Business Ethics and Corporate Governance - McDonalds

Q1:- Corporate Governance: the way in which the board is structured, changes over time, relations with shareholders, and shareholder activism

Ans 1:-

Size and Structure of the Board – The Board itself determines its size within the range of 11 to 24 members required by the Company’s Certificate of Incorporation. The Board believes that, at this time, the desirable number of Directors is between 11 and 15. In the event of a vacancy on the Board, the Directors may either fill the vacancy or decrease the size of the Board, in accordance with the terms of the Company’s Certificate of Incorporation. The Board shall periodically review its structure, considering (among other things) the existing composition of the Board, voting results for Directors in recent elections by shareholders, staggered terms, legislative and regulatory developments, trends in governance, the Company’s circumstances at the time, how a particular structure could affect the unique relationships between and among the McDonald’s System of employees, franchisees and suppliers, and such other factors as the Board may deem relevant.

Independence of Directors – All Directors except the CEO shall be independent. An independent Director is one who is free of any relationship with the Company or its management that may impair, or appear to impair, the Director’s ability to make independent judgments. The Board of Directors determines each Director’s independence after reviewing pertinent facts and circumstances in accordance with these Principles and the independence standards established by the Board. If a change in circumstance affects an independent Director’s continuing independence under the Board’s independence standards that Director is expected to offer to submit his or her resignation to the Chair of the Governance Committee. The Governance Committee shall determine whether to accept or reject such offer.

Management Director – The only management member of the Board shall be the CEO. The CEO is expected to resign from the Board at the time that his or her service in that capacity terminates.

Qualifications and Selection of Directors – The Governance Committee is responsible for selecting candidates for Board membership, subject to Board approval, and for extending invitations to join the Board. In selecting candidates, the Board endeavours to find individuals of high integrity who have a solid record of accomplishment in their chosen fields and who display the independence of mind and strength of character to effectively represent the best interests of shareholders. Candidates are selected for their ability to exercise good judgment, and to provide practical insights and diverse perspectives. Consistent with its charter, the Governance Committee is responsible for screening candidates, for establishing criteria for nominees (which shall be described in the Company’s annual proxy statement and published on the Company’s website), and for recommending to the Board a slate of nominees for election to the Board at the Annual Meeting of Shareholders. Candidates are approved by the full Board. The Board shall consider only those candidates for election or re-election to the Board who submit all information required under the Company’s By-Laws and these Principles.

Relations with shareholders and shareholder activism:-

The Oak Brook, Illinois-based McDonald’s Corp. (MCD) recently announced its decision to hike quarterly dividend by 6 cents to 61 cents per share. This translates into an 11.0% increase from the prior dividend. The increased dividend will be paid on December 15, 2010, to stockholders of record as on December 1, 2010. McDonald’s has a history of raising dividend every year since it paid first dividend in 1976 and brings the forward annual dividend yield as of September 23, 2010, to 3.27%. The new dividend yield of the company is approximately 75 bps more than a 10-year Treasury. McDonald’s has further enhanced shareholder value by repurchasing 20.8 million shares of stock in the first half of 2010. The company expects to return $5 billion in cash to shareholders in 2010 via dividends and stock buybacks. McDonald’s is rich in cash and is armed with cash and cash equivalents of $1.7 billion as of June 30, 2010, further reiterating the fact that the company is in a strong cash position and has the ability to provide a sound value to its shareholders. The effort of McDonald’s is to consistently enhance shareholder’s returns and relations, even in times of an economic downturn. Shareholders believe that an increase in dividend payment affirms the company’s optimistic outlook and depicts that it is heading toward future growth.

Q2:-Legal liability, compliance and any accounting issues

Ans 2:-

Beef french fries

Lawsuits were brought against the McDonald’s Corporation in the early 1990s for including beef in its French fries despite claims that the fries were vegetarian. In fact, beef flavouring is added to the fries during the production phase. The case revolved around a 1990 McDonald’s press release stating that the company’s French fries would be cooked in 100% vegetable oil and a 1993 letter to a customer that claimed their French fries are vegetarian. McDonald’s refuted this. The lawsuits ended in 2002 when McDonald’s announced it would issue another apology and pay 10 million dollars to vegetarians and religious groups. Subsequent oversight by the courts was required to ensure that the money that was paid by McDonald’s: “to use the funds for programs serving the interests of people following vegetarian dietary practices in the broadest sense.” There was some controversy in this ruling, as it benefited non-vegetarian groups such as Muslims, who cannot eat McDonald’s fries as they are non-halal, and research institutions that research vegetarian diets but do not benefit vegetarians. In 2005, the appeal filed by vegetarians against the list of recipients in this case was denied, and the recipients of the 10 million dollars chosen by McDonald’s were upheld.

