The SEC raises the bar on ESG enforcement: Was $35 million fine warranted?

The Securities and Exchange Commission (SEC) just fined a company $35 million because it didn’t maintain adequate disclosure rules for tracking workplace complaints and violated whistleblower protections for departing employees.

The only problem? The SEC admits not a single employee of the company came to the SEC to complain about its practices. And there’s no evidence of the company preventing or even dissuading any of its employees from talking to regulators.

Sound like a dystopian nightmare? Nope. It’s just the SEC sending a message to publicly traded companies to triple-check procedures, employee handbooks and shareholder communications to avoid the hot water that video game maker Activision Blizzard finds itself in.

This $35 million SEC fine is the largest yet for violating the “G” portion of the SEC’s environmental, social and governance (ESG) oversight. “The size of the penalty is substantial and highly unusual for a resolution without any allegations of materially false or misleading representations,” warn lawyers for Akin Gump Strauss Hauer & Feld. “[$35 million sends] a clear signal that the SEC is taking an aggressive approach to enforcing workplace-related disclosures.”

Dot every I, cross each T, and make sure the lawyers read it all

Activision Blizzard, maker of video game staples like Call of Duty and Candy Crush, didn’t mince words about hiring and retention issues in its annual and quarterly statements: “If we do not continue to attract, retain, and motivate skilled personnel, we will be unable to effectively conduct our business.”

Unfortunately Activision Blizzard didn’t “capture information” about those labor skill risk factors and how it could affect its long-term profitability. The SEC determined the company lacked “controls and procedures among its separate business units designed to collect or analyze employee complaints of workplace misconduct” and couldn’t determine if “larger issues existed that needed to be disclosed to investors.”

What likely caught the SEC’s attention was a clause in the company’s employee separation agreement. Activision Blizzard required departing employees to let it know if they received a request for information from regulators. The SEC concluded the clause “undermined the purpose” of whistleblower protection.

One SEC commissioner dissented and chided the SEC for playing “its new favorite game … of Corporate Manager.” The company is likely to make the same argument assuming it appeals the penalty.