SEC Investigation of Workplace Culture at Activision Tests the Boundaries of “Material Risk”

October 01, 2021

The SEC has subpoenaed Activision and several of its senior executives regarding complaints of sexual harassment or discrimination by Activision employees or contractors, expanding its definition of “material risk” in the process to include workplace culture risks. The subpoena is requesting disclosure of specific employment or personnel records for six former employees, separation agreements signed this year, and board minutes going back to 2019.

The SEC is expanding the definition of “material risk.”  Under SEC rules that went into effect in 2021, companies were required to disclose human capital management issues material to the operation of the company as a whole in the 10-K.  Though the intent behind the "principles-based" approach to human capital disclosure was to provide companies with some discretion in how they discussed risks and opportunities, the Activision subpoenas make clear that the SEC will now use a broad definition of materiality when reviewing those disclosures.  The allegations against the company are serious.  In particular, California has filed a suit against the company alleging sexual harassment and discrimination, while the company announced a settlement with the EEOC.  Yet, Activision has not hidden these legal proceedings from investors.  Rather, the SEC is concerned about when these risks were understood by the company and whether they were properly disclosed to investors. 

Will the SEC compel disclosure of workplace culture risks, including workplace harassment and gender/ethnicity pay equity?  Some criticisms have been raised that this effort represents a push to compel disclosure of uncharged wrongdoing.  If the Activision investigation results in a legal finding that the company misled investors, this could have ongoing implications for other companies.  For example:

  • Workplace culture and diversity, equity, and inclusion (DEI) could be considered material risks.

  • Even in the absence of current litigation, companies might be expected to disclose potential risks arising from pay equity concerns, hiring and advancement for women and ethnic minorities, and problematic behavior.
  • Enhanced SEC examination of internal documents, possibly including employment agreements below the NEO level, separation agreements, and internal documentation of problematic culture.

What it could mean:  Though the SEC has not yet published proposed rules on enhanced disclosure requirements related to human capital and climate change, this investigation underscores the SEC’s expanding definition of material risks to include human capital management.  It may provide some insight into the Commission's approach to those disclosures, and it is possible similar investigations could follow into environmental and climate risk.