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Shareholder Activism After Sandy Hook

Matt Kelly | December 19, 2012

And here we go: Shareholder activism coming to the firearms business, thanks to the tragedy at Sandy Hook Elementary School.

Yesterday I noted on Twitter that Cerberus Capital Management, a private equity firm, was selling off the Freedom Group International firearms business it owns and that divestiture may be the New New Thing for shareholder activists tired of the gun lobby's grip on this country. This morning, word comes from Boston that the state treasurer for Massachusetts will review his state's pension fund investments in the firearms business. The treasurer, Steve Grossman, didn't say he'll support divestiture yet (Smith & Wesson in based in the western part of the state) but rest assured that the pressure will be there.

Indeed, Massachusetts apparently only the latest state to reconsider where it puts its pension money, not the last. California's teacher union said Monday it would reconsider a $500 million investment with Cerberus—shortly before Cerberus said it was dumping Freedom Group. Many published reports say public-employee pension funds around the country are reviewing their holdings to see whether they should or should not sell off holdings.

Institutional investors have a considerable amount of power, of course, and investment firms like Cerberus have a much easier time walking away from a holding than corporations do shedding a line of business. The next question: whether individual investors start taking the battle directly to Corporate America, filing resolutions for businesses like Walmart or Dick's Sporting Goods to stop selling firearms. Proxy season is only weeks away and no corporate secretary will relish this headache, when shareholder resolutions are always a pain but the Sandy Hook tragedy is so searing and the need to do something so urgent.

I can't imagine shareholder activists will not try to push divestiture proposals somewhere; this is what they live for, after all. Moreover, remember that public-employee unions do have an agenda: to represent the interests of their members, who are quite often teachers, police, firefighters, and similar workers—that is, the people who respond first to tragedies like mass shootings and risk their lives to prevent them. Not getting shot is very much one of their interests, so I would not be at all surprised if we see shareholder pressure and even resolutions for the proxy statement. The questions are whether companies (a) will be able to keep such proposals off the proxy statement; and (b) will want to keep them off the proxy.

One standard for excluding a shareholder resolution from the proxy statement is whether the proposal intrudes into ordinary matters of business, which should be the domain of the board of directors. A proposal for a retailer to stop selling firearms sounds suspect to me—if you substitute the word “toys” or “bedding” for “firearms,” nobody would take that proposal seriously. We only object to selling guns because they are a dangerous product, but retailers sell plenty of dangerous products (chemicals, knives, flammable liquids) and common social standards are that the corporation, not shareholders, decides what types of products to sell. Arguing for exclusion will be unpleasant business, but logically and legally corporations won't be on weak ground.

The question of whether corporations will be on weak ground reputationally—that's a different matter, and perhaps one better treated by our sister magazine PR Week. Walmart, Dick's Sporting Goods, and other retail chains will need to review whether the money they get from gun sales is really going to be worth the headache of bad publicity and possible proxy fights.