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Have Guns Become Weapons of Value Destruction? Large investment firms have leaders at gunmakers, retailers, etc., in their sights.

"We share the nation's grief over the incomprehensible and senseless loss of life at Parkland, Florida, and we share the desire to make our communities safer," reads a letter that American Outdoor Brands Chairman Barry Monheit and CEO James Debney sent to the BlackRock investment firm's stewardship team on March 6.

The letter makes it clear that American Outdoor Brands, the holding company for Smith & Wesson, supports better enforcement of existing gun safety laws and is not opposed to the development of "mart gun" technology, but is opposed to legislation that would require the use of such technology.

The nine-page statement was the company's response to a similarly lengthy message from BlackRock CEO Larry Fink, who announced in early March that BlackRock would initiate a series of discussions with the three publicly traded companies whose primary business is firearms manufacturing: American Outdoor Brands, Vista Outdoor and Sturm, Ruger. BlackRock invests in all three companies through index funds.

American Outdoor Brands--the manufacturer of the AR-15-style rifle used to kill 17 students and teachers at the Marjory Stoneman Douglas High School in Parkland in February--is the only gunmaker so far to have responded publicly. Whether the comments will satisfy BlackRock remains to be determined, but at their annual meetings between May and September of this year, all three gun companies will face additional shareholder scrutiny over how their products are being used.

The Parkland shooting, and the student activism following it, cast a greater spotlight than ever on the role gun makers themselves play in making weapons available to people who might go on a murderous rampage--as well as retailers that sell guns, lenders that provide financing, and companies that offer discounts to NRA members.

A Quinnipiac University National Poll that came out the week after the Parkland shooting found that 66% of American voters overall and 50% of those who owned guns supported stricter gun laws, the highest levels ever measured by the poll.

"Guns join opioids, cyberhacks, sexual harassment, human rights and climate change as top-of-mind risks that shareholders will want to discuss with boards during engagements and at annual meetings," says Patrick McGurn, special counsel at Institutional Shareholder Services, which provides governance and responsible investment advisory services to investors.

BlackRock and other big institutional investors, including State Street, Vanguard and Capital Group, have begun to see gun safety as an issue they can't ignore. They're concerned that there could be a long-term decline in value, plus they have to answer to their own portfolio clients who have said they don't want to support the gun industry.

Although the holdings in index funds are determined by third-party providers, BlackRock has announced that, to accommodate requests from clients, it is exploring ideas for new index funds that exclude gunmakers.

At the same time, Fink's message to the gunmakers says the firm plans to drive change through private dialogue. After outlining a long list of questions for gun makers, including how they're managing the reputational, financial and litigation risk associated with manufacturing civilian firearms, and what steps they are taking to support the safe and responsible use of their products, the message adds that BlackRock will monitor gun-related companies "to assess their policies and practices in light of evolving societal expectations."

Expectations are evolving enough that directors of gun manufacturing companies should champion corporate responsibility as a competitive advantage, maintains Andrea Bonime-Blanc, the founder and CEO of GEC Risk Advisory in New York, a firm that provides advisory services on governance, risk, ethics and cyber security.

"If I were on the board of a gun company I'd be thinking forward," she says. "I'd want the company to be known as the most responsible gun manufacturer, so I'd look at what kinds of programs we could create for minimizing violence in dangerous neighborhoods or creating safer guns, or training and education."

In the past, that was a dangerous position to take.

In 2000, the National Rifle Association instigated a boycott--and the CEO received death threats--when Smith & Wesson, as the company was known then, signed a pledge to adhere to a number of gun safety measures in return for local governments around the country dropping more than 30 pending lawsuits holding the gunmaker liable for shooting deaths and injuries. Ultimately Smith & Wesson backed down, and the lawsuits lost momentum under the next Presidential administration.

More recently, the NRA came down hard on the companies that dropped their discounts for NRA members, including Avis, Chubb Insurance, Delta Air Lines, Hertz, and MetLife, calling the move "a shameful display of political and civic cowardice."

Granted, for these companies, as well as for Dick's Sporting Goods, Walmart and other retailers that have agreed to put stronger restrictions on gun sales than are required by federal law, gun and NRA-related revenues are a small part of their business.

Directors and executives of gun companies, on the other hand, are in a position of having to please both their customers and their investors. Yet increasingly, it may fall to those who run gun companies to reach a compromise within society at large.

As Bonime-Blanc sees it, at a time when Congress is deadlocked on the issue of preventing violence with assault weapons, "society and stakeholders are turning more to the corporate world for leadership."

