Company's Recent Actions Dealing with Risk and Uncertainty

Dealing with Risk and Uncertainty

Company's Recent Actions Dealing with Risk and Uncertainty

In recent months, McDonald's has been conducting further investigations into the conduct of Steve Easterbrook, its former CEO, regarding whether he concealed indecencies by other personnel in addition to accusations of prospective misconduct within the human resources department. Mr. Easterbrook was let go by McDonald's numerous months ago after it was established that he was partaking in sexual relationships with a subordinate. The company has sourced a new chief executive to manage the company, and Easterbrook was given a severance package worth tens of millions in compensation. However, a fresh lawsuit filed by McDonald's alleges that Mr. Easterbrook conducted sexual relations with three employees in addition to bestowing a well-paid number of shares to one of the employees. This is a significant problem for the company as it has had to deal with major allegations of wrongdoing by its senior executives (Haddon and Vranica, 2020).

It is not deemed illegal conduct to carry out consensual relationships with workmates or subordinates. Nonetheless, in this case, McDonald's faces the dynamic power problem in the sense that these subordinates could have felt obligated and forced to partake in such relationships to maintain their jobs. Furthermore, numerous women working at McDonald's have filed complaints on sexual harassment and gender discrimination. Former employees indicate that their complaints regarding the conduct of their co-workers and also senior executives such as Easterbrook were ignored and overlooked. In this regard, McDonald's is not only suing Easterbrook for covering up these relations but also has, in recent months, conducted an internal review of its HR department (Haddon and Vranica, 2020).

Advice for Improving Risk Management

The fundamental objective of risk management is to guarantee that the organization solely takes the risks that will facilitate the attainment of its key goals and objectives while maintaining all other risks under control. The capability to manage risk will aid McDonald's in conducting itself more confidently on business decisions in the future. There are several recommendations for McDonald's in improving risk management.

First of all, McDonald's must alter its organizational culture. Organizations have to learn the art of adapting to changes or otherwise risk experiencing failure. Managers ought to be proficient in working with scheduled organizational change in addition to being responsive to changes in the organizational environment (Alvesson and Sveningsson, 2015). The reality of the fact that the CEO of the company was established to partake in indecent conduct implies that the company's culture is terrible from the top of its hierarchy to the bottom. Owing to the several preceding complaints on harassment, discrimination, and also hiring and firing, the company has permitted a toxic work culture to prevail, especially in the franchises that are independently owned. In this regard, it is recommended that McDonald's should change and transform its organizational culture (Campbell, 2019).

Secondly, McDonald's should conduct training workshops for both management and employees on how to conduct themselves. This training is intended to ensure that none of the personnel violate the company's code of conduct. Moreover, the company should carry out sexual harassment prevention training for all employees and managers to guarantee the safety and protection of vulnerable personnel (Ghio and Verona, 2020).

Third, it is recommended that the company should conduct frequent internal reviews of its various department and place stringent penalties for any misconduct determined. To begin with, the company should encourage employees to anonymously report any incidences of misconduct not just from their fellow workers but also from their superiors. This is to ensure that employees do not fear retaliation (Ghio and Verona, 2020). Consequently, the company should take any complaints or allegations made seriously and conduct extensive reviews of the various departments to ascertain the veracity of such claims. Lastly, the company should implement severe penalties when such misconduct is established. This should range from fines to being fired. This will guarantee proper conduct amongst the workforce (Burt, 2015).

Adverse Selection Problem

Adverse selection alludes to a circumstance where one party has more information than another party, or vice versa, regarding some aspect of an entity or product. Adverse selection takes place when there is the exploitation of asymmetric information. Notably, in an adverse selection situation, one party in the arrangement has more precise and different information compared to the other party. On the other hand, the party that has less information is consequently at a disadvantageous position in contrast to the party that has more information. As a result, this asymmetry in information brings about a lack of efficacy in the services rendered, the prices, and also goods (Bonham, 2008).

The adverse selection that McDonald's currently faces is the misconduct of executives, managers, and supervisors, and the treatment of employees. To minimize the impact that such conducts have on the company's transactions, McDonald's must conduct internal audits and reviews of the company's operations and assessment of the different departments or divisions (Wiener-Bronner, 2020). Without a doubt, these unethical and improper conducts largely affect employees, who are a key component to the daily running and success of the examination. As a result, to mitigate the dire consequences, McDonald's needs to assess how its employees are hired, evaluated, and fired. These circumstances should be warranted (Wiener-Bronner, 2020).

Secondly, the company should determine whether any employee problems and concerns are fully investigated and dealt with. A dissatisfied labor force adversely impacts the productivity of the company. Lastly, it is recommended that McDonald's should gather feedback from the employees regarding any existent blind spots within the entity. For instance, the company could hire an executive exclusively purposed to deal with employee satisfaction, different from the HR department. This would encompass considering opinions, values, and perspectives of employees from all divisions and ensuring that their values are highly respected (Wiener-Bronner, 2020).

