So, You Want to Be A Public Company

Feb 11, 2019

For many entrepreneurs the idea of building their dream into a viable business is only one step in their career track. Their ultimate goal is a public company -a gargantuan entity, complete with deep pockets, teams of experts to throw at ideas once designated to the “later” section of your (single) work bench. A smoothly functioning machine with experts in virtually all areas of business, all dedicated to the corporate goal.

Hate to burst your bubble, but I’ve played on both fields, and I’ll take private enterprise anytime.

Granted, being a public company does open additional access to capital, but it also puts you into a position you might not have considered. The officers of a public corporation each have one job, but many bosses.

Every shareholder, to a certain extent, has certain “inalienable rights” - including the right to hector you endlessly when they disagree with any of your decisions- even ones that make them money.

On Friday (February 8, 2019) two of the industry’s major publicly traded companies, Sturm, Ruger & Co. (NYSE: RGR) and American Outdoor Brands Corporation (NYSE: AOBC) released what I’ve joking referred to as “required book reports” in response to shareholder demands that the company, in essence “do something” about gun violence.

On Friday, Ruger (above) and American Outdoor Brands Corporation (below) responded to shareholder resolutions with lengthy responses. Screenshots from Ruger and AOBC websites.

Both were forced into these responses by shareholder resolutions passed at annual stockholder meetings in 2018.

It’s important to clarify something about each of these resolutions: neither were passed by a majority of shareholders. They were passed by “majorities of voting shares” - and there’s a huge difference between the two.

The “majorities of voting shares” are, essentially, institutional investors who hold huge chunks of each company’s shares…think BlackRock, Vanguard and other similarly-sized diversified investment groups.

These companies have investors who have entrusted them with management of significant amounts of money. In the case of teachers unions and other groups, it’s hundreds of millions of dollars.

Occasionally, that forces investment groups to take actions that seem to fly in the face of their primary fiduciary responsibility: to invest client dollars into the best opportunities possible.

This is one of those instances.

The Sisters of the Holy Name of Jesus and Mary of Marylhurst, Oregon, brought these shareholder resolutions to both companies. More accurately, it’s the Interfaith Center on Corporate Responsibility (ICCR) a group of 300-plus religious investors who pushed the issue. The Sisters were only leaders of that vanguard.

They’d already gone to the leadership of Dick’s Sporting Goods (where they found they were, so to speak, “preaching to the choir”) and investment groups BlackRock and Vanguard.

They owned RGR and AOBC shares, qualifying them to propose their resolution to shareholders. Both companies we obligated to present it, despite stating their opposition.

Although neither Vanguard or BlackRock disclosed how they voted (although BlackRock CEO Larry Fink, is a preacher of “conscious capitalism’), that “majority of voting shares” was reached. And the resolution became something neither company could ignore- despite the fact it was non-binding.

Public companies can’t ignore the wishes of shareholders, and “a majority of voting shares” had spoken.

"The proposal requires Ruger to prepare a report. That's it. A report,” Ruger CEO Chris Killoy said following the Ruger vote, “The company will follow through on its obligation to produce that report.”

"What the proposal does not, and cannot do, is to force us to change our business, which is lawful and constitutionally protected. What it does not do, and cannot do, is force us to adopt misguided principles created by groups who do not own guns, know nothing about our business, and frankly would rather see us out of business.”

This is a very lengthy preamble, but it’s important to understand that neither of these companies leaped at the opportunity to assemble a lengthy study of “its activities related to gun safety measures and the mitigation of harm associated with gun products.”

When Killoy issued his statement, he made Ruger’s position quite clear.

American Outdoor Brands Corporation made their position equally clear with a statement they issued concurrently with their own Shareholders Report:

“Today’s report complies with a Resolution that was passed by a small percentage of our shareholders in September. Despite the fact that the Resolution was put forward by parties whose interests were not aligned with those of our customers, or those of our shareholders seeking true risk mitigation and value creation, the report represents our good faith effort and investment of company resources. Its contents demonstrate that our reputation with our customers for protecting their Second Amendment rights, and our ability to manufacture the high-quality firearms they want to purchase, are paramount to sustaining and growing our market share and stockholder value. We maintain our long-standing commitment to developing and manufacturing high-quality firearms that operate in a safe and reliable fashion, while encouraging their safe and lawful use.”

The reports don’t differ in the broadest sense: despite being put forth as shareholder concerns, the resolution passed at either company is, in essence, an attempt by anti-gun groups to influence how two companies run their businesses.

Ruger’s report directly addressed personal choice. Most, it says, who associate with Ruger choose to do so. Employees, the report says, choose to work at Ruger or not. “Investors,” they write, “are free to own our shares, or not.”

It’s a very nice way of saying the same thing I once told a viewer who’d made a point of telling me he didn’t like my new programming of “his favorite” network.

“Vote with your remote,” I told him, “if you don’t like our shows, go watch the ones you do. The ratings will decide if I’m right or not.”

Publicly traded companies can’t be that blunt. So they write “book reports”.

Both responses state some key facts that refute the assertion they need to “do something” about guns:

Today’s firearms are equipped with a wide variety of reliable safety features and devices. From included gun locks to built in devices like manual safeties, grip safeties, firing pin blocks, hammer blocks, trigger safeties and magazine disconnects to loaded chamber indicators and out-of-battery disconnects, firearms today are already equipped with a wide variety of devices to prevent accidents, whether mechanical or due to unauthorized handling.

Both companies are longtime participants in programs designed to prevent gun sales to disqualified individuals. The NSSF’s“Project ChildSafe” for consumers, the ATF’s “Operation Secure Store” for retailers and “Don’t Lie for the Other Guy” for consumers, and the industry-supported “Own It? Respect it. Secure it.” awareness campaign for responsible gun ownership are designed to keep guns out of the hands of anyone but responsible owners. Both companies support mental health initiatives. For decades, both have participated in educational seminars and responsible shooting programs with the NRA, NSSF, and others.