Further ingredient related lawsuits have been brought against McDonald’s since 2006. McDonald’s had included its French fries on its website in a list of gluten-free products; these lawsuits claim children suffered severe intestinal damage as a result of unpublicized changes to McDonald’s French fry recipe. McDonald’s has provided a more complete ingredient list for its french fries more recently. Over 20 lawsuits have been brought against McDonald’s regarding this issue, which the McDonald’s Corporation has attempted to consolidate.

Coalition of Immokalee workers (US)

In March 2001, the Coalition of Immokalee Workers, a group of South Florida farm workers, began a campaign demanding better wages for the people who pick the tomatoes used by McDonald’s and other fast food companies. McDonald’s was the second target after the group succeeded against Taco Bell.

McDonald’s Corporation has claimed that their SAFE (Socially Accountable Farm Employer) program is equal to or superior to the agreement between the CIW and Taco Bell. SAFE was initially represented, in November 2005, by CBR Public Relations Firm. According to their website, CBR-PR has “in-depth” experience handling “activist response management.” SAFE, unlike the Taco Bell agreement, does not include a wage increase, worker participation, worker support or basic buying transparency. The program is run by the Florida Fruit and Beverage Association and the Redlands Christian Migrant Association, a childcare provider with no experience in labour issues. As the Florida Fruit and Vegetable Association represents farmers who have an interest in reducing costs, often at the expense of farm workers, this represents a conflict of interests. Under SAFE, farm workers themselves continue to be excluded from monitoring the conditions under which they work.

According to the Robert F. Kennedy Center for Human Rights, “By partnering with SAFE and embracing its weak expectations — which do not include even such fundamental labour standards such as the right to overtime pay and freedom of association — McDonald’s is setting the bar even lower for its American agricultural producers than it does for its suppliers in communist China.”

Fries advertisement (UK)

In 2003, a ruling by the UK Advertising Standards Authority determined that the corporation had acted in breach of the codes of practice in describing how its french fries were prepared. A McDonald’s print ad stated that “after selecting certain potatoes” “we peel them, slice them, fry them and that’s it.” It showed a picture of a potato in a McDonald’s fry’s box. In fact the product was sliced, pre-fried, sometimes had dextrose added was then frozen, shipped, and re-fried and then had salt added.

Coffee case

Stella Liebeck of Albuquerque, New Mexico, was in the passenger seat of her grandson’s car when she was severely burned by McDonalds’ coffee in February 1992. Liebeck, 79 at the time, ordered coffee that was served in a styrofoam cup at the drivethrough window of a local McDonalds.

After receiving the order, the grandson pulled his car forward and stopped momentarily so that Liebeck could add cream and sugar to her coffee. (Critics of civil justice, who have pounced on this case, often charge that Liebeck was driving the car or that the vehicle was in motion when she spilled the coffee; neither is true.) Liebeck placed the cup between her knees and attempted to remove the plastic lid from the cup. As she removed the lid, the entire contents of the cup spilled into her lap.

The sweatpants Liebeck was wearing absorbed the coffee and held it next to her skin. A vascular surgeon determined that Liebeck suffered full thickness burns (or third-degree burns) over 6 percent of her body, including her inner thighs, perineum, buttocks, and genital and groin areas. She was hospitalized for eight days, during which time she underwent skin grafting.

The case went to the court where the jury awarded Liebeck $200,000 in compensatory damages. The jury also awarded Liebeck $2.7 million in punitive damages, which equals about two days of McDonalds’ coffee sales.

Q3:- Executive compensation: who and how the compensation is determined, Role of board and compensation committee, and disclosure to shareholders and the public.

Ans 3:-

Who and how the compensation is determined

The Compensation Committee is a standing committee of the Board of Directors. The Committee shall have the authority to determine the compensation of the Company’s executive officers and such other employees as the Committee may decide. The Committee shall also prepare the report of the Committee for inclusion in the Company’s annual proxy statement.

Role and Responsibilities of Compensation committee

The following shall be the principal responsibilities of the Committee:

Compensation Philosophy, Programs and Policies.  In consultation with senior management, the Committee shall establish the Company’s general compensation philosophy, and oversee the development and implementation of executive compensation programs and related policies, including any guidelines or requirements as to Company stock ownership by officers of the Company.  In undertaking these responsibilities, the Committee shall take into account factors it deems appropriate from time to time, including the Company’s business strategy and risks to the Company and its business implied by such programs.  The Committee shall review on a periodic basis the Company’s executive compensation programs, select an appropriate peer group for purposes of such periodic review, and make any modifications that the Committee may deem necessary or advisable, in its sole discretion.

