LEARNING FROM MISTAKES: THE IMPORTANCE OF EFFECTIVE INTERNAL GOVERNMENT SYSTEMS

Author: Logan Sparks, Associate Editor

Corporate governance has proven to be a huge liability to corporations that fail to adhere to the ever-evolving legal and societal standards placed upon them.[i] Corporate governance may be defined by two separate categories: internal and external governance. [ii] Internal corporate governance refers to the organizational and managerial systems within the corporation such as the board of directors, shareholders, CEOs, and compensation schemes. [iii] External governance, on the other hand, refers to outside market forces which constrain corporate behavior, such as the laws of capital, labor, and product markets. [iv] The importance of effective internal governance cannot be overstated, and Activision Blizzard’s controversy and subsequent punishment by the U.S. Securities and Exchage Commission is the perfect example of such.

Activision Blizzard is a game development company which was established by the merger of Activision and Blizzard Entertainment, two well-known gaming brands.[v] As a large and successful company, internal governance should have been focused on minimizing key risk factors. However, from 2018 to 2021 Activision Blizzard failed to implement adequate controllership mechanisms to collect and analyze employee complaints of workplace misconduct.[vi] Instead of providing such disclosure mechanisms, Activision Blizzard prevented such disclosures by implementing rules which required former employees to provide notice to the company if they received a request for information from the SEC. [vii] As a result, the company was investigated by the SEC, prosecuted, and ultimately agreed to settle for $35 million. [viii]

While the threat of SEC charges should be enough to convince corporations that internal governance is important, sufficient controllership mechanisms also would have protected Activision Blizzard from breaching constitutional rights, and from negative publicity. Some of the most egregious workplace misconduct allegations against Activision Blizzard were those accusing the company of violating Title VII of the Civil Rights Act of 1964 by subjecting female employees to sexual harassment, pregnancy discrimination, and related retaliation.[ix] The lawsuit filed by the Equal Employment Opportunity Commission resulted in a settlement of $18 million, along with substantial injunctive relief aimed at preventing workplace harassment, discrimination, and retaliation. [x] Therefore, after losing at least $53 million, the company has agreed to seemingly create the controllership mechanisms that should have identified these risk areas and addressed them prior to any lawsuits or investigations. While still a popular company due to the products developed and sold, the controversy did break into the public eye, resulting in reputational harm and negative representations by the media, such as allegations of having a frat-boy like workplace culture. [xi]

Therefore, corporations should learn from Activision Blizzard’s mistake and ensure to place the proper funding and time into the development of adequate internal governance systems. If they do not, they may find themselves subject to fines, litigation, and detrimental publicity.

General idea and themes inspired by a presentation given by Jeff Boujoukos, Kelly Gibson, and Amy Schuh from Morgan Lewis on June 14th, 2023.

[i] See Dana R. Hermanson, CORPORATE GOVERNANCE AND INTERNAL AUDITING: THE CORPORATE GOVERNANCE BACKLASH, Warren Gorham & Lamont, 2004 WL 3158383.

[ii] § 2:1. General control structure—Introduction, 1 Publicly Traded Corporations Handbook § 2:1, Section C (2023-1).

[iii] Id.

[iv] Id.

[v] See Activision Blizzard About Us Page. https://www.activisionblizzard.com/who-we-are. (last visited Sept. 17, 2023).

[vi] Press Release, U.S. Securities and Exchange Commission, Activision Blizzard to Pay $35 Million for Failing to Maintain Disclosure Controls Related to Complaints of Workplace Misconduct and Violating Whistleblower Protection Rule (Feb. 3, 2023) https://www.sec.gov/news/press-release/2023-22.

[vii] Id.

[viii] Id.

[ix] Press Release, U.S. Equal Employment Opportunity Commission, Court Approves EEOC’s $18 Million Settlement with Activision Blizzard, (March 30, 2022) https://www.eeoc.gov/newsroom/court-approves-eeocs-18-million-settlement-activision-blizzard.

[x] Id.

[xi] See generally Aaron Greenbaum, Everything You Need to Know About the Activision Blizzard Scandal, Den of Geek, January 20, 2022, https://www.denofgeek.com/games/activision-blizzard-lawsuit-major-events-history-everything-explained/ ; Kari Paul, Judge approves Activision Blizzard’s $18m settlement over sexual harassment suit, The Guardian, March 29, 2022, https://www.theguardian.com/technology/2022/mar/29/activision-blizzard-sexual-harassment-lawsuit-eeoc-settlement; Shannon Liao, Judge likely to approve $18 million Activision Blizzard sexual harassment suit settlement, The Washington Post, March 22, 2022, https://www.washingtonpost.com/video-games/2022/03/22/activision-blizzard-lawsuit-settlement/; Todd Martens, “Blizzard’s new boss wants to have fun with games. But first, his company is in a crisis”, Los Angeles Times, July 6, 2022, https://www.latimes.com/entertainment-arts/story/2022-07-06/blizzard-mike-ybarra-navigates-controversy-changing-gaming-culture.