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A Delaware judge has found David Fairhurst, McDonald's former Global Chief People Officer, liable for allegedly failing to prevent pervasive sexual harassment at the fast food chain. This failure reportedly caused a significant loss in market value after chief executive Steve Easterbrook was dismissed in 2019 over a relationship with a subordinate.

According to the judge, vice-chancellor Travis Laster, as Chief People Officer Fairhurst "had an obligation to make a good-faith effort" to gather information about the misconduct and to alert the board. Laster added that Fairhurst "could not consciously ignore red flags indicating that the corporation was going to suffer harm."

The ruling sets an important precedent, indicating that Delaware courts will put executives, not just board members, in the crosshairs for failing to implement the oversight necessary to stop misconduct. "It puts a little bit more pressure on boards and management to make sure that they really have systems in place to detect bad conduct and then do something about it," said Doug Baumstein, a securities lawyer at Mintz.

Investors claim that Fairhurst breached his fiduciary duties by allowing a corporate culture to develop that condoned sexual harassment and misconduct. Laster has yet to rule whether the board, rather than shareholders, should bring the lawsuit to recoup damages on the fast-food chain's behalf or if it is too conflicted to do so.

Starling recently published "The Era of Accountability," a Deeper Dive supplement to our 2022 Compendium, which discusses the global push from regulators, politicians, investors, employees, and the public to hold corporate leaders accountable for the (mis-) management of culture and conduct risks. This Deeper Dive is only available here on Starling Insights.

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