Chief Executive Officer Compensation.  The Committee shall annually review and approve the Company’s goals and objectives relevant to the compensation of the Chief Executive Officer and shall evaluate the performance of the Chief Executive Officer in light of those goals and objectives.  Based on such evaluation, the Committee shall have the sole authority to set the compensation (including base salary, incentive compensation and equity-based awards) of the Chief Executive Officer.  In determining compensation, the Committee shall consider factors it deems appropriate from time to time, including the Company’s performance and relative shareholder return, the nature, extent and acceptability of risks that the Chief Executive Officer may be encouraged to take by such compensation, the value of similar compensation packages for chief executive officers at comparable companies, and the compensation awarded to management in prior years.

Officer Compensation. The Committee shall also review and approve the compensation (including base salary, incentive compensation and equity-based awards) of officers above the level of Vice President of the Company and its business unit subsidiaries corresponding to its geographic operating segments, review the compensation of Managing Directors above the equivalent level of Vice President and review and approve compensation guidelines for all other officers.

Benefit Plans. The Committee shall review and shall have the authority to amend the Company’s incentive compensation plans, equity-based plans, retirement plans, deferred compensation plans and welfare benefit plans, as the Committee may deem necessary or advisable in its sole discretion, unless otherwise provided by applicable law.  Unless their administration is otherwise delegated in accordance with the provisions of such plans or of Article III.L., the Committee shall administer such plans, including determining any incentive or equity-based awards to be granted to members of senior management under any such plan.

Post-Service Arrangements and Perquisites.  The Committee shall review periodically (i) policies with respect to post-service arrangements covering officers above the level of Vice President, and (ii) the perquisites provided to officers at and above the level of Vice President.

Independent Contractors. The Committee shall oversee the development and implementation of policies with respect to the engagement of individuals as independent contractors of the Company.

Monitoring of Named Fiduciaries. With respect to any funded employee benefit plan covering employees of the Company subject to the fiduciary responsibility provisions of the Employee Retirement Income Security Act of 1974, the Committee shall monitor, and shall have the authority to appoint or terminate, the named fiduciary or named fiduciaries of such plan, unless constituent plan documents specify an alternative procedure for monitoring or appointment.

Compensation Discussion and Analysis; Compensation Disclosures. The Committee shall review and discuss the Compensation Discussion and Analysis section proposed for inclusion in the Company’s Annual Report on Form 10-K and annual proxy statement with management and recommend to the Board whether such section should be so included.  In that connection, the Committee shall also review the related tabular and other disclosures about executive compensation proposed by management for inclusion in such Annual Report and proxy statement.

Annual Compensation Committee Report. The Committee shall produce an annual report for inclusion in the Company’s annual proxy statement, in accordance with applicable rules and regulations.

Committee Performance Evaluation. The Committee shall evaluate its own performance on an annual basis and develop criteria for such evaluation.

Access to Consultants. The Committee shall have the resources and authority to discharge its duties and responsibilities as described herein, including the authority to select, retain and terminate counsel, consultants and other experts.  The Committee shall have the sole authority to select, retain and terminate a compensation consultant and approve the consultant’s fees and other retention terms.

Delegation. When appropriate, as permitted under applicable law and the listing standards of the New York Stock Exchange, the Board or the Committee may delegate any of its responsibilities to a subcommittee comprised of one or more members of the Committee, the Board or members of management.

Other Duties. The Committee shall also carry out such other duties as may be delegated to it by the Board of Directors from time to time.

The disclosure of the information to the shareholders and the public is done by describing the salaries in the annual reports of the firm.

Q4:- Moral issues and moral dilemmas involved in the management and ethical code of conduct in the company in the context of the goals of the organisation

Ans 4:-

Moral issues involved in the management:-

There are various incidents in which the company failed on their moral grounds. Some of the issues are discussed here.

McDonald’s used beef fat for ‘vegetarian’ French fries

McDONALD’S faces a $100 million (£70 million) lawsuit after apologizing to customers for failing to admit that beef fat was used to fry its chips. The fast-food chain had maintained for more than a decade that only vegetable oil was used in the hope of appealing to vegetarians and religious groups who do not eat beef products. Yesterday’s apology triggered a violent protest by Hindus in India. The American company, which has served more than 200 billion portions of french fries around the world, confessed to a method of using beef fat to partly fry chips before they are sent to restaurants. They are then frozen and refried on the premises using vegetable oil.

