News analysis
McDonald’s sexual harassment ruling impacts corporate America
A court in the county of Delaware in the US has made a fascinating ruling that will have a broader impact on the lives of American corporate directors.
What’s happened?
In a first-of-its-kind decision, a Chancery Court judge in Delaware ruled that corporate officers owe a fiduciary duty of oversight to their company (just like corporate board members).
Who is involved in this ruling?
The ruling centres on the case of former McDonald’s chief human resources officer David Fairhurst, who allegedly breached his duty to the company by allowing sexual harassment and misconduct to flourish.
The judge’s ruling focused on whether shareholders could sue the former HR chief Fairhurst because he had a duty of loyalty to the company and that he breached that duty. The shareholders won their argument.
What does this mean for corporate law in America?
This could be a once-off ruling or have broader implications, as Delaware is the premier destination for incorporating companies in America.
The ruling certainly matters in Delaware and for executives whose companies are incorporated in Delaware.
Corporate directors who fail to fulfil their oversight duties can be sued derivatively by shareholders acting on behalf of the corporation.
“Under Delaware law, corporate officers owe the same fiduciary duties as corporate directors,” the judge wrote in McDonald’s Corporate Shareholder Derivative Litigation.
“Although no Delaware decision has stated the proposition in so many words,” the judge added, “This decision confirms that officers owe a duty of oversight.”
The McDonald’s decision unequivocally states that non-board directors, like CEOs, CFOs, general counsel and human resources chiefs, owe a duty of loyalty to their companies.
Why is Delaware important in American governance?
Since the early 1900s, Delaware has been the leading state for forming businesses.
Over one million American companies have chosen Delaware to be their legal home.
Even though Delaware has an impressive number of entities, it is even more remarkable that many large and influential corporations are incorporated with their shares listed on major stock exchanges.
Approximately 60 per cent of Fortune 500 companies are located in Delaware.
Read more: Take the Diploma in Corporate Governance to learn more about your duties as a director
