By Heather Haddon 

McDonald's Corp. said it is suing former Chief Executive Steve Easterbrook and seeking to recoup tens of millions of dollars it paid in severance and benefits, alleging that he lied to the board about sexual relationships with employees before his ouster last fall.

The fast-food giant dismissed Mr. Easterbrook without cause in November 2019, following an investigation into his conduct. Investigators found he had a short-term, consensual relationship with an employee over text and video, but Mr. Easterbrook denied any physical sexual relationships with McDonald's employees, according to the complaint filed Monday.

Investigators who conducted the review for the company didn't find additional inappropriate communications between Mr. Easterbrook and company employees on his mobile devices and so limited their probe to the consensual relationship, according to a person familiar with the inquiry.

McDonald's reopened the matter after it received an anonymous tip in July about a relationship between Mr. Easterbrook and an employee, according to the lawsuit. An investigation found that Mr. Easterbrook allegedly engaged in three additional relationships with employees that were sexual in nature, including the one that triggered the July inquiry. Investigators found that Mr. Easterbrook destroyed evidence about the sexual relationships and lied about his behavior during the initial investigation last fall, the complaint said.

The company said in the suit that its investigation found dozens of nude and sexually explicit photographs and videos of women, including employees, sent from Mr. Easterbrook's corporate email account to a personal one. Mr. Easterbrook had deleted the photos from his company-issued phone, and they weren't discovered during the corporate investigation that triggered his firing, according to the complaint.

"McDonald's does not tolerate behavior from any employee that does not reflect our values," Chris Kempczinski, who succeeded Mr. Easterbrook as CEO in November, wrote in a companywide message Monday.

Mr. Easterbrook didn't respond to requests to comment.

Because McDonald's decided to fire Mr. Easterbrook without cause, he received severance and benefits that he could have been denied had the board found him at fault. Mr. Easterbrook's compensation, benefits and stock were potentially worth nearly $42 million, according to an analysis at the time by executive-pay firm Equilar.

Board efforts to recover compensation from CEOs for activities and statements pertaining to their termination are unusual, said Steven Hall, managing director of pay consulting firm Steven Hall & Partners.

Patrick McGurn, special counsel to proxy-advisory firm Institutional Shareholder Services, said such clawbacks are rarely so sweeping or so public. "This isn't your standard clawback," he said.

Mr. Easterbrook, appointed CEO in 2015 helped McDonald's streamline operations and modernize. He also took part in a culture of partying and fraternizing among some senior managers and rank-and-file employees, The Wall Street Journal previously reported, citing some former employees and people currently connected to the company.

McDonald's hired outside counsel last year to investigate the consensual relationship between Mr. Easterbrook and an employee. Investigators found evidence of sexting, or sending explicit content via messaging apps, between the two over several weeks.

Attorneys also searched the backup data for Mr. Easterbrook's company-issued phone and iPad but found no evidence of improper relationships with other employees, according to the complaint and a person familiar with the investigation. Investigators reviewed company email on Mr. Easterbrook's phone but not additional messages that weren't stored on his devices, the person said.

McDonald's alleged in its suit that Mr. Easterbrook approved a stock grant to an employee with whom he was having a sexual relationship. The grant was valued at hundreds of thousands of dollars, according to the suit.

In the suit, McDonald's said its severance plan with Mr. Easterbrook included a provision that it can stop payment of benefits and require the former CEO to pay back severance if it determined at any time that he committed an act that would have allowed him to be fired for cause. The company said a firing for cause could be carried out in case of a serious violation of its standards and employment policies, along with dishonesty, fraud, illegality or moral depravity.

At the time of his firing, Mr. Easterbrook said that the consensual affair was a mistake, and that he agreed with the board's decision to dismiss him. Mr. Easterbrook also said at the time that he hadn't engaged in other relationships with employees, according to McDonald's.

McDonald's said in the complaint that to have fired Mr. Easterbrook for cause last year, it would have had to prove that his behavior had constituted "dishonesty, fraud, illegality or moral turpitude." At the time, board members felt they lacked evidence to justify firing him for cause, the complaint said.

After receiving the anonymous tip in July, McDonald's brought in outside counsel again to investigate.

McDonald's said in the complaint, filed Monday in the Court of Chancery of the State of Delaware, that Mr. Easterbrook breached his fiduciary duties as a company officer and committed fraud.

The company said it is seeking to recover the amount it paid him in compensation and severance benefits. It is also seeking to prevent him from exercising stock options.

Some shareholder groups had criticized the board's decision to categorize the firing as without cause despite conduct that violated longstanding company policies forbidding relationships with direct and indirect reports. Proxy-advisory firm Glass Lewis advised shareholders this year to vote against the company's executive pay package given the severance afforded to Mr. Easterbrook.

That payout included $700,000 in cash severance to Mr. Easterbrook. Total compensation, including equity awards, amounted to $17.4 million in 2019. Stockholders in May approved total compensation and equity awards for Mr. Easterbrook.

Mr. Kempczinski, who served under Mr. Easterbrook as the head of McDonald's U.S. business, pledged to overhaul the company's culture after assuming the job in November. He outlined his plans to renew company values during a virtual summit late last month.

McDonald's in March hired Heidi Capozzi, previously the senior vice president of human resources for Boeing Co., as its new global chief people officer. In a message to employees on Monday, Ms. Capozzi said employees who witness any questionable behavior should reach out through their manager or a company hotline without fear of retaliation.

"We will thoroughly investigate any information and take serious and decisive action to hold those accountable for wrongdoing, no matter what, " Ms. Capozzi wrote in an email viewed by the Journal.

Write to Heather Haddon at heather.haddon@wsj.com

 

(END) Dow Jones Newswires

August 10, 2020 20:03 ET (00:03 GMT)

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