Nutrition

Nutritionists argue that the type of high fat, low fibre diet promoted by McDonald’s is linked to serious diseases such as cancer, heart disease, obesity and diabetes. The sort of diseases that is now responsible for nearly three-quarters of premature deaths in the western world. The scientific justification of that is also available. But after all this, Mcdonald advertises their products as nutritious.

Environment

Mcdonalds annually produce over a million tons of packaging, used for just a few minutes before being discarded. Conservationists have often focussed on McDonald’s as an industry leader promoting business practices detrimental to the environment. And yet the company spends a fortune promoting itself as environmentally friendly. The reason for this is that there is no account or record of how much recycling or recycled products they are using.

Employment

The Corporation has pioneered a global, highly standardised and fast production-line system, geared to maximum turnover of products and profits. McDonald’s now employ more than a million mostly young people around the world. But at the same time they are exploiting the younger blood by paying them lower wages and longer working hours.

Animals

As the world’s largest user of beef they are responsible for the slaughter of hundreds of thousands of cows per year. In Europe alone they use half a million chickens every week, all from windowless factory farms. All such animals suffer great cruelty during their unnatural, painful and short lives, many being kept inside with no access to fresh air and sunshine, and no freedom of movement.

Ethical code of conduct

McDonald’s is committed to conducting business ethically and in compliance with the letter and spirit of the law. This commitment is reflected in McDonald’s Values. Inherent in each value is our commitment to be ethical, truthful and dependable and this is reflected through our Standards of Business Conduct which serves as a guide to making good decisions and conducting business ethically. The ethical codes of conducts are

Protecting Company assets

All McDonald’s employees must safeguard Company assets, including our most valuable asset: our brand. One of the ways we protect our brand is to prevent the improper use of the McDonald’s name, trademarks or other intellectual property.

Conflicts Of Interest

Each of us must avoid any situation in which our personal or financial interests might cause our loyalties to be divided. We must avoid even the appearance of a conflict of interest that might cause others to doubt our fairness or integrity.

Doing Business with Family and Friends

A conflict of interest may arise when you have any business dealings with family members or close personal friends. You must disclose any potential conflict of interest to both your supervisor and the global Compliance Office. Also, be very cautious about sharing information with relatives or friends who work for competitors, or have business interests in competitors.

Outside Employment and Other Business Arrangements

All of us have a primary duty to advance McDonald’s interests. Outside employment or other business arrangements must not interfere with this obligation. As a McDonald’s employee, you may not accept or receive compensation from any supplier or business entity with whom you are conducting business on behalf of McDonald’s.

Gifts, Favours & Business Entertainment

We will not pay bribes or provide anything of value that may influence or appear to influence the judgment or actions of another. We will not seek or accept bribes, kickbacks or any improper payments. We exercise good judgment and moderation in providing business gifts or entertainment. We respect the policies of other organizations with which we do business.

Outside Investments

Employees may not own a substantial interest in any competitor of McDonald’s, or any business entity that is currently doing business, or seeking to do business with McDonald’s. This rule applies to both direct and indirect ownership. “Substantial interest” is an ownership interest greater than 5% of the total net worth of the employee and immediate family members, or greater than 1% of the outstanding equity securities for investments in a public company.

Electronic Communications Usage

Everything related to McDonald’s e-mail and other electronic communications systems, including all communications and information created, received, saved or sent on McDonald’s systems, are the property of the Company. Employee e-mail sent and received through Company computers, including e-mail and internet search activity using third-party internet service providers, is subject to search and monitoring, with or without notice, regardless of whether the Company’s systems are accessed in or out of the office, or whether the communications pass through the Company’s server. The Company will periodically and randomly perform monitoring of individual employee usage. For these reasons, employees have no personal right to privacy in any material created, received, saved or sent using the Company’s e-mail or computer systems

Business records and communications

Shareholders count on McDonald’s to provide honest and accurate information and to make responsible business decisions based on reliable records. All financial books, records and accounts must accurately reflect transactions and events. They must also conform both to generally accepted accounting principles and McDonald’s system of internal controls.

The letter and spirit of law

Our first and most fundamental obligation in every place where we do business is to obey the letter and spirit of the law. This applies both to McDonald’s employees and to third parties acting on behalf of our Company. If you have a concern about the legality of any matter, you are responsible for consulting with the legal Department before any potentially illegal acts have taken place.

International business

McDonald’s complies with all applicable laws and regulations wherever we do business. Almost every country in the world prohibits making payments or offers of anything of value to government officials, political parties or candidates in order to obtain or retain business. We must never pay commissions or fees to dealers, distributors, agents, finders or consultants that are used as a bribe or kickback.

