- Investors seek to eject McDonald’s board members over their approval of what stakeholders say is an excessive pay package to a former CEO, accused of violating company policy.
- The fight over executive pay comes at a time when McDonald’s is under pressure to address allegations of sexual harassment, worker safety and low-wages at its restaurants.
- Some market watchers say executive pay has ballooned over the years and ESG investors are looking to rein it in.
McDonald’s Corp. Chairman Enrique Hernandez, Jr. and another key board member up for reappointment on Thursday will face opposition from investor groups who take issue with their approval of a severance package valued over $44 million for former CEO Steve Easterbrook after he was accused of wrongdoing.
CtW Investment Group, which represents union pension plans that are shareholders in McDonald’s, and other investors say they plan to oppose the reappointment of Hernandez and Compensation Committee Chair Richard Lenny, in a move indicative of a growing revolt by investors across industries against “golden parachutes” for executives who could be fired for cause.
Also at issue at Thursday’s meeting is an executive compensation package the McDonald’s board has proposed that opponents say is virtually unchanged for future executives, the practice that allowed Easterbrook to keep his severance even though the board found in an internal investigation that he “demonstrated poor judgment.”
The probe, announced last November, found Easterbrook had violated the company’s standards of business conduct on dating by engaging in a consensual relationship with an employee. Easterbrook could not be reached for comment. However, in an email he sent to employees at the time and released to the media, he wrote, “This was a mistake… Given the values of the company, I agree with the board that it is time for me to move on.”
The former CEO was able to walk away with a severance package that included $675,000 in cash and over $28 million in unvested options, which CtW Executive Director Dieter Waizenegger alleges was because the board did not cite a specific cause for Easterbrook’s removal when they fired him.
“The top person at the company can violate the code of conduct and walk away with an overly generous payment,” Waizenegger told Karma. “That sets the wrong tone for the whole organization.”
In a May 2 letter of guidance to its clients who are McDonald’s investors, proxy advisory firm Glass Lewis said, “[We] believe that exempting CEOs from key provisions of crucial rules around corporate policy sets a questionable tone at the top, with negative potential ramifications for a firm’s culture and even the opportunity to create new, unique governance risks.”
The firm urged shareholders to vote against the reappointments, as well as the board’s proposal to approve the overall executive pay package, joining a growing chorus of labor groups and investors upset about the McDonald’s board’s actions.
The former CEO was able to walk away with a severance package that included $675,000 in cash and over $28 million in unvested options.
In November, New York City Comptroller Scott M. Stringer, who oversees the New York City Employees’ Retirement System’s $211 billion pension fund, wrote a letter to the board complaining about Easterbrook’s severance package and asking McDonald’s to implement clawback measures, along with requiring shareholder approval of future severance packages.
“It is hard to imagine how a board could set a worse ‘tone at the top’ than this,” Stringer wrote in the letter. CtW and Doug McMurdo, chairman of the Local Authority Pension Fund Forum, an umbrella organization of multiple U.K. pension funds, also signed.
McDonald’s declined to comment on the shareholder meeting or specific proposals and board members. Hernandez and Lenny did not respond to requests for comment.
The challenges to the board over executive compensation come as McDonald’s employees are protesting over wages and working conditions. On Wednesday, the Service Employees International Union and minimum-wage campaign Fight for $15 organized a strike of McDonald’s workers in several cities, to protest working conditions during the COVID-19 pandemic. The Associated Press also reported last month that about 50 workers have filed sexual harassment complaints with the Equal Employment Opportunity Commission against restaurant franchises in the past four years.
“McDonald’s is a people first company, and we know that crew are the heart and soul of every restaurant,” the company said in a statement to Karma. “Around the world we believe that McDonald’s and its business partners have a responsibility to take action on this issue and are committed to promoting positive change.”
The fight at McDonald’s is part of a growing trend where investors with a focus on environmental, social, and governance matters are nudging companies to adhere to ESG goals and hold management and board members accountable for failures to meet targets. Investor advocacy groups, such as the Netherlands-based Follow This, have successfully pushed big oil companies like Royal Dutch Shell PLC to combat climate change through proposals raised at shareholder meetings, while thousands of money managers overseeing $80 trillion in assets have signed onto commitments like the United Nations-backed Principles for Responsible Investment, promising that they will avoid companies that do not align with their ESG goals.
Ballooning executive compensation is no exception. Companies that traditionally experienced little scrutiny over executive compensation are increasingly facing pushback from investors interested in ESG, including proposals that would allow shareholders to clawback what they view as excessive executive payouts and require boards to seek shareholder approval for future compensation packages. U.S.-based non-profit As You Sow, for example, has urged companies including Home Depot Inc. to create more modest compensation packages that incentivize management to work towards long-term company growth.
“It is hard to imagine how a board could set a worse ‘tone at the top’ than this.”
In another example, Wells Fargo underwent a challenge over its executive compensation when — following reports in 2016 that bank employees were opening accounts without customers’ consent, and payment of a $3 billion fine to settle a probe by the Justice Department — the New York City Comptroller’s Office successfully negotiated on behalf of the New York City Employees Retirement System’s pension fund for a $60 million clawback from executives. Wells Fargo acknowledged the wrongdoing at the time and vowed to continue to change its corporate practices to avoid failures in the future.
Dissenting McDonald’s investors face an uphill battle Thursday. CtW owns about 3.4 million shares — a less than 0.5% stake in McDonald’s — while Glass Lewis is an advisory firm that does not vote or directly hold shares in the company. The bulk of McDonald’s ownership remains with bigger, more traditional shareholders that experts say rarely challenge companies on compensation.
“A significant number of shareholders like ESG funds will vote against this package,” says Rosanna Landis Weaver, a program manager who focuses on executive compensation at As You Sow. “But because of the large ownership of a few index funds that hardly ever vote against pay, I am not sure how the vote will go.”
To make matters more challenging, McDonald’s has opted to hold the meeting online to minimize health risks amid the COVID-19 pandemic. Experts say that the online format can limit discourse, as companies can seek to screen out unwanted questions.
“During these unprecedented times, virtual-only meetings are … an efficient means of preserving timing and continuity, but they do pose the risk of negatively impacting shareholder rights if improperly executed,“ says Derek Butcher, a senior ESG analyst at RBC Global Asset Management. “We encourage companies to be as transparent and clear as possible regarding meeting logistics, including the treatment of shareholder questions.”
Photo by Scott Olson/Getty Images
