’s human resources chief David Fairhurst in which shareholders claim that Fairhurst has failed to effectively address issues of sexual harassment throughout the company. To make matters worse, Fairhurst himself has been the target of sexual harassment claims within the company that eventually led to his termination.
The reason this case has turned so many heads is due to the fact that not only did Fairhurst fail to conduct proper oversight over compliance and social risks facing the company but also showed to be a serious part of the problem despite being the chief of the department designated to dealing with sexual harassment matters.
This highlights a long-standing issue within the corporate environment in which executives and the board of directors have maintained some level of immunity in terms of liability and accountability when dealing with compliance risks. This immunity was reduced back in 1996 when theDelaware Court of Chancery made a decision stating that directors do have basic oversight duties. The company in question at the time was healthcare providerCaremark International Inc. and while this decision did give more responsibility to directors for compliance oversight the decision also highlighted that in order to file a lawsuit against directors’ shareholders must display that the director in question failed to put nearly any effort into addressing mission-critical risks.
Caremark claims as they have become known, rarely saw the light of day over the past two decades until 2019 when Ice Cream company Blue Bell was responsible for gross negligence resulting in a listeria outbreak that killed three people. Shareholders felt that directors were responsible for failing to conduct effective compliance oversight regarding food safety standards. This again reignited the question of Caremark claims and brought to light a clear disparity within the accountability process.
Even today it is often the case that directors are covered by insurance that prevents them from paying out of pocket for such oversight failures, however, the relatively recent attention that has been brought to Caremark claims is beginning to cause concern for directors because at the very least it could have a destructive impact on both the individual and the organization as a whole.
While the recent example of McDonald’s is likely to cascade into an era of greater accountability for directors there is still a significant amount of uncertainty as to what directors are accountable for.Current standards state that directors are accountable for oversight regarding mission-critical risks whereas in the case of David Fairhurst, many disagree that sexual harassment is considered mission-critical. On the other hand, many argue that in order to conduct proper oversight the individual must have a clear understanding of day-to-day operations, this is often better achieved through employees that are on the ground. In addition, if lower-level employees fail to provide effective oversight this can make the job of directors to conduct oversight extremely difficult as well.