Did we just nudge the limits of shareholder activism?

Opinion: A company's ultimate owners are its shareholders, not heroic chief executives or idealistic directors.

Institutional investor Blackrock started the corporate governance year in a powerful way by sending a high-profile letter to chief executives in January.  

Larry Fink wrote that to “prosper over time, every company must not only deliver financial performance but also show how it makes a positive contribution to society.” These sentiments were lauded in many quarters. Some took it to be a call to shareholder activism. There’s much truth in that.

Not so long after the letter was sent, its aspirations were put to the test. In March, Nikolas Cruz opened fire on his classmates at Parkland School in Florida. Widespread outrage culminated in calls for improved gun controls and spurned a new generation of activists on gun violence. People questioned what “positive contribution to society” there could be from gun manufacturers. And investors looked to Mr Fink for leadership.

BlackRock is the largest shareholder in gun makers Sturm Ruger and American Outdoor Brand, the owner of Smith & Wesson. It's the second-largest shareholder in Vista Outdoor. The gun used in the Parkland School shooting was a Smith & Wesson assault rifle.

BlackRock’s extensive holdings in gun makers came under heavy scrutiny after Parkland. Mr Fink’s January letter created an expectation of bias to action after calling for leadership by investors to ensure “the prosperity and security of their fellow citizens.” 

To date, BlackRock has said it will re-examine its holdings in gun makers and is having "constructive discussions" with the companies. It will also start offering clients the option to invest in funds that exclude firearm manufacturers and retailers. What BlackRock hasn’t done is divest its holdings in gun manufacturers. 

Price of liberty
BlackRock’s continuing holdings will disappoint some who see it as a lack of moral leadership after Parkland. But let’s be clear. Companies such as Smith & Wesson make weapons. They do so legally, profitably and subject to considerable regulation. As long as these conditions are met investors are freely at liberty to park money in these companies. I don’t like it myself but that’s the sometimes uncomfortable price of liberty.

And it’s hard to characterise BlackRock as failing an ethical test here. The January letter expressed socially responsible aspirations which met with wide approval. Its intentions reflect cutting-edge thinking about socially responsible governance. BlackRock has taken steps to address the challenges in front of it without destroying investor value.

Chaotic disclosures and divergent metrics on societal governance are going to get heavy scrutiny in the next few years. But for now, we’ve probably seen some of the real limits of shareholder activism in the BlackRock case. And to go further would have been high risk. 

Any company that strays beyond its corporate purpose treads the fine line between corporate social responsibility and political activism. A company’s ultimate owners are its shareholders, not heroic chief executives or idealistic directors.

If you embark on a campaign of political activism you must be confident there is a shareholder mandate to do so. Irrespective, your fiduciary duty to their best interests is supreme. The BlackRock example is a literal reminder of needing to put your money where your mouth is. A company that positions itself as a social arbiter is going to be looked to for follow through.

Simon Arcus is a governance consultant and former chief executive of the Institute of Directors.

This is supplied content and not commissioned or paid for by NBR.

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