Thursday, January 24, 2013

A Fantasy: The Disarmament Agenda for Active Investors

 A Fantasy: The Disarmament Agenda for Active Investors

Active institutional investors still reach for the Sullivan principals when it’s time to take decisive action on corporate behavior.  The Sullivan principals pushed institutional investors to divest their holdings in companies doing business in apartheid South Africa.  Thirty years later, institutional investors still tend to invoke divestiture as the remedy when companies engage in behavior they deem inappropriate.

While divestiture was the appropriate response to apartheid, it isn’t the right reaction to firearms.  American institutional investors had little choice in the case of South Africa, since they couldn’t directly engage the South African government.  Widespread divestiture was one of the few ways that investors could put pressure on the government, as U.S. companies bowed to investor demands and ceased doing business in South Africa.
Trying to Graduate (2010)

In the case of firearms, institutional investors have a direct path to influence corporate behavior.  In fact, they follow this path in a number of other situations.  For example, when it comes to executive compensation, the composition of corporate boards, and matters of corporate governance, many public pension plans take an active approach.  In other cases, they hire activist money managers to increase their stake in a company and then directly engage the management and board.  If an issue is important enough to a pension plan, the trustees and investment officers will exercise their prerogatives as investors.

Some institutional investors argue that active intervention in corporate matters is only appropriate in order to maximize the investment return for beneficiaries.  This view is too narrow.  Institutional investors are charged with maximizing the value of the overall portfolio commensurate with an appropriate level of risk.  They’re not simply charged with getting the highest possible return on each and every investment.  It seems to me that effective gun control and registration is entirely consistent with the best interests of the pension beneficiaries.  A reduction in gun violence, even if it crimped the profits of a pension’s firearms holdings, would probably have a small net benefit elsewhere in its portfolio and is a policy worth pursuing.

I realize that this is fantasy, but I’d like to see institutional investors engage with their money managers and the underlying arms manufacturers.  As owners, they ought to insist that companies:

·      Support gun control efforts at the state and federal level.
·      Sponsor amnesty programs that encourage people to turn in unregistered and high capacity weapons to law enforcement.
·      Cease manufacturing assault weapons, high volume clips, silencers, and similar products for sale to civilians.
·      End support of the NRA’s political activities and halt contributions to its PAC.
·      Require all retailers who sell their products to conduct background checks on purchasers, whether those sales take place in stores or gun shows.
·      Back research on the prevention and treatment of gun-related injuries.

In order to advance this agenda or something like it, institutional investors would begin by meeting with their money managers, whether the manager is Cerberus or the manager of one of the publicly owned gun manufacturers, and push them to support this agenda.  When the money managers drag their heels, they would ask for meetings with the management of the arms manufacturers.  Having been rebuffed by management, they would ratchet up the pressure by proposing proxy initiatives and running board slates.

In my dream world, the institutions would also put pressure on their banks.  Big pension plans have sizable ownership in banks and are significant clients for a wide variety of financial products.  As owners and clients, they would compel the banks to cease doing business with arms manufacturers who don’t adopt progressive gun control policies and practices.  In particular, they would pressure the banks to stay away from the Cerberus sales process for Freedom Group.  If potential buyers couldn’t get financing, maybe Cerberus and Freedom Group would sit down with their owners and begin serious discussions.

I know my agenda is far-fetched because only a handful of public pension plans are even willing to consider divesture.  Most other institutional investors, particularly mutual funds, are content to collect their dividends and investment gains from gun manufacturers.  And, what about the schoolteachers and civil servants who are the ultimate beneficiaries of CALSTERS and NYSERS, two pension plans that have announced that they’ll divest?  They’ve they’ve got to hope that another Bushmaster 223, a gun their pension plan helped to manufacturer and sell, doesn’t wind up in their classroom or office building.  Sadly, this scenario isn’t a fantasy.

I want to thank Richard Robbins, the founder of Upper West Side Strategies and a columnist for the Huffington Post, for engaging me in a discussion of these issues.  Mr. Robbins has expressed many similar views on his blog, and is making numerous attempts to bring more attention to this issue.  You can find him at

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