Following a seminal ruling from a Delaware judge last week, McDonald’s shareholders can now sue the fast-food company’s former chief people officer for allegedly enabling a culture of sexual misconduct and resulting damage. The ruling is particularly groundbreaking because it has long been the board’s responsibility to answer for a company’s bad behavior. But last week’s ruling gives C-suite executives “duty of oversight,” which holds them accountable for breaches of fiduciary duties, much like boards are. 

As the New York Times notes, “Giving company executives the ‘duty of oversight,’ given that they manage much of a company’s daily operations, means they can be sued for big money”—potentially billions. 

I spoke with Susan Divers, a lawyer and the director of thought leadership at the ethics and compliance training firm LRN, about the implications for HR chiefs. But first, some context.

McDonald’s terminated David Fairhurst, its former global chief people officer, in November 2019 following sexual misconduct allegations at the company. His dismissal came just a day after the fast-food chain ousted then-CEO Steve Easterbrook for engaging in sexual relationships with employees. Now, McDonald’s shareholders can sue Fairhurst on the basis that he ignored and fostered a toxic work culture that condoned sexual harassment and impropriety. 

“Fairhurst’s fiduciary duties included a duty of oversight, which required that he make a good faith effort to establish an information system that would generate the information necessary to manage the Company’s human resources function,” wrote Vice Chancellor Travis Laster in the court ruling. “Those duties, they say, demanded that he address or report upward about any red flags regarding sexual harassment and misconduct at the Company.” 

The ruling underscores that chief executives are not exempt from the repercussions of turning a blind eye to red flags. “There’s an increased focus for a number of reasons on personal liability for misconduct,” explains Divers. “So this is really about executive responsibility.”

What it means for HR chiefs 

It will be all the more important for CHROs to have effective systems and channels for reporting misconduct and appropriately responding to warning signs. “This is very clearly saying that you can’t consciously ignore red flags,” says Divers of the ruling. “You have to do something about them, and that’s a big deal.”

HR heads should work closely with company compliance officers and legal to track and report misconduct and flag potential risks. Divers recognizes that such a shift in C-suite behavior might be difficult for HR heads who typically act as a removed and neutral party—offensive to no one in order to gain the trust of all. But that mentality will have to change, and quickly.

“I like the Titanic analogy,” she says. “If you see an iceberg, especially if you can see it from the deck, that’s a red flag, and it can sink the ship.”

What it means moving forward

HR heads must work with leaders companywide to create a culture of accountability and policy adherence, regardless of rank.

“Rules aren’t self-executing. What determines whether rules get followed or not is the culture,” Divers says.

McDonald’s had a zero-tolerance policy while Fairhurst worked at the company, meaning no tolerance for misconduct or inappropriate behavior. McDonald’s declined to comment on the record. “Fairhurst should have been fired under the zero-tolerance policy they had in place,” says Divers. He was later terminated for cause in 2019 after an incident involving misconduct at a company event came to the attention of the board, according to McDonald’s. Separately, Easterbrook was terminated after the board investigated his relationship with an employee. 

The McDonald’s case is yet another reminder that a people leader’s job is to manage talent risk, no matter who is involved. “Executives have to get better at that, and the HR department has got to abandon Swiss neutrality,” Divers tells Fortune. “There are many good HR departments, but they have to be more of a partner in that mentality and the management of risk.”

Amber Burton
amber.burton@fortune.com
@amberbburton

Reporter's Notebook

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Some of your high-earning employees might not be faring as well as you think. Almost 51% of people earning over $100,000 reported living paycheck-to-paycheck in December 2022, up nine percentage points from the year prior, according to a recent report from PYMNTS. But don’t jump to blame fiscal irresponsibility or a lack of financial literacy.

“Persistent high inflation is certainly part of the equation, but a looming recession, high interest rates, volatile financial markets, and white-collar layoffs are also hitting higher-income earners,” writes Fortune’s Megan Leonhardt.

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A round-up of the most important HR headlines, studies, podcasts, and long-reads.

- New job engagement surveys, aiming to find more accurate ways to measure employee job satisfaction, are becoming increasingly popular. New York Times

- Dutch technology company Philips plans to cut about 6,000 jobs by 2025. CNBC

- The 32,000-person Disney union will vote on whether to accept a labor contract that would increase wages by a minimum of $1 per hour annually until 2026. CNN

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Watercooler

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Male mediocrity. For years, men have weaponized incompetence to avoid office drudge work, often leaving it to women. —Ross McCammon

Retaliatory firing. A former Google employee accused his boss of groping him and then retaliating when she caught wind of his HR complaint. —Alice Hearing

Necessary medicine. The only way to end inflation is with more layoffs, says former Walmart U.S. CEO Bill Simons. “Inflation hurts 100% of the population—a recession might hurt 2% to 3% that have lost their job.” —Christiaan Hetzner

COVID, year four. The world is still in a pandemic, according to the World Health Organization. WHO Director-General Tedros Adhanom Ghebreyesus accepted a recommendation from the COVID-19 emergency committee to extend the current emergency status. The committee gathers every few months to reconsider whether the emergency state continues. —Erin Prater