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Sexual Harassment Liability May Stretch Beyond Just the Harasser

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So, when an individual sexually harasses another individual, who is liable? In most cases, the answer is clear—the harasser. However, when the harasser is a senior executive, particularly the CEO, could the board of directors be held liable? How about the Chief Human Resources Officer (CHRO)? A recent lawsuit against the CEO, CHRO, and board at McDonald’s illustrates at least the possibility that they can be held liable. 

A shareholder lawsuit was filed against former CEO Steve Easterbrook, former CHRO David Fairhurst, and the board of directors for violating their fiduciary responsibility to shareholders. The lawsuit alleged that the board had failed in its oversight responsibilities by allowing a “boys club” culture to develop among the senior executives, including the CEO. This included frequent gatherings at an open bar in the McDonald’s headquarters building as well as encouraging executives to hire young, attractive women.  

In 2019, the board fired Easterbrook for having a consensual affair with an employee, and after his firing, he was accused of having additional sexual relationships with other employees. He settled a lawsuit filed by the board who sought to claw back some of his compensation and also paid a fine as part of an agreement with the Securities and Exchange Commission.  

Mr. Fairhurst was also terminated in 2019, having been the subject of several sexual harassment complaints during his time as the CHRO. The shareholder lawsuit argued that he should have been or was aware of the systemic issues regarding sexual harassment yet failed to respond appropriately.  

The Delaware court hearing the case dismissed the part of the lawsuit aimed at the board of directors, not because they cannot be held liable, but because they did respond to the “vibrant” red flags about harassment by taking appropriate action. However, the court left in place the lawsuit against Mr. Fairhurst, allowing it to proceed. So, while the McDonald’s board seems to be off the hook, the former CHRO has not been so lucky.  

 

Discussion Questions: 

  1. Part of the reason the court ruled that the board had taken appropriate action against the CEO was that they fired him “for cause” rather than let him resign. If they had let him resign, do you think the board should have been held liable? Why or why not? 

  1. As a Section 16 employee, the CHRO has a fiduciary responsibility to shareholders. In what ways do you think Mr. Fairhurst might not have fulfilled his fiduciary responsibility? How might his actions, or inactions, have negatively impacted shareholders?  

  1. If it is true (and we only know there were allegations) that Mr. Fairhurst had been the subject of multiple reports of sexual harassment, how do you think it happens that the head of HR could end up engaging in clear violations of HR policies? 

Vanderford, R. (March 1, 2023). McDonald’s directors beat sexual misconduct oversight lawsuit. https://www.wsj.com/articles/mcdonalds-directors-beat-sexual-misconduct-oversight-lawsuit-8ae392db 

  

Notes for Instructors: The court’s decision seems to make clear that boards could be held liable if they do not exercise sufficient oversight, and part of that oversight deals with the culture. This goes beyond the company’s overall culture, to the unique culture among the top executives. Because the board acted quickly once they were made aware of it, the court seemed to think they had exercised sufficient oversight. The stock price of McDonald’s was hurt when Mr. Easterbrook and Mr. Fairhurst were fired, which is part of their lack of fiduciary responsibility. However, often sexual harassment complaints cost significant amounts of money in defending them, in losing them, or in having to settle them. Finally, this illustrates that all people, no matter what their position, perspective, or expertise, can give into their baser instincts. Just because someone is in HR does not mean they perfectly model everything HR stands for.