Investor Pressure on Firearms Manufacturers

Courteney Keatinge is Director of Environmental, Social & Governance Research at Glass, Lewis & Co. This post is based on a Glass Lewis publication by Ms. Keatinge.

The mass shooting at a high school in Parkland Florida has focused renewed attention on the issue of gun violence. While regulators debate the appropriate actions to take, a number of companies and investors have recently made moves to address the issue.

For example, both Walmart and Dicks Sporting Goods announced at the end of February that they would place new restrictions on gun sales. Specifically, Dicks Sporting Goods announced that it would immediately end the sales of military-style semi-automatic rifles and its sale of high-capacity magazines. Walmart, which does not sell bump stocks, high capacity magazines or similar accessories, stated that it was removing from its website items that resembled assault-style rifles, including nonlethal guns and toys. In addition, both retailers stated that they would not sell firearms to customers under the age of 21.

Additionally, several companies, many in response to consumer complaints, have cut their ties to the National Rifle Association (“NRA”). Companies including MetLife, Symantec, Hertz and Delta Airlines have recently ended discount programs for NRA members. However Delta faced immediate backlash for ending its relationship to the organization. Shortly following the Atlanta-based airlines’ announcement, Georgia lawmakers followed through on a threat to punish the company by repealing a budget provision that included a $50 million airline fuel tax exemption, which would have saved Delta an estimated $40 million.

Some investors have also taken action in response to recent events. At the end of February, State Street (which owns nearly 2% of shares of both Sturm and Ruger and American Outdoor Brands) stated that it would be “engaging with weapons manufactures and distributors to seek greater transparency from the them on the ways that they will support the safe and responsible use of their products.” In addition, State Street noted that it would be monitoring the companies’ lobbying activities.

Further, Bank of America announced that it would “examine what [it] can do to help end the tragedy of mass shootings” and that it would take an immediate step to “engage the limited number of clients [it has] that manufacture assault weapons for non-military use to understand what they can contribute to this shared responsibility.”

Similarly, BlackRock (which is the largest shareholder in Sturm Ruger and American Outdoor Brands) recently announced that it would be “engaging with weapons manufactures and distributors to understand their response to recent events.” However, BlackRock still continues to receive pressure to take action on this issue. On February 26, Massachusetts Senator Elizabeth Warren wrote a letter to Larry Fink, BlackRock’s chairman and CEO, encouraging the firm to go beyond having conversations with gun manufactures in order to “ensure that the gun companies in which [it] invest[s] are taking steps to reduce gun violence.”

Although the focus on gun violence has increased due to recent events, this issue has been the subject of a number of shareholder proposals submitted to companies in the past years. Relevant proposals have been submitted to both gun manufacturers and retailers, and have sought a variety of measures to address the issue, including corporate reporting on the subject, taking steps to improve business practices, and even suggesting restrictions on the products that retailers sell. However, not all of the submitted proposals have made it to the meeting agenda.

Prior to the upcoming proxy season, the only gun-related proposal that has gone to a vote of shareholders in recent years requested that Vista Outdoor (and, previously, its predecessor company, Alliant Techsystems) report on the steps that it has taken with respect to various elements of the Sandy Hook Principles, a list of 20 measures that were designed to curb gun violence that companies making or selling guns and ammunition would need to endorse and adhere to in order to avoid “economic divestment actions.” However, these proposals did not receive significant investor backing; in 2017, the proposal at Vista Outdoor received only 8.21% support (excluding abstentions and broker non-votes).

For retailers, some investors took a more direct approach, questioning whether the companies they own should continue to sell guns. One such proposal, submitted at Walmart, was the subject of an extensive legal battle. In 2015, Walmart challenged a shareholder proposal requesting that the board amend the compensation, nominating and governance committee charter to provide for oversight “concerning the formulation and implementation of policies and standards that determine whether or not the company should sell a product that especially endangers public safety and well-being, has the substantial potential to impair the reputation of the company and/or would reasonably be considered by many offensive to the family and community values integral to the company’s promotion of its brand.“ The proponent, the Trinity Church, specifically noted that the board should determine whether or not the company “should sell guns equipped with magazines holding more than ten rounds of ammunition…and to balancing the benefits of selling such guns against the risks that these sales pose to the public and to the Company’s reputation and brand value.”

Walmart sought to exclude the proposal on the grounds that it dealt with ordinary business matters. The motion to exclude raised a larger question about the underlying law, and whether proposals can transcend ordinary business operations if they relate to a policy issue that is “divorced from how a company approaches the nitty-gritty of its core business.” Although gun violence is clearly a larger policy issue, ultimately the Third Circuit Court of Appeals contended that the proposal did not transcend Walmart’s ordinary business operations because “product selection is the foundation of retail management.” The company was allowed to exclude the proposal, forcing proponents to adjust their tactics when engaging with and submitting shareholder proposals to companies concerning gun safety.

In the coming year, investors may see up to three firearms-related shareholder proposals. The Interfaith Center on Corporate Responsibility (“ICCR“) has stated its intention to file resolutions at American Outdoor (Smith & Wesson), Dicks Sporting Goods Inc., and Sturm Ruger & Company.

Given the SEC exemption of the 2015 proposal at Walmart, proponents have changed their approach with respect to the proposals filed at gun retailers. Dicks Sporting Goods, where the resolution was filed prior to its recent aforementioned commitments, received a proposal similar to that previously submitted to Alliant. The proposal requests that Dicks Sporting Goods report on the actions it has taken “on elements such as those based on the Sandy Hook Principles.” Although not specifically addressed in the text of the resolution, the proponents’ proposal also suggests that the company take a number of actions, including committing to lobby, stock and advise on technology-enhanced safety measures for guns and ammunition and that it reevaluate policies regarding the sale, design or conversion of military style assault weapons for civilian use, including information to assist conversions.

Strum Ruger and American Outdoor have been targeted by a different type of proposal. Proponents have submitted a novel proposal at both of these companies that would require them to issue a report on their activities related to gun safety measures and the mitigation of harm associated with gun products, including: (i) evidence of monitoring of violent events associated with products produced by the companies; (ii) efforts underway to research and produce safer guns and gun products; and (iii) an assessment of the corporate reputational and financial risks related to gun violence in the United States.

Although certain investors have successfully pushed companies on a number of environmental and social issues, this may be an instance where the market speaks louder than proxies. This is largely due to the fact that most socially responsible investors screen out investments in companies that manufacture (and, in some instances, sell) firearms and other weapons. As a result, investors who are often the most progressive in engaging with companies and supporting shareholder resolutions on environmental and social issues are essentially entirely absent from these companies’ share ownership profiles. This may explain less than resounding support for certain related shareholder proposals.

However, it’s worth noting the broader trend in recent years of large, mainstream asset managers, including those with significant stakes in a number of gun manufacturers, becoming increasingly vocal on environmental and social issues in general—and beginning to support more shareholder resolutions. With managers getting more active in voting and the events in Florida still top of mind, investors may want to keep a close eye on companies engaged in the manufacture and distribution of firearms this proxy season, as market or investor pressure could force changes in how these companies do business.

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