gavel on a wooden bench

In a novel case that is drawing internal criticism, the U.S. Securities and Exchange Commission (SEC) charged fast food giant McDonald’s Corp. and its former CEO with failing to disclose the truth about the circumstances of the CEO’s firing after the company uncovered multiple, undisclosed, improper relationships between the ex-CEO and other employees.

The SEC charged the former CEO of McDonald’s, Stephen Easterbrook, for allegedly making “false and misleading statements to investors” about the circumstances that led to his firing in 2019.

Easterbrook agreed to settle the charges without admitting or denying the regulator’s findings.

In settling, he consented to a cease-and-desist order imposing a five-year officer and director ban and a US$400,000 civil penalty.

The company also settled without admitting or denying the SEC’s findings.

McDonald’s consented to a cease-and-desist order, but the SEC decided not to impose a financial penalty on the company given its substantial cooperation with the regulator’s investigation.

According to the SEC’s order, McDonald’s terminated Easterbrook in 2019 for exercising poor judgment and violating company policy by engaging in an inappropriate personal relationship with an employee.

At the time, they entered into an agreement that indicated he was fired without cause, “which allowed him to retain substantial equity compensation that otherwise would have been forfeited,” the SEC said.

However, in 2020, after a new complaint and a second internal investigation, it was revealed that “Easterbrook had engaged in other undisclosed, improper relationships with additional McDonald’s employees,” it noted.

The company then sued Easterbrook to recover the estimated US$47.5 million in severance and unvested equity compensation he left the company with, based on his initial termination agreement. That case was settled out of court in 2021.

The SEC’s order found that “Easterbrook knew or was reckless in not knowing that his failure to disclose these additional violations of company policy prior to his termination would influence McDonald’s disclosures to investors related to his departure and compensation.”

It also found that the company failed to disclose to regulators and investors that it had exercised its discretion to terminate Easterbrook without cause in the first place, and that as a result it violated its disclosure obligations.

“When corporate officers corrupt internal processes to manage their personal reputations or line their own pockets, they breach their fundamental duties to shareholders, who are entitled to transparency and fair dealing from executives,” said Gurbir Grewal, director of enforcement at the SEC, in a release.

“By allegedly concealing the extent of his misconduct during the company’s internal investigation, Easterbrook broke that trust with — and ultimately misled — shareholders.”

Public issuers like McDonalds’s are required to disclose “all material elements of their CEO’s compensation, including factors regarding any separation agreements,” stated Mark Cave, associate director of enforcement at the SEC.

“Today’s order finds that McDonald’s failed to disclose that the company exercised discretion in treating Easterbrook’s termination as without cause in conjunction with the execution of a separation agreement valued at more than $40 million.”

However, a pair of SEC commissioners criticized the charges against the company.

In a joint statement, Hester Peirce and Mark Uyeda said the charges use “a novel interpretation” of the commission’s executive compensation disclosure requirements.

“We have concerns that this action creates a slippery slope that may expand… disclosure requirements into unintended areas — a form of regulatory expansion through enforcement,” they said.

“If the commission intends to expand a settled disclosure requirement, the commission or its staff should publicly articulate its views through rulemaking or formal guidance so that companies understand the requirement before the commission starts enforcing it,” the commissioners suggested.