Activision Blizzard CEO’s duty to disclose sexual misconduct claims falls into legal ‘gray area,’ expert says
On Wednesday, a group of Activision Blizzard (ATVI) shareholders joined a chorus seeking to oust longtime CEO Bobby Kotick after The Wall Street Journal reported that he knew of sexual harassment and rape claims at the gaming giant but failed to report some of them to the board.
The outcry has raised questions about Kotick’s duty to disclose what he knew about sexual misconduct allegations within the video gaming company. Frustrations over the matter have been escalating since August when California’s Department of Fair Employment and Housing sued Activision, alleging that female employees were subjected to sexual harassment and unequal pay.
“Generally, the CEO, CFO, anyone at that level, does have a fiduciary responsibility, if something comes to their attention — whether it’s embezzlement or sexual harassment, or whatever it might be — to inform the board,” Jeffrey Cramer, senior managing director at Guidepost Solutions, and former federal prosecutor, told Yahoo Finance.
The Journal reported Monday that Kotick, who’s also a board member, knew but failed to tell the rest of the board about the alleged rape of a female employee of Activision’s subsidiary, Sledgehammer Games, by her male supervisor. Internal documents, the Journal’s report states, show Kotick held back the extent of what he knew about complaints “of employee misconduct in many parts of the company.”
The rape complaint, which was reportedly settled out of court without alerting the board, adds to federal regulatory investigations into the company’s handling of misconduct.
On Tuesday, Activision’s board released a statement in support of Kotick. “The Board remains confident that Bobby Kotick appropriately addressed workplace issues brought to his attention,” the statement read.
At this stage, Cramer says, it’s not surprising that the board is maintaining public support for Kotick. Typically, the directors call for an independent investigation to find out who knew what, when, he says.
“The board will do a thorough review, and then once the board has more information,” Cramer said, “that position might change.”
‘The standards are shifting’
Corporate law and governance experts say it’s not just Kotick who can face scrutiny about who knew what, and when. It’s unclear, he said, whether Kotick and the other board members could be legally liable for failing to alert shareholders and the board about alleged sexual misconduct. That’s because of shifting expectations in the post #MeToo world, Douglas Chia a senior fellow at Rutgers Law School’s Center for Corporate Law and Governance, tells Yahoo Finance. Few courts, he says, have evaluated how fiduciary laws govern obligations of public company executives to disclose claims of sexual misconduct.
“In today’s environment, the standards are shifting, and there’s more of an expectation that the investors want to know more earlier,” Chia says. “… There’s nothing that really says what’s legally required.”
The current legal landscape is “a very gray area” that likely invokes state corporate laws and federal securities laws that can pressure both the board and Kotick, according to Case Western Reserve University School of Law associate professor Anat Alon-Beck.
“I put it on the board, not just on the CEO,” Alon-Beck adds. “It’s a very delicate situation because the CEOs have obligations under securities laws to report on material events. I think today, after the #MeToo movement, this is a big deal.”
In Delaware, where Activision Blizzard is incorporated, state corporate laws make CEOs such as Kotick, as well as board members, fiduciaries to the corporation, Alon-Beck explains. The role requires them to exercise duties of care and loyalty to shareholders and makes them liable for breaching those duties.
Under federal securities laws, liability can arise if a “material” disclosure is omitted — though “materiality” has no clear and consistent definition, Chia said.
“You could have a claim that the CEO and or the board breached their fiduciary duty because they failed to monitor what was going on at the company, from a compliance point of view on sexual misconduct,” Chia says.
In August, shareholders filed one such suit, claiming Activision failed to inform investors that California’s Department of Fair Housing and Employment had been looking into claims of discrimination and sexual harassment, prior to the agency’s lawsuit filed that month.
Still, requiring a CEO of a large public company to report each and every instance of misconduct to the board is not likely a standard a court would impose, Chia said. However, he added, major allegations such as rape, and patterns of sexual misconduct claims, should indeed go that far up the chain of command.
For Alton-Beck, reporting significant events just to the board isn’t far enough as a strategy to protect against modern legal claims. Shareholders, she suspects, are going to have to be part of the equation.
Delaware state law requires board members to exercise oversight to avoid potential illegal conduct, she explains. In turn, the board should ensure that systems are in place within the company to help prevent illegal sexual misconduct and to learn about and investigate them, if they occur.
“If the court finds that [Activision] breached the duty of loyalty because they didn’t exercise oversight, then they need to answer for the harm that they caused the corporation,” she says. “To me, it’s a clear-cut case that there’s a violation of duty of loyalty here, if they failed to put a system in place.”
Yahoo Finance contacted Activision Blizzard to obtain information about its oversight policies but did not receive a comment before publication.
Shares of Activision Blizzard (ATVI) were trading at $62.50 at market close on Friday, approximately 60% down from their 52-week high of $104.53.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.
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