In the past seven days, McDonald’s (MCD) had the second lowest Impact Score on our Safeguard ESG impact platform. This week's score is driven by a lawsuit filed late last week by the Byrd brothers who own and operate four McDonald’s stores in the Nashville area. Importantly, the lawsuit brings to light economic discrimination towards Black franchisees by McDonald’s. The company attempts a remedy that's a band-aid approach at best.

Sam Leavitt
November 9, 2020

ESG Spotlight: McDonald's, Out of the Deep Fryer and Into the Fire

ESG Spotlight: McDonald's, Out of the Deep Fryer and Into the Fire

In the past seven days, McDonald’s (MCD) had the second lowest Impact Score on our Safeguard ESG impact platform. The latest notification from our Safeguard Platform flags the restaurant giant for a lawsuit filed late last week by the Byrd brothers who claim McDonald’s is using tactics to drive Black franchisees out of its ownership model. James Byrd Jr. and Darrell Byrd operate four McDonald’s locations in the Nashville area and are leading this suit on behalf of all Black McDonald’s owners. This is coming on the heels of a legal battle with former CEO Steve Easterbrook who embroiled the company in a troublesome sexual harassment scandal.

In 1998 McDonald’s had 377 Black franchisees in the US, today there are only 186 in their ownership system. Over the same time period, McDonald’s store locations have increased, from 12,472 to 13,846 in the US. Recent allegations by franchisees, like plaintiffs James Byrd Jr.and Darrell Byrd, as well as the lawsuit filed in September, allege that these numbers are not a coincidence and that it paints a picture of a systemic predatory practices that push Black ownership out of the McDonald’s model. The suits allege that franchisees were steered towards real estate in areas with high cost and low revenue opportunity, locations that other franchisees would not buy. They also claim that McDonald’s prevented Black franchisees from buying and selling on the open market as well as charged premiums because of their racial background. These claims are backed by two Black former executives who filed a lawsuit in January claiming, among other things, that the corporation used harsh reviews to strong arm Black franchisees out of their system.

A Band-Aid Approach

Early this week, McDonald’s hired a new Diversity Officer just days after the Byrd lawsuit was filed. The new Diversity Officer, Reginald Miller, was the former diversity and inclusion Vice President at VF Apparel Corporation(VFC). The timing of the hire has the appearance of a band-aid attempt and reactionary solution to a problem that runs deep within the company. This action is in contrast to companies like Starbucks (SBUX), who we highlighted a few weeks ago, that are taking proactive approaches to diversity and inclusion.

Safeguard ESG Impact Tracker: Restaurant and Leisure Sector Sentiment and Mentions, Past 3 Months

In the past year, lawsuits were filed for racial discrimination at all levels of the company, from franchise ownership, to the executive and employee level. Hiring a Diversity Officer is probably something that McDonald’s should have done years ago as a proactive measure rather than a reactionary fix. It is particularly telling that a company that has normally weathered negative attention due to strong earnings is taking a dip in stock price. A well known company such as McDonald’s is always under a microscope whenever something happens, good or bad. There is nothing to indicate that these are isolated incidents based on past behavior. A continuation in this direction leads to elevated reputational risk and the damages sought after in this suit are substantial. Plaintiffs are seeking $5 million per franchisee location and depending on how many franchisees join the Byrd brothers suit, damages could be in the billions.

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About Amenity

Amenity Analytics is the industry leader in providing insights from unstructured text by using Natural Language Processing (NLP) assisted by Artificial Intelligence (AI) and Machine Learning (ML). Amenity’s NLP system is a sector-agnostic, language-dependent tool for quantitative text analysis that is deployed across the financial services industry and beyond.

This communication does not represent investment advice. Transcript text provided by FACTSET and S&P Global Market Intelligence.

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