Q5:- Human right violations or promotion in the firm

Ans 5:-

Human Right Violation

McDonald’s Linked to Six Cent-an-Hour Sweatshop in Vietnam

Seventeen year-old women are forced to work 9 to 10 hours a day, seven days a week, earning as little as six cents an hour in the Keyhinge factory in Vietnam making giveaway promotional toys–especially Disney characters–for McDonald’s. After working a 70-hour week, some of the teenage women earn just $4.20! At the end of February, 200 of the workers fell ill, 25 collapsed and three were hospitalized as a result of acute exposure to acetone.

Happy Meals at McDonald’s include giveaway toys based on characters from Disney’s films. According to Brad Ball, McDonald’s senior vice president, “Last year’s 101 Dalmatians holiday movie promotion produced the most successful Happy Meal in our history, which speaks to the tremendous customer appeal of the McDonald’s-Disney partnership. As we embark on our new global alliance, we anticipate 10 great years of unbeatable family fun as customers enjoy ‘the magic of Disney’ only at McDonald’s.” (PR Newswire Associates, March 19, 1997). McDonald’s is the largest retail food chain in the world, with 12,000 franchises in the U.S. Disney is the second largest entertainment / media conglomerate in the world. One out of every four T.V. stations in the U.S. belongs to Disney.

Six Cents an Hour is a starvation wage:

The most basic, simple meal in Vietnam–rice, vegetables, and tofu–costs 70 cents. So, three meals would cost $2.10, yet many of the young women at the Keyhinge factory making McDonald’s / Disney toys earn just 60 cents after a 10 hour shift. Just to eat and get back and forth to work, the women estimate they would need to earn–after deductions–at least 32 cents an hour. So, the wages at the Keyhinge factory do not even cover 20 percent of the daily food and travel costs for a single worker, let alone her family–not to mention rent ($6.00 a month for a single room) and other basic expenses.

Sanitation issue

In Vancouve, Beena Datt is an employee of McDonalds. In 2008, Beena Datt claimed that she developed a “skin condition” that meant she couldn’t wash her hands in compliance with McDonald’s hygiene policy. That’s the same hygiene policy that makes McDonald’s like an embassy to Canadians travelling overseas. McDonald’s is fanatical about hand-washing, to their credit. They have hand-washing rules. Not just the obvious “wash your hands after the bathroom” rules. But other rules, like wash your hands after shaking someone’s hand. Wash your hands after retrieving food from the freezer. Wash your hands after touching a door handle.

Datt wouldn’t wash her hands. She just wouldn’t — she said she couldn’t due to skin problem she has. So her employment was terminated. The B.C. Human Rights Tribunal ordered that McDonald’s pay her not only $23,000 for “lost income”, but an additional $25,000 for her “dignity and self-respect”. You see, in B.C. a food preparation worker’s self-respect trumps a company’s commitment to cleanliness. They violated her “human rights”.

Human Right promotion

They have a policy to support human rights. McDonalds support fundamental human rights for all people. We will not employ underage children or forced labourers. We prohibit physical punishment or abuse. We respect the right of employees to associate or not to associate with any group, as permitted by and in accordance with applicable laws and regulations. We comply with employment laws in every market where we operate.

Q6:- Key learning from the case analysis

Ans 6:-

The ethical issues around McDonalds are: Food Health, cruelty towards animals, exploitation of children and labour

Let us discuss the issues one by one:

Food Health

McDonalds has been misleading people by claiming that their food is healthy, although it was found to be fatty and unhealthy. McDonalds should stop misleading the people as this is unethical.

Cruelty towards animals:

Animals are treated with cruelty so as to meet the demand for beef and chicken to be used in their food products. The animals are not given food, air, water and are tortured.

Animal activists have brought this to their attention. McDonalds should not treat animals with such cruelty.

Exploitation of children:

Children are tempted to eat the unhealthy food that is offered by McDonalds and thus a large number of children are suffering from obesity, heart problems and other lifestyle related illnesses. McDonalds should either try and make their food more healthy or stop claiming that the serve healthy food.

Exploitation of labour:

The employees working at McDonalds are not adequately compensated and are also exploited in terms of the hours of work that they have to put in. The labourers who manufacture the toys for McDonalds are exposed to hazardous substances for long periods of time. They should be properly compensated and safety equipment should be provided to them.

Thus the learning’s from this case study are that an organization of such repute should not delve into unethical practices like misleading consumers, exploit their employees, cruelty towards animals.

These practices could give them temporary benefits but will affect the financial health and reputation of the organization in the long run like in the year 2002 when their stock price plummeted 70% due to the exposure of their unethical practices.