Moral Hazard Problem

The moral hazard problem alludes to the risk that a party has not gotten into any agreement or covenant in good faith or has rendered deceptive or false information regarding its assets, liabilities, or financial credit capability. What is more, the moral hazard problems may take into account when a party is incentivized to take infrequent and uncommon risks in a desperate endeavor to generate a profit before settling the contract (Coleman, 2012). The moral hazard problem that McDonald's is currently facing is linked to the conduct of its former CEO, Mr. Easterbrook. In this moral hazard situation, the CEO had agreed with the board of the company to guarantee the proper performance of the company and to direct it in its everyday undertakings. However, the CEO provided misleading information regarding his indecent conduct with relationships with subordinates and also improper human resource undertakings. For the most part, this sort of conduct by the CEO could be linked to the fact that he possessed significant power and believed that he would not face any consequences for his actions.

There are several best practices utilized in the industry that McDonald's can employ to deal with this moral hazard problem. At the core of moral hazard lies asymmetric information. The party taking risks in the arrangement has progressively more information regarding the state of affairs or intents in comparison to the party that bears the consequences. As the CEO of the company, Mr. Easterbrook partook in misconduct after finalizing his contract agreement. This situation is one in which the CEO of the company shied away from his responsibility in the workplace setting. As an employee of the firm, Mr. Easterbrook had a fundamental incentive to carry out the work set out for him in return for his compensation. One of the industry approaches that McDonald's can employ incentives to both encourage and discourage employees' conduct. For instance, the company can set out a contract for the CEO based on performance and conduct in the organization. That is, the CEO would only be paid if the company performed appropriately. At the same time, the company can set out punishments for any misconduct. For example, circumstances such as sexual harassment or relations lacking consent can result in punishment for the CEO.

Principal-Agent Problem

The actions taken by the board of directors of a company can have a significant impact on how executives and senior managers manage not just risks but the organization as a whole. If plenty of emphases is positioned on solely examining and assessing short-term financial metrics, it implies that there will be a tendency of such executives to optimize short-term performance to the detriment of the company's long-term health. As a result, a fundamental risk to alleviate at the board level is how well the incentives for senior executives are in alignment with the fundamental goals of the owners. The principal-agent problem emanates when there is a misalignment between the incentives of the employees and the objectives of the owners of the company (Bonham, 2008).

In essence, the principal-agent problem takes place when one individual, referred to as the agent, is permitted to carry out decisions on behalf of another individual, referred to as the principal. In such a state of affairs, there are problems of moral hazard in addition to the conflict of interest. This is because even though the agent is given authority to act on behalf of the principal, the agent's conduct might be in such a manner that is in contradiction to the best interests of the principal (Coleman, 2012). The situation that McDonald's faces concerning Mr. Easterbrook is a perfect and ideal example of a principal-agent problem. In this case, Mr. Easterbrook, as the CEO of the company, is the agent and is granted authority to make decisions and act on behalf of the principal, in this case, the board of directors and owners of the company.

There are several tools that McDonald's employs to guarantee the alignment and profitability of the company. One of the tools that the company employs is performance assessment and compensation. The compensation handed out to the agent is the fundamental tool for aligning the interests of both the agent and the principal. To properly resolve the principal-agent problem, it is imperative to make certain that the compensation is tied to the performance of the agent. In this regard, it implies that the compensation of executives such as a CEO is linked to the performance of the company not just financially but also in other aspects such as the satisfaction of employees (Walker, 2013). In this particular tool, the performance of the agent is typically measured by individual assessment owing to the reason that it is an appraisal approach that is both flexible and balanced. Some of the prevalent approaches that are included in this tool include the provision of stock options and also deferred compensation. It is critical to note that by linking the compensation of the agent to the benefits attained by the principal is beneficial in guaranteeing the elimination of conflicts of interest (Walker, 2013).

Other tools used by the company include contract design and monitoring. The fundamental aim of contract design encompasses the formation of a contract framework or context between the agent and the principal to tack the problem of information asymmetry, instigate the agent's incentives to function in the best interests of the principal and to ascertain processes for monitoring agents. As a result, the contractual agreement that is set out between the principal and the agent is one that has a great incentive for the agent to convince him or her to act ethically on behalf of the principal at all times (Bonham, 2008). Moreover, regarding monitoring, the company conducts internal audits, reviews, and assessments. The main aim of an internal audit or review is to assess whether the functioning of the firm is being executed in the right way and ensure that there are proper internal controls. Furthermore, the main aim of internal assessments is to examine the internal climate of the company as set out by the agent and the decisions being carried out (Walker, 2013).

Organizational Structure and Overall Profitability

An organizational structure is delineated as a system that explains how particular activities are enforced and guided to attain the goals and objectives of an organization. Also, the organizational structure influences the flow of information between different levels within the entity (Barney and Hesterly, 2009). McDonald's Corporation employs a divisional organizational structure. In essence, in this corporate structure, the company is split into departments or components that are handed responsibilities based on operational requirements. Each of the company's division deals with a particular operational aspect or a group of strategic goals and objectives (Barney and Hesterly, 2009). McDonald's structure at the top comprises the CEO, the COO, and the CFO. After that, the company is split into different divisions, including marketing, corporate affairs, finance, human resources, and strategic planning divisions. McDonald's also has other functional divisions comprising of the customer services, supply chain, legal, franchising, and security and licensing departments (McDonald's, 2020).