03/09/19 THEY DON'T BITE THE HAND THAT FEEDS THEM

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THEY DON'T BITE THE HAND THAT FEEDS THEM

Coca-Cola Co.'s largest customer is McDonald's Corp. Sonnenschein Nath & Rosenthal has been the hamburger chain's lead law firm for decades. DDB Needham Worldwide Inc. and Leo Burnett Co. are two of its longtime ad agencies. And Dean Foods Co. supplies the Arches with pickles.
What else do these firms have in common? Each has an executive, retired executive, or director on the McDonald's board. In fact, by current standards of corporate governance, only 4 of McDonald's 15 directors can be called independent--meaning they don't work for the company, do outside business with it, or have a McDonald's exec sitting on their own board.
''NOT EVEN CLOSE.'' That's not all: Cross-directorships, in which directors serve on each other's boards, are common, too. Gordon C. Gray, for example, chairman of a Canadian mining company and an independent director, also sits on the board of a subsidiary of Stone Container Corp., a McDonald's packaging supplier whose CEO, Roger W. Stone, is a fellow McDonald's director.
Thanks to pressure from shareholders and regulators, Corporate America over the past decade has raised the quality of its boards and increased its directors' accountability. But that trend has passed McDonald's by. ''They are not even close to keeping up with corporate-governance standards that most other companies their size meet,'' says Anne Hansen, deputy director of the Council of Institutional Investors in Washington. Adds Warren Bennis, a University of Southern California professor who studies leadership: ''For a company that size, it's stunning.'' The National Association of Corporate Directors recommends ''a substantial majority'' of a company's directors be independent. And many shareholder groups discourage cross-directorships; governance experts say they can lead directors to look out for each others' interests, rather than those of shareholders.
McDonald's denies that the many relationships between its board members and the company are a problem. ''We have always had a board that was fairly heavily peopled by inside directors. I am not troubled by that at all,'' says CEO and Chairman Michael R. Quinlan. He argues that insiders bring detailed knowledge of McDonald's to the board. And director Robert N. Thurston, a former Quaker Oats Co. executive, calls it an active board that ''can stick our noses anywhere we want to.'' To suggest that directors are hampered by company ties ''discounts the independence and the pride and the intelligence and the fortitude of the people on the board,'' he adds.
The proper question, though, may not be whether the directors have integrity--there is no evidence they don't--but whether, as a group, they bring the type of broad experience and objectivity that a company facing a watershed requires. Despite the hamburger chain's lackluster performance in the past few years, its board has done little to agitate for change, say people who follow the company. ''This board is so stale, it's hard to imagine it asking the right questions,'' Bennis says. Or, as one major shareholder puts it: ''If McDonald's is one of your largest customers, I don't think you're going to challenge the CEO too much.''
Compare the McDonald's board with those at another globally branded company. Nine of Coca-Cola's 13 directors are independent. The board includes former Senator Sam Nunn, former baseball Commissioner Peter V. Ueberroth, former Delta Air Lines CEO Ronald W. Allen, and superinvestor Warren Buffett.
In fact, inspect almost any company with a brand similar in strength to McDonald's, and you will find more outside directors, a shorter average term, a younger board, and greater diversity of experience. Inspect McDonald's, on the other hand, and you will find a disproportionate number of directors who rely on the company for one kind of paycheck or another.
By David Leonhardt in Oak Brook, Ill.

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