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Game Over for Activision Blizzard CEO?

Shareholder group calls for resignation in wake of a sexual harassment lawsuit.

Is it the end of the road for Bobby Kotick, CEO of video game company Activision Blizzard ATVI ? On Nov. 17, a group of Activision Blizzard shareholders that represent $329 billion in assets under management or advisory (and own a little under 5 million shares of Activision Blizzard), asked for Kotick’s resignation.

The shareholders include investor advocacy group Shareholder Association for Research & Education, NEI Investments, Australian retirement fund providers Verve Super and Future Super, and the Strategic Organizing Center Investment Group.

“As new reporting indicates, and in contrast to past company statements, CEO Bobby Kotick was aware of many incidents of sexual harassment, sexual assault, and gender discrimination at Activision Blizzard, but failed either to ensure that the executives and managers responsible were terminated, or to recognize and address the systemic nature of the company’s hostile workplace culture. Moreover, and despite numerous government investigations, settlements, and top executives’ departures that have negatively affected both the company’s public reputation and its share price, the board has been almost entirely silent. We, therefore, call on Mr. Kotick to resign as CEO of the company, and on the board of directors to take responsibility for failing to recognize and address what the California Department of Fair Employment and Housing has described as a “frat boy” workplace culture to flourish,” the group wrote in a letter to the board of directors, which was shared with Morningstar.

In addition, the shareholders asked for chairman Brian Kelly and lead independent director Robert J. Morgado to announce their retirement no later than Dec. 31, 2021. They also have three other asks:

  1. The company retain an independent expert in corporate governance with a strong background in uprooting sexist and discriminatory workplace practices to conduct a review of past board practices, structure, and composition to determine how and why the board failed to address the company's "frat boy" culture before the public announcement of the California lawsuit;
  2. Independent of this review, commit to a thorough refreshment of the board to increase diversity and inclusion, a key element of which should be the nomination of a nonexecutive Activision Blizzard employee, selected through a fair and open process by the Activision Blizzard workforce, to serve as an employee director subject to election at the next annual meeting;
  3. If the board does not terminate CEO Robert Kotick, include the announced voluntary reduction in total CEO pay in his employment contract for at least five years and auto-renew it if the stated workplace goals are not met. In addition, clarify if any other executives will accept similar reductions or if the company will eschew granting bonuses for this year.

"The company needs to take concerted and forceful action to address the concerns and requests of employees, shareholders and other stakeholders. Anything less is unacceptable," said Jamie Bonham, director of corporate engagement at NEI Investments. Sustainalytics, a Morningstar company, gives the company a Controversy Score level of 4--which is High (the second-highest risk level), based on labor relations, though it has an overall ESG Risk Rating of 19.1, or Low.

Failure at the Top

The shareholders contend that "a month of turmoil has made board failure indisputable." They point to a lawsuit filed by the State of California's Department of Fair Housing and Employment alleging widespread discrimination and sexual harassment. In response, on Oct. 28, Kotick sent a letter to employees that both announced five changes the company would make to promote diversity and instituted a zero-tolerance for harassment. The signing shareholders believe this is not enough. "This announcement failed to address the board's role in enabling the company's 'frat boy' culture and does not contemplate a review of past board practices and their contribution to the current crisis. Most recently, a report published by The Wall Street Journal reveals that numerous internal documents contradict statements made by Mr. Kotick during this burgeoning crisis," the letter states, adding that the "grave allegations raise serious questions of whether Activision Blizzard's board is acting in the best interest of long-term shareholders." "Shareholders are raising their expectations for companies--strong short-term returns are no justification for the kinds of events that have been reported here. The company has very serious governance risks. Investors are calling for the remaining directors to do their duty, and crush the 'frat boy' culture that has flourished," said Anthony Schein, director of Shareholder Advocacy at SHARE. He added that if the board does remove Kotick, Kelly, and Morgado, then the process to recruit replacements will be crucial, and the company should expect careful investor overwatch through that process and into the future, and if the CEO, chair, and lead independent director do not respond to the letter, the company should be prepared for further scrutiny and overwatch investor action. "If the company does not meet these requirements, we believe it runs the risk of eroding any remaining trust it has with key stakeholders. It will almost certainly lead to further shareholder activism at its AGM. We are currently focused on driving the change that is needed in the company (and the industry) but if we don't see that change, we always have the option to exit the company completely," Bonham added.

Who Owns Activision?

According to Morningstar Direct data, the largest shareholder of Activision Blizzard is Vanguard Group, which holds 8.26% of the company. BlackRock is the next largest shareholder, with a 7.44% stake. State Street Corporation also makes the top five, with a 4.44% stake. "The quarterly results were overshadowed once again by the fallout from the allegations of widespread sexual discrimination, harassment, and misconduct at the company and by the announcement that Diablo 4 and Overwatch 2 would be delayed into at least 2023. While the firm settled with the U.S. Equal Opportunity Commission for the paltry sum of $18 million, the state of California is still pursuing its lawsuit against Activision Blizzard for its wrongdoing. While Blizzard made a number of executive changes over the summer, the most prominent one has already been unwound, as recently appointed co-head Jen Oneal announced that she will be leaving the firm by the end of the year. Despite the executive and procedural changes, we expect that the fallout from the lawsuit will linger and make it difficult to attract and retain top talent in a very competitive industry," said Neil Macker, Morningstar senior equity analyst. He maintains his Morningstar Economic Moat Rating of narrow and his $97 fair value estimate for the stock, which is currently undervalued, as per his estimates.

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