McDonald's Risk Management: Easterbrook Scandal Analysis
This paper examines how McDonald's responded to risk and uncertainty surrounding the misconduct of former CEO Steve Easterbrook, who was dismissed after engaging in undisclosed sexual relationships with subordinates. Drawing on concepts from risk management theory, the paper addresses the adverse selection and moral hazard problems the company faced, as well as the classic principal-agent conflict illustrated by Easterbrook's behavior. It also evaluates McDonald's divisional organizational structure and offers recommendations for strengthening internal controls, reforming workplace culture, and establishing an enterprise risk management function to prevent future executive misconduct.
- Introduction: McDonald's and the Easterbrook Misconduct: Overview of Easterbrook scandal and workplace misconduct allegations
- Recommendations for Improving Risk Management: Culture reform, training, and internal review proposals
- Adverse Selection and Information Asymmetry: How information gaps harmed McDonald's operations and employees
- The Moral Hazard Problem: CEO misconduct as a textbook moral hazard scenario
- The Principal-Agent Problem: Board-CEO misalignment and tools to realign incentives
- Organizational Structure and Overall Profitability: Divisional structure weaknesses and enterprise risk management proposal
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What makes this paper effective
- Anchors abstract economic and management concepts — adverse selection, moral hazard, and the principal-agent problem — to a concrete, well-known real-world case, making the theoretical discussion immediately accessible.
- Each section follows a consistent pattern: define the concept, apply it to the McDonald's situation, then offer actionable recommendations, giving the paper a clear and practical orientation.
- Uses a range of academic and news sources to support both the factual case background and the theoretical frameworks, demonstrating appropriate source diversity for a business management paper.
Key academic technique demonstrated
The paper demonstrates applied conceptual analysis — taking formal economic and organizational behavior concepts and using them as analytical lenses on a current corporate case study. This technique requires the writer to accurately define each concept, identify the features of the real situation that match the concept's conditions, and derive practical implications from that match.
Structure breakdown
The paper opens with a factual case summary of the Easterbrook scandal, then moves through four distinct analytical frameworks (risk management, adverse selection, moral hazard, and principal-agent theory), each treated as a self-contained section with a definition, case application, and recommendations. It closes with a structural analysis of McDonald's divisional organization and a proposal for an enterprise risk management unit. The references follow APA formatting conventions.
Introduction: McDonald's and the Easterbrook Misconduct
In recent months, McDonald's has been conducting further investigations into the conduct of Steve Easterbrook, its former CEO, regarding whether he concealed misconduct by other personnel, in addition to allegations of improper behavior within the human resources department. Mr. Easterbrook was dismissed by McDonald's after it was established that he had engaged in a sexual relationship with a subordinate. The company sourced a new chief executive to manage operations, and Easterbrook was given a severance package worth tens of millions of dollars in compensation. However, a subsequent lawsuit filed by McDonald's alleges that Mr. Easterbrook conducted sexual relations with three employees and awarded a substantial number of company shares to one of them. This represents a significant problem for the company, as it has had to contend with major allegations of wrongdoing by its senior executives (Haddon and Vranica, 2020).
Consensual relationships between coworkers or between managers and subordinates are not in themselves illegal. Nonetheless, McDonald's faces a dynamic power problem in the sense that subordinates may have felt pressured to participate in such relationships in order to retain their jobs. Furthermore, numerous women working at McDonald's filed complaints regarding sexual harassment and gender discrimination. Former employees indicated that their complaints about the conduct of coworkers and senior executives, including Easterbrook, were ignored and overlooked. In this regard, McDonald's is not only suing Easterbrook for covering up these relationships but has also, in recent months, conducted an internal review of its HR department (Haddon and Vranica, 2020).
Recommendations for Improving Risk Management
The fundamental objective of risk management is to ensure that an organization takes only those risks that will facilitate the attainment of its key goals and objectives, while keeping all other risks under control. The capability to manage risk effectively will aid McDonald's in making more confident business decisions in the future. Several recommendations follow for how McDonald's can improve its risk management practices.
