McDonald’s CEO Ouster Order From SEC Creates Reporting Quandary

The SEC’s unprecedented finding that McDonald’s didn’t disclose enough information about a CEO firing is prompting questions about whether companies have sufficiently clear guidance on what to tell investors in similar situations.

The fast food giant deemed its 2019 firing of Steve Easterbrook—for having a relationship with a subordinate—as termination “without cause.” That allowed Easterbrook to leave with tens of millions of dollars in compensation that would’ve otherwise been forfeited, the SEC said.

McDonald’s decision to not publicly reveal more information about its exercised discretion violated federal securities law, the SEC said last week.

The finding is a novel interpretation of the Securities Exchange Act and is inconsistent with how companies often approach disclosures, attorneys said.

Companies historically have not disclosed details on CEO firings made “without cause.” But after the order, companies may now feel obligated to disclose arguments for the other side as to why they could have fired a CEO for cause, attorneys said.

This kind of information could also paint an incomplete picture and make it more difficult for companies to negotiate separation agreements, they said.

“It raises a lot of questions that companies are going to need to grapple with that will be difficult,” Goodwin Procter LLP partner Alexandra Denniston said.

‘A Victim’

Easterbrook left McDonald’s with equity-based compensation of about $44 million after he was found to have engaged in a personal relationship with a McDonald’s employee. Information about relationships he had with other employees later came to light, and McDonald’s sued to recover the severance pay.

McDonald’s settled the case in December 2021, with Easterbrook agreeing to return tens of millions in cash and equity.

“Public issuers, like McDonald’s, are required to disclose and explain all material elements of their CEO’s compensation, including factors regarding any separation agreements,” Mark Cave, associate director of the SEC’s enforcement division, said in a news release announcing the charges.

The SEC order said McDonald’s violated federal securities law because it “failed to disclose that it exercised discretion in terminating Easterbrook ‘without cause’ under the relevant compensation plan documents after finding that he violated corporate policy.” The SEC declined to comment beyond the news release.

Two Republican commissioners dissented from the order, saying it was based on a “novel interpretation” of the executive compensation disclosure requirements.

The SEC didn’t impose financial penalties on McDonald’s, citing its cooperation with the investigation. But the charges are troubling and are an aggressive use of the disclosure requirements, said Toby Galloway, a former SEC attorney and current chair of Winstead PC’s securities litigation and enforcement practice group.

“I see them as a victim in the whole thing,” Galloway said.

Companies may terminate an executive “without cause” to avoid expensive and protracted legal disputes, even if they could argue there was cause for the firing, attorneys say. The disclosure the SEC wanted from McDonald’s doesn’t align with how companies have approached these issues, they said.

“Nor do I think it’s really practicable,” said Patrick Gibbs, head of Cooley LLP’s securities litigation and enforcement group.

When an executive leaves under a cloud of misconduct allegations, the disclosure language can be heavily negotiated.

While investors may want to know if the company is paying an executive severance when it might not have to, “just providing that ‘we used our discretion not to terminate somebody for cause’ is information that could be misleading to investors without additional facts that the company may not be able to disclose,” Denniston said.

Details about internal deliberations, for example, can be restricted because of confidentiality or privilege concerns.

Expansive View

The action against McDonald’s comes amid the SEC’s increased focus on issues related to executive compensation and investor disclosures.

The agency recently finalized rules requiring companies to report more detailed pay-versus-performance data in their proxy statements, making executive pay information more accessible to shareholders. The SEC has also established new requirements for recovering erroneous executive bonuses.

“It seems like they’re taking a more expansive view than prior iterations of the SEC and taking the view that more disclosure is better for investors,” Denniston said.

The SEC’s order against McDonald’s creates uncertainty, attorneys said. Companies will parse through the decision but it will be difficult for them to be sure that they won’t be second-guessed by the SEC for what information they decide to disclose, Gibbs said.

Galloway warned that “companies need to be very careful about what they say when a CEO leaves as a result of any sort of misconduct or disagreement with the board.”

The agency may be using McDonald’s as a warning shot. Other companies that face similar charges in the future might not escape fines or other penalties, attorneys said.

“There’s nothing about the framework that the SEC has laid out in this settlement that would preclude them from seeking penalties and fines in later situations,” Gibbs said.