Reference no: EM133345556

Case: McDonalds has faced many issues within the past five years that negatively affected their public perception and reputation of the firm. These issues consist of the company's treatment towards their franchisees along with the allegations against the previous CEO.

McDonald's and their relationship between their franchisees is a common issue that effects and risks their business. These issues range from coronavirus relief, technology fees, and most recently their new grading system. McDonald's management and U.S. franchisees were at odds due to the coronavirus pandemic. In the year 2020, franchisees wanted more financial assistance from McDonald's, while the company was asking operators to provide more support for restaurant workers. McDonald's was pushing for franchisees to do more to protect their workers, while franchisees were asking for more financial relief to keep them afloat. The National Franchisee Leadership Alliance, which negotiates with McDonald's on behalf of franchisees, asked for a two-week extension on service fees and rent due April 10, "citing the uncertainty surrounding the Small Business Administration emergency loans" (Lucas, 2020). McDonald's operators make a base rent payment on the first of the month and then pay rent and fees on the 10th (based on the prior month's revenue for the location). McDonald's management ended up denying this request on April 3. The National Franchisee Leadership Alliance told McDonald's management in a letter that its members and most of the company's franchisees were increasingly losing faith in the partnership and company leadership. They believed too much time had passed since the covid crisis had started where there were many opportunities for the company to make a statement of support. Other companies were doing more than McDonalds was doing for their workers. The NOA mentioned in their letter that other fast-food executives are foregoing their salaries. This led to the CEO Chris Kempczinski saying that him and four other executives would be taking pay cuts. The US President Joe Erlinger responded to the NOA saying that the franchisees faith in management seemed based on unlimited financial support. The president estimated that McDonalds had given operators about $900 mllion of additional liquidity, alleging that no other major franchisor has done more to support its franchisees. Erlinger emphasized their financial support intended to help owner/operators survive this crisis and that, "McDonald's is not able to guarantee owner/operator cash flows or equity values" (Lucas, 2020). Overall, the company was at odds with US franchisees when it came to coronavirius relief. This was a public "feud" giving a bad public perception of the firm since they were seen as not being able to properly support their workers during the pandemic.

In 2021, multiple McDonald's franchisees voiced support for a potential legal action against the company over $70 million in past technology fees. McDonalds is a very tech driven company. In 2021, they insisted that its franchisees owed it money for the fine technology that was driving business toward ever-higher revenues. The National Franchisee Leadership Alliance had communicated with their members who say that, "McDonald's hadn't proven franchisees owe technology fees of $423 a month on past uncollected dues that amount to $70 million" (Rogers, 2021). McDonald's has agreed to an independent audit to try to resolve the dispute but has maintained it has "absolute confidence" the fee is owed to the company. Beyond the technology dispute, some franchisees expressed frustration with rising technology fees and the performance of the company's technology. McDonalds tried to quietly solve this serious problem. The way the company treats their franchisees has continuously been in the media, especially the past couple years. This treatment gives McDonald's a bad reputation and perception. Especially after this serious issue where they believed their franchisees needed to now pay them monthly for technology they choose to place in their restaurants.

McDonald's franchise owners are expressing concern and frustration over a new grading system that McDonald's is planning to start using in January 2023. Franchise owners are saying it is poor timing due to unprecedented pressures in the workforce. They are worried the new process will instead harm operations and alienate workers in an already-tight job market. They also believe the new assessment is killing morale. The grading system comes at a bad time where companies are facing pressure in attracting and retaining workers. Labor costs have gone up at McDonald's along with at other fast-food companies. This causes franchisees to increase prices along with pay, and competition for workers is difficult. The company plans to enact the system, called Operations PACE, which stands for Performance and Customer Excellence, in January 2023. McDonald's notes its "business climate is changing" in their overview of the system, since they need a "new approach that supports achieving our growth plan objectives.