On one point that seems to be a hot-button issue with “gun safety” proponents like the IICR, the two companies were in virtual lock step: smart gun technology simply does not exist.

Ruger’s report offers a simple explanation as to why anti-gun groups don’t appear to understand the inherent challenges of “smart guns”:

Proponents of “smart guns” often ask, “If my smart phone can lock for anyone other than me, why can’t a gun?” This question reflects a misunderstanding of how a conventional firearm operates and oversimplifies a complex issue. In fact, the private sector and federal government have been struggling for over two decades to determine whether modern technology can be integrated into firearms without sacrificing the reliability and durability that owners demand from them.

Today, the idea of smart guns is just that; an idea. Further, as businesses with fiduciary responsibilities to their shareholders, both companies clearly state an obvious business fact: even if the technology existed, there’s no guarantee there’s any consumer demand for it.

Both reports address the fact that making firearms comes with inherent risks, for both manufacturers and investors.

They address that risk in ways that speak to their individual corporate philosophies.

Ruger is a gun company, and looks as the inherent risks associated with firearms as something mitigated via good design, rigorous testing, and a willingness to address issues head-on.

AOBC, although it has that same view as core element of its overall corporate DNA, addresses mitigates some of that risk via diversification. That is further reflected in the rebranding of Smith & Wesson Holding Company into American Outdoor Brands Corporation and acquisition of a variety of companies making things other than guns.

Neither approach is wrong, But reflect different management philosophies.

In their rigorous responses to the IICR resolutions, both companies have gone to great lengths to be responsive to strident shareholders, even when stating fundamental facts the resolutions choose to ignore.

The firearms industry, despite the resolutions insistence that the industry needs more oversight isn’t lacking for regulation. In fact, gun manufacturing is one of the most heavily regulated industries in the United States.

Further, individual firearms ownership, although guaranteed under the Second Amendment, isn’t the come-one, come-all, situation the resolution implies.

The perceived “epidemic” of gun violence is, in Ruger’s explanation, “exacerbated by misinformation disseminated by the media and opponents to the firearms industry”.

And, as Ruger’s report continues, that misinformation “has applied pressure on federal, state, and local legislatures to further regulate the sale and possession of firearms.”

But, as Ruger clearly states, “this (additional regulation) is a risk we disclose in our Form 10-K.” AOBC does as well.

Lawful ownership of firearms, both point out, comes only after a process designed to prevent criminals and the unstable from possessing guns. Both reports advance the industry position that new laws aren’t needed, but laws already on the books should be enforced.

As Ruger’s report puts it, “We believe that the vast majority of stakeholders do not attribute the criminal misuse of a lawfully manufactured and sold firearm to its manufacturer, any more than they believe auto manufacturers are responsible for the criminal misuse of vehicles at the hands of drunk drivers.”

In other words, Ruger (nor AOBC- who addresses the anti-gun bias of the IICR in detail in its report) does not agree with the IICR’s “underlying premise” that law-abiding gun manufacturers are responsible for “gun violence” or that Ruger runs the risk of having their reputation “tarnished” by the criminal misuse of their products.

AOBC goes further, stating: “Most of the public, AOBC’s business partners, banks, customers, and end consumers understand that the manufacturer of a firearm is not responsible in any way for its illegal misuse. There is no connection between AOBC’s brand reputation and the criminal misuse of the firearms manufactured by the Company, and AOBC has not suffered financial or reputational harm from the criminal misuse of its firearms. AOBC’s initial media monitoring discussed earlier in this Report also supports this conclusion.”

In fact, both reports refute “reputational harm” implied by the shareholders by pointing out a simple fact: the strength of both businesses is anchored in their longstanding and unquestioned support of the Second Amendment. Trying to appease non-customers or anti-gun groups wouldn’t just be a waste of time; it would be damaging to the business.

Is there a message inside these reports for the hundreds of thousands of owners of Ruger and AOBC’s Smith & Wesson products?

Absolutely, but it’s a business fact, not some cloaked message of support for a strident group of “shareholders.”

If you are a publicly-traded company, you have some benefits that privately-held companies don’t, but they come with limitations and obligations to shareholders.

Fulfilling obligations to shareholders -even if they represent a tiny minority of total shareholders, and even when they run counter to a company’s overall health - requires a considered response.

Both Ruger and American Outdoor Brands Corporation have offered those considered responses.

They’ve also taken this “opportunity” to state-in detail -their rejection of the positions put forth by those activist shareholders.

AOBC has gone so far as to issue “Principles for Responsible Engagement” -an accompanying document for “Shareholders of AOBC, including equity shareholders, who wish to have a dialogue with the company.” It is, for lack of a better description, a set of principles that must be accepted, not debated, before commencing a meaningful dialog with the company.

It sets AOBC core principles, and those include stewardship of the Second Amendment, acceptance of the broad right of citizens to possess firearms as settled law, and a focus on the “manufacture and distribution of firearms that meet market needs and will not sacrifice shareholder value in pursuit of technologies or products that destroy shareholder value or serve only the purposes of advancing the agendas of third-parties who do not otherwise agree with these Principles.”

These “book reports” represent a perfect example of why I prefer private businesses to publicly owned ones. With nearly a half-century in the business world, I can assure you that my response as a private business owner would be shorter and considerably more “colorful” in its wording, but the take-away would be the same.

—Jim Shepherd

Editor’s Note:

Both reports are available on the company’s websites.

AOBC: under Featured Items “Shareholder Requested Report Feb. 8, 2019