SEC Focus on ESG Has Expanded to Workplace Culture and Sexual Harassment Investigations

Activision Blizzard (Activision) is back in the news this month with another lawsuit triggered by allegations of sexual harassment within the company. Parents of a former Activision employee who committed suicide at a corporate retreat filed a wrongful death suit alleging that the company had “fostered and permitted a work environment in which sexual harassment was pervasive” and that this was a “substantial factor in the wrongful death.” This lawsuit was filed as the SEC’s investigation of Activision for its disclosures to investors about sexual harassment allegations within the company reportedly expands in scope.

Until recently, the SEC’s focus on Environmental, Social and Corporate Governance (ESG) issues has concentrated on the corporations’ attention to their responsibilities on climate change and similar issues. It is now apparent that the agency is also paying attention to the “S” in ESG and, in particular, whether companies have misled their investors about their efforts to address workplace diversity or workplace culture when they don’t adequately disclose material and credible allegations of sexual harassment and other workplace misconduct. Recent allegations against Activision have put public filers on notice that they should actively assess the quality of their workplace culture, their related policies and training, and their investor disclosures on workplace culture issues that arise.

Activision Blizzard: A Case Study

In September 2021, the Wall Street Journal reported that the SEC was investigating the sufficiency and timeliness of Activision’s investor disclosures regarding how the company had handled employees’ allegations of sexual misconduct and discrimination. The SEC reportedly subpoenaed documents from Activision and its senior executives, including CEO Bobby Kotick. The subpoena reportedly sought Board of Director meeting minutes, personnel files of six former employees and their separation agreements, Kotick’s communications with other senior executives regarding complaints of sexual harassment and discrimination, and other documents.

Around the same time, the EEOC filed a complaint against Activision, alleging that its employees had been subjected to “sexual harassment that was severe or pervasive” and that the company “failed to take corrective and preventative measures.” The complaint resulted in an $18 million settlement (pending court approval) and the appointment of an outside monitor. Activision is also facing a lawsuit by the California Department of Fair Employment and Housing in which similar allegations have been raised and a class action brought on behalf of Activision’s investors that alleges in part that the company failed to disclose to investors its ongoing problems with sexual harassment and workplace harassment allegations.

The value of the company’s shares declined when the lawsuits and investigations became public, and the fallout has continued. In January 2022, Microsoft announced that it was acquiring Activision. The press further speculated that Kotick would leave the company after the deal closed. In February, the Wall Street Journal reported that the SEC issued another subpoena to Activision that expanded the scope of the investigation, requesting documents over a broader time frame and from more company executives.

Key Takeaways

The Activision matter is a good reminder to companies of the importance of taking proactive measures to maintain a healthy workplace environment and engaging counsel to assist with compliance and disclosure issues, workplace culture training, and periodic culture assessments. Once a serious sexual harassment complaint has been made (especially very publicly), rebuilding the culture and trust of the workforce is essential. Bringing in experienced counsel to revamp policies and train the workforce and management from the top down shows the workforce that the company takes sexual harassment seriously, which will increase morale, especially among the female workforce. It also sets clear expectations and accountability with the workforce, which in turn makes workers feel confident and safe.

Finally, companies need to ensure that they are not making material misstatements or omitting material information in their public statements or disclosures to investors. Now that the SEC’s Division of Enforcement ESG Task Force is focusing on workplace related disclosures, the stakes have increased even further to include potentially substantial monetary fines.

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.