Greed-to-Grief, No. 19

By all accounts, Steve Easterbrook did a fabulous job as the CEO of McDonalds for five years starting in 2015. He modernized the restaurants by adding kiosks for ordering and kicked off all-day breakfast, to the delight of millions.

In businesses like McDonalds that have many locations, one of the key measurements of success is called Same-Store Sales or SSS. A company can appear to be growing if it adds more stores or acquires other businesses. These are all things that keep the revenue line going up. But if SSS are not growing, there is a problem with the company’s approach.

If sales at existing stores are shrinking, all that may be happening is sales from new stores are masking the decline and allowing the company to show revenue went up. But the “quality” of that revenue is suspect, and rather than get rewarded for top-line growth, the company will see its stock price decline because investors want companies that can grow organically through SSS. To say it’s a huge metric is an understatement.

As Easterbrook took over as CEO, same-store sales were declining. In other words, existing McDonalds restaurants were shrinking, as was McDonalds’ stock price. With Easterbrook’s turnaround plans in place, SSS began increasing and by the end of his tenure in 2019, SSS were growing at a remarkable 6.0% per year, the highest in the history of the company. The company’s stock price rose from $76 per share in 2015 to almost $200 per share in 2019.

A fantastic corporate turnaround and one that will be in business school curricula for the foreseeable future. The business-school case study may or may not chose to include a description of how Easterbrook’s run came to an end.

Here is Easterbrook’s statement after being terminated by the McDonalds board in November 2019:

In a separation with a senior executive, the company’s board needs certain things, and the executive needs certain things. Most of what happens is governed by the executive’s employment agreement. For example, Easterbrook’s agreement stated that if he was terminated without cause, he could keep the stock he earned as CEO.

Easterbrook kept the stock and in turn, released any ability he had to take legal action against the company, which would be another costly sideshow the board wanted to avoid.

Up to this point, this is a fairly routine termination of a CEO who violated company policy but did not break the law. It did not stay routine for long.

There is an old saying, “The cover-up is worse than the crime.” Well, this was the case with Easterbrook. Less than a year after the termination, the board received an anonymous tip that the former CEO had not one, but several improper sexual relationships with employees during his five years as CEO.

The board did not take this new information lightly and launched an investigation that confirmed many liaisons. The situation then shifted from a semi-amicable termination of a successful CEO who had a lapse in judgement, to a board that was dealing with a liar and somebody who defrauded them.

The incriminating messages and photos from Easterbrook’s phone that were recovered through forensic technologies all but sealed the board’s next move.

Hell hath no fury like a board scorned.

They went after Easterbrook for just about every penny he made at the company. Rather than face potential criminal charges and time in prison, the disgraced former CEO returned more than $100 million.

I hope it was worth it.

Key Takeaways

• Easterbrook was not an overnight success. He worked at McDonalds for 20+ years and had short stints at a few other smaller restaurant chains along the way. He let the CEO title and being the boss of one of the world’s top brands distort his judgement. He forgot who he was.

• For all Bill Gates did that was right or wrong, when he started a relationship with Microsoft marketing executive Melinda French, she resigned from the company, and he remained as CEO. They were married for 27 years, until, um, Gates had an affair.

• Imagine the stress Easterbrook felt living with the lies for years in front of his colleagues, investors, board members, and family. Then again, maybe he felt no guilt for the deception. 

Things I think about

A rogue wave is formed when the energy from several converging waves combines to create a temporary wall of water several times higher than any of the individual waves.

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