Environmental, Social, and Governance (“ESG”) principles are becoming increasingly prominent tools for managing risk and creating value in the corporate world. ESG-focused decision making can define business priorities that support a company’s financial goals and long-term enterprise sustainability. ESG-focused leaders can help companies identify business risks and opportunities, then implement and maintain responsive, responsible, and measurable forward-looking business practices.
While the “E” and “G” in ESG have received much attention, the “S” factor is also significant for leading sustainable organizations. And employees, current and future, are important elements of the social aspect.
Identifying the business risks and opportunities within the social aspect of ESG includes looking at a company’s treatment of its employees (for example, education, advancement, compensation), its diversity, equity, and inclusion policies and practices, and its discrimination and harassment policies and practices. Businesses that rely on recruiting and retention of a human workforce face the risks of securing a strong team, maintaining it, and creating a pipeline of suitable workers. These same businesses can create opportunities to mitigate those risks with practices and policies that support a healthy workplace and prepare a pipeline of future employees.
Meanwhile, securities disclosure obligations that require companies to report on risk factors in regular financial reporting can likewise require companies to establish controls and practices that address the risk. Video game company Activision Blizzard’s recent experience with two different federal agencies serves as a reminder of the importance of paying close attention to reporting of risk and implementation of controls in the workplace.
The Activision Blizzard EEOC Case
In early 2018, the U.S. Equal Employment Opportunity Commission (“EEOC”) received an anonymous letter about sexual harassment at Activision Blizzard. After gathering additional information, the EEOC decided to initiate a company-wide investigation. Following this investigation, in 2021, the EEOC sued Activision Blizzard in federal court, alleging sexual harassment, pregnancy discrimination, and retaliation in violation of Title VII of the Civil Rights Act of 1964. On the same day, the EEOC also filed a proposed Consent Decree to resolve the lawsuit, which included an $18 million settlement fund to compensate eligible individuals.
The Activision Blizzard SEC Case
But that wasn’t all. Following the EEOC case, the Securities and Exchange Commission (“SEC”) conducted its own investigation related to very similar issues, but with a focus on the related controls and procedures. On February 3, 2023, the SEC announced that Activision Blizzard agreed to pay $35 million to settle charges that it failed to maintain disclosure controls and procedures to disclose workplace concerns.
Activision Blizzard had identified employee hiring and retention as risk factors in its annual and quarterly filings, stating: “If we do not continue to attract, retain, and motivate skilled personnel, we will be unable to effectively conduct our business.” Thus, according to the SEC, Activision Blizzard was aware that its ability to attract, retain, and motivate employees was a business risk—but it did not have the systems in place to adequately analyze potential misconduct. As a result, management lacked visibility into employee complaints, and thus could not assess whether any material issues existed that would have required public disclosure.
The SEC decision came with a notable dissent from Commissioner Hester M. Pierce, who wrote that “[i]f accurate, the reported widespread workplace harassment at Activision Blizzard is deeply concerning, but it is not our concern.” She argued that the SEC order does not articulate any securities law violations, and that the workplace issues were addressed by the EEOC. Notwithstanding this dissent, the SEC found that it was within its purview to look at the controls and procedures around employees’ complaints of workplace misconduct and hit Activision Blizzard with a massive penalty for its perceived failings.
Lessons for Employers
The Activision Blizzard case illustrates that companies can face serious legal challenges around employment practices—even from seemingly unrelated agencies—especially in this new era of ESG-focused communication and reporting. In this context, employers should prioritize cultivating a fair, equitable, and inclusive workplace where employees feel valued and safe, and ensure that they have the proper policies, processes, and controls in place to manage any concerns that may arise. Employers that report risks and message employee-centric activities must be able to demonstrate the activities, monitor implementation, and account for deviations through internal reporting and controls.
Companies can establish clear, easy to understand procedures for employees to make complaints, and for those complaints to be investigated. Allegations of harassment, discrimination, retaliation, or any other unlawful conduct should be promptly and thoroughly investigated. Moreover, as the SEC investigation shows, companies should have transparent reporting and accountability procedures to ensure that the proper controls are in place, particularly for larger employers (and certainly for public companies subject to SEC regulation). Aligning corporate messaging with implementation and oversight ensures that mitigation of risks reflected in public disclosures are manifest and integrated throughout the business activities.
Employers who incorporate ESG principles and tools, including in the “social” aspect, into their business activities and who report ESG risks publicly must ensure adequate follow through. Business leaders that identify risks to workforce and workplace sustainability must implement monitored and measured activities to improve the employer/employee relationship, increase employee satisfaction, and hold the organization accountable for gaps. Doing so can enhance company value, productivity, and long-term sustainability. And failing to do so can increase legal and reputational liability.