First, McDonald's must alter its organizational culture. Organizations must learn the art of adapting to change or risk experiencing failure. Managers ought to be proficient in managing planned organizational change as well as being responsive to shifts in the organizational environment (Alvesson and Sveningsson, 2015). The fact that the company's CEO was found to have engaged in misconduct implies that the company's culture was problematic from the top of its hierarchy downward. Given the numerous preceding complaints regarding harassment, discrimination, and improper hiring and firing practices, the company permitted a toxic work culture to persist, particularly in independently owned franchises. It is therefore recommended that McDonald's change and transform its organizational culture (Campbell, 2019).
Second, McDonald's should conduct training workshops for both management and employees on standards of professional conduct. This training is intended to ensure that no personnel violate the company's code of conduct. The company should also carry out sexual harassment prevention training for all employees and managers to guarantee the safety and protection of vulnerable staff (Ghio and Verona, 2020).
Third, it is recommended that the company conduct frequent internal reviews of its various departments and impose stringent penalties for any misconduct identified. The company should encourage employees to anonymously report incidents of misconduct involving not only coworkers but also superiors, ensuring that employees do not fear retaliation (Ghio and Verona, 2020). Any complaints or allegations made should be taken seriously, and extensive reviews of the relevant departments should follow to establish the veracity of such claims. Finally, the company should implement severe penalties when misconduct is confirmed, ranging from fines to termination of employment. This will promote proper conduct throughout the workforce (Burt, 2015).
Adverse Selection and Information Asymmetry
Adverse selection refers to a situation in which one party possesses more information than another regarding some aspect of an entity or product. It occurs when asymmetric information is exploited: one party in an arrangement holds more precise and more complete information than the other, placing the less-informed party at a disadvantage. This asymmetry in information leads to inefficiencies in services, pricing, and goods (Bonham, 2008).
The adverse selection problem that McDonald's currently faces stems from the misconduct of executives, managers, and supervisors, and from the treatment of employees more broadly. To minimize the impact of such conduct on the company's operations, McDonald's must conduct internal audits and reviews across its departments and divisions (Wiener-Bronner, 2020). These unethical and improper behaviors largely affect employees, who are a critical component of the company's daily functioning and success. To mitigate the consequences, McDonald's needs to carefully assess how its employees are hired, evaluated, and dismissed, and ensure that such processes are fair and well-documented (Wiener-Bronner, 2020).
The company should also determine whether employee concerns and complaints are being fully investigated and addressed, since a dissatisfied workforce adversely impacts productivity. Additionally, McDonald's should gather feedback from employees to identify any blind spots within the organization. For example, the company could designate an executive specifically responsible for employee satisfaction, separate from the HR department. This role would encompass considering the opinions, values, and perspectives of employees from all divisions and ensuring those perspectives are respected (Wiener-Bronner, 2020).
References
Alvesson, M., & Sveningsson, S. (2015). Changing organizational culture: Cultural change work in progress. Routledge.
Barney, J. B., & Hesterly, W. S. (2009). Strategic management and competitive advantage. Pearson Education.
Bonham, S. S. (2008). Actionable strategies through integrated performance, process, project, and risk management. Artech House.
Burt, C. D. B. (2015). New employee safety: Risk factors and management strategies. Springer.
Campbell, A. F. (2019). The firing of McDonald's CEO won't solve the chain's sexual harassment problem. Vox. Retrieved from: https://www.vox.com/identities/2019/11/4/20947689/mcdonalds-ceo-steve-easterbrook-fired
Coleman, T. S. (2012). Quantitative risk management: A practical guide to financial risk (Vol. 669). John Wiley & Sons.
Ghio, A., & Verona, R. (2020). The evolution of corporate disclosure: Insights on traditional and modern corporate communication. Springer Nature.
Haddon, H., & Vranica, S. (August 25, 2020). McDonald's probe into ex-CEO investigates HR department, coverups. Wall Street Journal. Retrieved from: https://www.wsj.com/articles/mcdonalds-probe-into-ex-ceo-investigates-hr-department-cover-ups-11598398673
Louisot, J. P., & Ketcham, C. H. (2014). ERM — Enterprise risk management: Issues and cases. John Wiley & Sons.
McDonald's. (2020). What's the structure of McDonald's and how each department in the organization interacts/works together? Retrieved from:
Walker, R. (2013). Winning with risk management. World Scientific.
Wiener-Bronner, D. (August 26, 2020). McDonald's is investigating its HR department and possible cover-up of employee misconduct by former CEO. CNN. Retrieved from: https://edition.cnn.com/2020/08/26/business/mcdonalds-easterbrook-investigation/index.html
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