The program calls for between six and 10 visits a year from company and third-party assessors per location, layered on top of other inspections for things such as local food safety regulations. Some owners fear the system will result in a less-collaborative approach to operations, with harsher grading. Prior McDonald's grading systems were more collaborative and has mutually agreed upon goals. McDonald's defends their plain believing it is necessary because they are focused on maintaining their world-famous standards of excellence. The system is, "designed with ongoing input from franchisees, will offer tailored support and coaching to restaurants to help them provide a seamless McDonald's experience that will keep customers coming back" (Rogers, 2022). Franchise owners are unhappy with these changes and expressed a lack of confidence in the company's CEO, Chris Kempczinski and its U.S. president, Joe Erlinger. McDonald's unveiled the new policy changes during the summer. McDonald's rejected owner's request to delay new changes to its franchise policies. They are still implementing changes January 2023 instead of pushing it back to June 2023. McDonalds believes they are not wrong because they are giving time for their restaurants to learn the new system. They believe the new system is better since the assessment framework includes personalized resources that will help franchisees improve everyday performance and drive sales, profitability and guest counts. The company is pushing to hold franchise owners accountable for how they represent the brand online and in person. McDonald's says its values are: "Serve, Inclusion, Integrity, Community and Family," and should be incorporated into owner and operator standards.

One of the biggest issues within the past five years that negatively affected McDonalds public perception and reputation had to do with the previous CEO. McDonalds fired their CEO Steve Easterbrook in 2019 after allegations against misconduct before they sued him in August 2020 for lying about his misconduct. Finalized in 2021, Easterbrook had to return 105 million dollars to the company due to his misconduct. Steve Easterbrook was a CEO of McDonald's. He did a poor job as CEO which put a poor reflection on the company. Easterbrook paid back more than $105 million in equity awards and cash to the burger giant after it learned that he had lied about the extent of his misconduct while he was its top executive. McDonald's fired Easterbrook in late 2019 after he admitted to exchanging videos and text messages in a consensual relationship with an employee. At the time he told the company there were no other similar instances.

Due to this McDonald's approved a separation agreement which allowed him to keep millions in stock-based benefits and other compensation. In July 2020, the company got an anonymous tip from an employee claiming that Easterbrook engaged in a relationship with another employee. McDonald's investigated and confirmed that Easterbrook had that relationship as well as two others. In August 2020, McDonald's sued Easterbook saying that they would not have terminated him without cause if they had known the extent of his misconduct, "The company sought the return of equity awards granted in 2018 and 2019, since Easterbrook's separation agreement made clear he would forfeit those if the company determined he had engaged in 'detrimental conduct'" (Press, A., 2021). Easterbrook stated that during his tenure as CEO, "I failed at times to uphold McDonald's values and fulfill certain of my responsibilities as a leader of the company" (Press, T., 2021).McDonalds emphasizes the fact that they have values that they continuously follow and uphold. Yet the action against Easterbrook occurred while the company already had sexual harassment complaints, "Over the last five years, at least 50 workers have filed charges against the company, alleging physical and verbal harassment and, in some cases, retaliation when they came forward" (Press, 2021).

Before Easterbrook was fired McDonald's had introduced a new harassment training program yet franchisees weren't required to provide it. In Spring 2021, McDonald's decided to mandate worker training to combat harassment, discrimination and violence in their restaurants starting in 2022. This training would be required for all their workers in their stores worldwide. The CEO's misconduct negatively impacted the perception and reputation of the firm yet on the other hand, it made McDonald's push and require worker training related to harassment in all their restaurants instead of just recommending it.

Overall, the issue of McDonalds' CEO, Steve Easterbrook, committing sexual harassment gave the company a very bad perception/reputation, especially since it was uncovered that over the last five years at least 50 workers had filed charges alleging physical and verbal harassment, and even retaliation when they came forward. Yet on the positive side, the company ended up taking this issue seriously and mandated worker training to combat harassment, discrimination, and violence.

Did the events have a positive or negative affect on the firm's financial performance?