Activist Investors Force Firearm Manufacturers to Report on Safety Efforts

The statistics are just staggering.  According to an article in the Washington Post on June 19, 2018, “there are more than 393 million civilian-owned firearms in the United States, or enough for every man, woman, and child to own one and still have 67 million guns left over.”  Data released by the Bureau of Alcohol, Tobacco, Firearms and Explosives states that in 2016 alone, approximately 11.5 million firearms were manufactured in the United States.  In the last fiscal year, net sales from firearms for Sturm, Ruger & Company, Inc. and American Outdoor Brands Corporation were 99% and 74% of their total net sales, respectively. 

More than two years ago, a group of faith-based institutions, including the Sisters of the Holy Names of Jesus and Mary and the Catholic Health Initiatives, members of the Interfaith Center on Corporate Responsibility, purchased shares in Sturm, Ruger and American Outdoor, which until December 2016 was known as Smith & Wesson Holding Corporation.

Then the Parkland, Florida tragedy occurred on February 14, 2018.  A few weeks later, these faith-based investors submitted two nearly identical shareholder proposals to Sturm Ruger and American Outdoor, “requesting reports detailing the companies’ efforts to make their products safer.”  Sister Judy Byron of the Sisters of the Holy Names explained, “We are eager to hear what these companies are doing to ensure the safety of children and communities whose lives may be at risk as a result of their products.”

The proposals echoed the concerns by a diverse coalition of more than 100 investors including the Interfaith Center on Corporate Responsibility and other faith-based investors, asset management firms, and the State of Rhode Island.  These investors, “representing $634 billion in assets are calling on gun manufacturers, retailers and distributors, as well as companies with financial ties to these industries, to review their operations, supply chains and policies and take meaningful action on this public safety concern.”  Accordingly, this diverse coalition plans to engage “with companies we own to urge immediate and positive action that addresses gun violence.”

The proposals to respective shareholders of Sturm, Ruger and American Outdoors stated that it was “imperative that we assess all options for decreasing the societal impact of gun violence and mitigate financial and reputational risks for the company.”  The shareholder proposals requested that the boards of the two major gun manufacturers issue a report by February 8, 2019, “on the company’s activities related to gun safety measures and the mitigation of harm associated with gun products,” including: “Evidence of monitoring of violent events associated with products produced by the company.  Efforts underway to research and produce safer guns and gun products.  Assessment of the corporate reputational and financial risks related to gun violence in the U.S.”

In the American Outdoor proposal, the proponents argued that the company “has a responsibility to mitigate potential impacts through improved monitoring of its distribution and retail sales channels and enhanced reporting on research and development efforts to improve the safety features of its consumer products” “because existing disclosures of current risk mitigation measures are seen as insufficient for investors to assess their effectiveness.”

Of course, both companies recommended that their shareholders vote against the proposals.  Sturm, Ruger attempted to dismiss the proposal in its proxy by stating that the “misuse of firearms is beyond our control.”  Similarly, American Outdoor stated that it is “unfeasible, unrealistic, and unhelpful” to “monitor events associated with our firearms.”

Shockingly, both of the shareholder proposals passed.  In one news article, the victory with the Sturm, Ruger proposal was described as “an unprecedented victory for the activists: no gun company had ever been forced by its shareholders to consider the public safety implications of its products.”  Following the vote, Sturm Ruger’s CEO said, “The shareholders have spoken and we will follow through on our obligation to prepare that report in due course.”

The proposals passed in large part due to critical support from major shareholders including the companies’ largest shareholder, BlackRock Inc.  On March 2, 2018, BlackRock issued a press release, making it clear that the Parkland tragedy required a “response and action from a wide range of entities across both the public and private sectors” and that it has an obligation to its clients to engage with companies “to promote sustainable business practices that can create long-term value.”  BlackRock also made it clear that it was willing to “vote against specific directors” or “vote against management on shareholder proposals.”

The proposals also received support from the two major proxy advisory firms, Institutional Shareholder Services and Glass Lewis.  Institutional Shareholder Services wrote that shareholders should support the proposals because they seek “concrete evidence that the board is properly assessing risks to the company’s long-term viability.”  Glass Lewis has called the faith-based shareholders’ approach “pretty novel and pretty impressive” because they have focused on issues such as “reputational risk” “that are relevant not only culturally and socially but also relevant to shareholders” as the risk can cause a company’s stock value to decline.

The proponents know that a single report about gun safety will not reduce gun violence, but they want to engage the gun manufacturers in “basic responsible corporate governance.” Ms. Byron knows that Sturm, Ruger and American Outdoor are not happy that they have to produce the gun safety reports, but the way she puts it, “We have to decide what our next step is because we’re in this for the long haul.”