We have reached a point, following the latest mass school shooting in Parkland, Florida, where investors can say that it is their fiduciary duty to retain holdings in the shares of gun manufacturers and it is their fiduciary duty to divest them. Not the same investor, of course, different ones.
Defined as the legal duty of a fiduciary to act in the best interests of the beneficiary, the argument over its practical application becomes: what are the best interests? Making money for your beneficiaries out of gun stocks and the shares of the outlets that sell them, divesting from them because they are wrong, or divesting from them to avoid future financial risk if gun legislation is enacted in the US? This last, which once seemed to me about as unlikely as anything I could think of, now seems a real possibility.
As scores of US corporations break their ties with the National Rifle Association; as there are calls for major credit card companies to follow the example of PayPal and Square and not allow their products to be used to buy firearms; as three of the major gun retailers, including WalMart, announce that they will raise the age limit to purchase guns to 21; as Morningstar and US SIF publish reports to help investors find out if they are invested in gun stocks; and as even some US politicians say that something must be done… there appears to be a change in attitudes.
As for shareholder resolutions on gun safety, there is one, so far
But as far as fiduciary duty is concerned, you can find arguments on all sides. The Des Moines Register reported several statements from pension fund officials saying nothing would change. “Acting as fiduciaries, the IPERS [Iowa Public Employees’ Retirement System] investment board makes decisions in the best interest of the members…, and works to maximize rate of return within prudent risk levels,” said Judy Akre, an IPERS spokeswoman. Iowa Senate President, Republican Jack Whitver, agreed: “They should do their fiduciary duty to return the best that they possibly can for shareholders.” So did Republican senator Charles Schneider, co-chair of the Legislature’s Public Retirement Systems Committee, and he was supported by Democratic senator Jeff Danielson (because support for the gun industry is on both sides of the aisle) who said that divesting would represent “a step too far”. IPERS is already prohibited from investing in some businesses, however: for example, those that do business with Iran and Sudan, and businesses that boycott Israel.
At the other end of the spectrum, California’s State Treasurer John Chiang told National Public Radio that he was currently urging his state treasurer colleagues to divest in retail and wholesale suppliers of weapons that are banned for possession or sale in the state of California. Chiang sits on the boards of both CalPERS and CalSTRS. “We can make a clear and powerful signal that the inaction by Congress is heartless, it’s intolerable, and there are people who want to make sure that kids aren’t losing their lives,” he said. CalSTRS had already sold off its investments in gun manufacturers in 2015, following the shooting at Sandy Hook Elementary School in Connecticut. Christopher Ailman, CalSTRS’s chief Investment Officer, told NPR that it was a purely financial decision, not a moral one. CalSTRS has also divested from coal and tobacco. But Ailman stressed that the divestment had no effect on the companies’ products or strategy. “They don’t care,” he said.
Then Senator Elizabeth Warren sent letters to nine investment managers, including BlackRock and Fidelity, which are invested in one or all of the main firearms and ammunition manufacturers, American Outdoor Brands, Sturm Ruger & Co, Olin and Vista Outdoors, saying: “I urge you to begin to use your vast investment in gun manufacturers to prevent gun violence”.In contrast, the state pension fund of Florida – the state where the latest shooting occurred – reacted to pressure from teachers whose pensions it has in its fiduciary care by saying “the SBA must act solely in the interest of the participants and beneficiaries,” and that “as primarily passive investors, we essentially own the entire market.” But, like IPERS, the fund has the same restrictions on investing when it comes to Iran, Sudan and Israel, so it doesn’t own the entire market. But it is the job of state lawmakers to make these decisions, not pension fund officials. In such a move, New Jersey state senator Vin Gopal and two General Assembly members are introducing bills to prohibit the state from investing in gun stocks.
On the public company side, BlackRock has been the most vocal in its response, sending a press release out on what questions it is asking the gun companies or retailers it invests in during promised engagements. These include: “What is your strategy to manage the reputational, financial and litigation risk associated with selling/manufacturing these products?” But, as money managers, many mutual funds simply replicate indices, perhaps it is the fiduciary duty of the index providers to remove such companies from the indices?
One is tempted to ask, why has this sudden flurry of activity taken so long? The US Department of Labor changed its stance on ERISA
funds being able to take ESG issues into account nearly three years ago. As for shareholder resolutions on gun safety, there is one, so far, at American Outdoor, but there were none last season.
A spokesperson from one of the major mutuals said: “We are in dialogue with our clients, some of whom may want to own the Russell 1997 not the Russell 2000. We are under an obligation to replicate the index that our clients want, so we have to find out what their response is, and follow their dictates.”
It’s also important to see how firearms companies respond, continued the spokesperson. Are they just going to hide behind the NRA? That would increase the risk of holding the stock. Or is American Outdoors going to divest itself of the unit that manufactures AR 15s? Are they going to support certain legislation, such as background checks, age limits etc? Such moves could mitigate risk and some shareholders might decide to retain their holding position.
The seemingly all-powerful NRA is under fire, accusing the companies that have cut ties of “a shameful display of political and civic cowardice”. But it commands huge power over both Republican and Democratic politicians, and even if you put together all the gun control organisations, it would still dwarf them. Virginia legislators, for example, have asked Delta to relocate to another state because it terminated discounts for NRA members.
But what this comes down to is a question of ethics or money. If you can have both, the decision would be easier, but you often can’t. There are three publicly-traded gun manufacturers, amounting to about 10 weighted basis points in the index, so how much difference to performance would divestment make? Gun manufacturers’ share prices fell at the time of the latest shooting, but most have rebounded.
It’s not just manufacturers, though: there is also Walmart, Cabela, and Dick’s Sporting Goods, who each sell a lot of guns. Divesting from Walmart could make a difference but, even though it hasn’t sold assault rifles for years, its shares suffered more than most. Perhaps what we need is either a redefinition of fiduciary duty, or another phrase entirely. So, one describes beneficiaries’ financial interests and another their moral interests. Though then, of course there will be arguments of what morality means.
On the other hand, you can kill a lot more people with an F-15 fighter plane than with an AR 15, so why stop here?