Corporate Officers Can Face Personal Liability for Failing to Report and Stop Sexual Misconduct, Court in McDonald’s Case Rules

February 2, 2023

Accountability at the top for those who fail to call out and investigate sexual misconduct in the workplace is as critical to addressing this pervasive problem as consequences for the actual perpetrator. Under a recent decision in a case involving McDonald’s, accountability for corporate officers can include significant personal liability when they turn a blind eye to sexual misconduct or a toxic work environment.

Leaders Can’t Ignore “Red Flags” About Workplace Sexual Misconduct

The January ruling came in a Delaware derivative lawsuit filed by shareholders against McDonald’s and its former chief people officer, David Fairhurst. The plaintiffs in In Re McDonald’s Corporation Stockholder Derivative Litigation claimed that Fairhurst breached his oversight duties by both participating in and “consciously ignoring red flags” about pervasive sexual misconduct at the company, including multiple consensual affairs between the company’s former CEO, Steve Easterbrook, and employees. That misconduct resulted in the high-profile firings of both men in 2019. The plaintiffs seek to recover, on behalf of the company, compensation for damages done to McDonald’s reputation and finances, including clawing back any remuneration or benefits that Fairhurst received upon his departure. Prior to this lawsuit, McDonald’s sued its former CEO, Easterbrook, to recover his severance package, ultimately resulting in a settlement and repayment of $105 million.

The case is significant because Delaware Chancery Court’s judicial rulings have tremendous influence on corporate conduct nationwide. As far as precedent, this court previously held that only members of a company’s board of directors had the oversight responsibilities they now attribute to corporate officers like Fairhurst.

The court denied Fairhurst’s effort to dismiss the suit, holding that, like directors, “corporate officers owe a duty of oversight.” In Fairhurst’s case, that duty included “an obligation to make a good faith effort to put in place reasonable information systems so that he obtained the information necessary to do his job and report to the CEO and the board.” The court also held that “he could not consciously ignore red flags” about sexual harassment and misconduct, “indicating that the corporation was going to suffer harm.” The court concluded:

“As Global Chief People Officer, Fairhurst was obligated to know about what was going on with the Company’s employees, and he had day-to-day responsibility for the department charged with promoting a safe and respectful workplace. It is reasonable to infer that Fairhurst knew about and played a role in creating the Company’s problems with sexual harassment and misconduct… The plaintiffs have therefore stated a claim against Fairhurst for breach of his oversight duties.”

The decision is a positive development in the fight against workplace sexual harassment and misconduct. It puts those in charge of a company and its workforce on notice that their personal financial well-being is at stake when they ignore the well-being of their employees and fail to put a halt to such illegal conduct.

(*Prior results do not guarantee a similar outcome.)