Indeed, directors are not immune.

There is, in fact, a political activist campaign afoot petitioning two individual directors of American Outdoor Brands, Anita Britt and Gregory Gluchowski, to make a statement about gun safety by stepping down from the board.

Praveen Kathpal of Alexandria, Va., who started the petitions through, says he chose these two particular directors because they're from mainstream business backgrounds and relatively new to the board--Gluchowski, who is the CEO of the Hillman Group, a hardware company in Cinncinnati, joined in 2015, while Britt joined in early February of this year. Kathpal thought the choice of serving on the board might be more reversible for them than for someone who's been on the board a long time.

Neither director responded to our requests for comment, but Britt resigned from her job as the CFO at St. Thomas University in Miami Gardens, Fla., after the president of the Catholic university issued an ultimatum to her. The U.S. Conference of Catholic Bishops has been pushing for stricter gun control for many years and the school was facing community backlash.

Investment fund managers have not yet singled out any board members.

Fink has stated in a general message about the firm's stewardship, however, that "based on our engagement conversations and our long-term view of the company, we may vote against specific directors or we may vote against management on shareholder proposals."

The state treasurer from California, John Chiang, recently urged the board of the California Public Employees' Retirement System, (CalPERS) to reduce its stake in assault rifle retailers and wholesalers. CalPERS voted against the proposal, saying the move would do little to reduce gun violence, according to Reuters.

A number of pension and faith-based funds tend to invest in gun companies specifically so that they can push for reforms. Among these proposed reforms is a resolution from the Connecticut Retirement Plans and Trust Funds that passed last year seeking declassification of Vista Outdoors board.

Connecticut State Treasurer Denise Nappier noted in a letter to the state senate that declassification would "lead to greater accountability on the part of board members because each would be up for election on an annual basis."

Vista's response has been to say that the board will recommend certain amendments that would provide for a phased-in declassification; again subject to a shareholder vote at the 2018 annual meeting in August.

This year Mercy Investment Services, the asset management program for the Sisters of Mercy order of nuns, has introduced a shareholder resolution for Vista Outdoor and Sturm Ruger requesting that the board issue a report by February 2019 on the company's activities related to gun safety, "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; and assessment of the corporate reputational and financial risks related to gun violence in the U.S."

The Interfaith Center on Corporate Responsibility (ICCR), a coalition of more than 300 shareholder activists, has a similarly worded resolution for American Outdoor Brands and Sturm Ruger.

"A good board will pause at this point and discuss what its future is,just as ExxonMobil's board has paused to talk about fossil fuels," says Tim Smith, the director of shareholder engagement at Waiden Asset Management, a Boston money management firm that works with ICCR. He's referring to an effort last year when investors in the oil giant passed a resolution saying the company should report on how global efforts to contain climate change might affect its reserves and resources.

It appears that directors of gun-related companies will need to recognize that they're in an industry that will continue to face reputational risk unless the U.S. can solve the problem of mass shootings.

Jan Alexander has written about financial markets, management strategy and the global economy for Strategy+Business, Institutional Investors, Forbes, Worth, and Money.

RELATED ARTICLE: A Social-Risk Tipping Point?

Directors must weigh risks involved with joining social-outrage campaigns. By April Hall

In a political climate where public opinion can turn on a dime, boards of directors need to consider a new business risk--"social risk."

Case in point, Delta Air Lines.

After discontinuing its one-time discount to National Rifle Association members flying to the organization's annual meeting, the airline faced intense positive and negative feedback.

In Georgia, where the company is headquartered, legislators moved to kill a tax break on jet fuel, impacting millions of dollars the company was set to save.

Still, the CEO and the board stood behind their decision, releasing statements to the public and employees.

"While Delta's intent was to remain neutral, some elected officials in Georgia tied our decision to a pending jet fuel tax exemption, threatening to eliminate it unless we reversed course," Delta CEO Ed Bastian said in the statement. "Our decision was not made for economic gain and our values are not for sale. We are in the process of a review to end group discounts for any group of a politically divisive nature."

One New York politician lauded Delta's decision in the face of the tax kerfuffle.

".@Delta, as one of your most frequent flyers, know that the NY LG admires your principled stance," tweeted Kathy Hochul, New York's Democratic lieutenant governor. "Let's continue our great relationship. NY is open for business & [heart]'s Delta--move HQ to where you're appreciated?"

The question of whether or not to weigh in on such divisive issues is challenging boards more than ever before.

"In many cases it's the tipping point. I think that's what happened with Parkland," says William Klepper, a management professor at Columbia Business School and author of The CEO's Boss: Tough Love in the Boardroom and Governance and Managing Change in the 21st Century. "In the case of societal endurance, we've reached it at this time. This is not going to go away."

The attention corporate leaders give to social outrage is becoming less of a fad and more of a trend, adds corporate adviser Barie Carmichael, author of Reset: Business and Society in the New Social Landscape.

But to what extent directors in the nation's boardrooms sanction social engagement, she advises, should be assessed as a social-risk proposition.

In the case of Delta, the decision to discontinue the discount was made days after the deadly shooting of 17 people at Marjory Stoneman Douglas High School in Parkland, Fla. The shooter used an automatic assault rifle in the massacre.

Dick's and Walmart made larger business pivots by raising the age at which customers can purchase guns. Walmart, which had already taken assault weapons out of stores went a step further and removed any product resembling an assault weapon.

A Walmart spokesman said the company does not comment publically on internal conversations, but media reports say company management made the decision on pulling all assault weapon-like products and later informed the board.

While it looks like those decisions were made on a dime, Klepper says he's sure February wasn't the first time the subject came up.

"I would make a bet that the discussion is happening in the confines of the boardroom," says Klepper. An open and frank discussion demonstrates the close relationship the board needs to have with the CEO, who is often a member of the board, Klepper adds.

Delta's move also highlights how what intends to be a "neutral" move can court explosive controversy, says one specialist in corporate governance.

The airline publicized the discount cut as not taking a stance for or against gun control, but it's the public interpretation that counts, wrote David A. Katz, a partner, and Laura A. Mcintosh, a consulting attorney at the law firm Wachtell, Lipton, Rosen & Katz wrote for the New York Law Journal in March.

The authors used the example of Under Armour's CEO dropping out of the President Trump's American Manufacturing Council last year. Under Armour was forced to release a "clarification" on the company's position on a range of political issues that had nothing to do with their business.

"While it is management's job to navigate between the Scylla and Charybdis of red and blue America, the board may find it necessary to intervene if it becomes convinced that management decisions in this regard are likely to be harmful to the company and its shareholders," wrote Katz and McIntosh.

While many companies have stayed quiet on issues of gun control or the groups that support gun use, the Feb. 14 shooting has changed something in the corporate conversation.

Should directors and corporate managers even join the conversation?

There are varying views.

For Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, the choice is clear--there is no room for political discussion inside or outside of the boardroom.

"Politics and corporate lives don't mix," Elson says. "When you mix the two you're going to offend people--and you don't want to offend anyone."

The mistake in Delta's case, he notes, was giving the discounted fare in the first place. Removing it compounds the problem.

"If the company is getting involved in politics, not ordinary business, it should discuss it with the board," he says. "But they shouldn't delve into politics at all. That's why we have political institutions."

Klepper agrees to a certain extent, but finds extenuating circumstances in the most extreme sociopolitical events.

"Here's the confusion," he explains. "It's not a question of politics, it's a question of principle. The mistake is thinking of this as a political issue. This is about the core values of that (company)."

Social risk has to be evaluated as not just a short-term issue, points out Carmichael.

Take Delta. The airline leveraged its stand while leaving the opportunity open in the future to end similar discounts if other organizations prove to be politically problematic, she says.

The eventual benefits of the move will play out for months to come. Not only in the marketplace, she explains, but in the job market as well.

"I think it is an arms race for the next generation of talent," Carmichael says. "One of the reasons I think you see CEOs speaking out is they need to be 'for something'" to attract young employees.

Millennial want to not only know how much profit a company makes, but how that profit is made, she adds. "They will look at the corporate footprint to see where they stand socially."

Taking a social stand comes with a "laundry list of 10,000 risks to consider," says Klepper. But, he adds, the ultimate board decision should be based on the company's "core values" and balance that with their commitment to the bottom line and shareholders.

Caption: A woman holds an "I Stand With Emma" sign at the People's Rally Against Gun Violence in Los Angeles, Calif, in February.

Caption: With the calls, "End gun violence, no more silence!" hundreds of students from Alameda High School in California participate in a student walkout to protest gun violence.

Caption: Edward Stack, CEO of Dick's Sporting Goods, announced they will no longer sell assault-style weapons.
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Author:Alexander, Jan
Publication:Directors & Boards
Geographic Code:1U5FL
Date:Mar 22, 2018
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