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Sturm, Ruger Targeted by Activists Again

By Rich Duprey – Apr 20, 2019 at 10:45AM

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A shareholder resolution asserts that the gunmaker is dismissive of concerns and has unseemly ties to a gun-rights group.

America's largest gunmaker, Sturm, Ruger (RGR 0.38%) is once again the target of activist investors who want to express dissatisfaction with management's response to last year's shareholder ballot initiative that required Ruger to report on the risks facing its business.

A second bite at the apple

Activists won a shareholder proposal demanding that Ruger monitor violent crimes using its firearms, examine so-called smart gun technology, and assess the risks gun violence may be causing to both Ruger's reputation and its finances.

Pistol chained down by padlock

Image source: Getty Images.

Because the shareholders' meeting occurred shortly after the February 2018 Parkland school shooting in Florida and emotions were still raw, the activists were able to secure almost 70% of the votes cast in favor of the resolution. A similar initiative was also successful later in the year at Ruger peer American Outdoor Brands (SWBI -0.09%), the owner of Smith & Wesson firearms.

Ruger's report was issued in February and detailed the problems inherent in monitoring criminal events, the severe limitations smart gun technology possesses, and the nominal risks facing it above and beyond what Ruger is already required to assess.

American Outdoor's report reached similar conclusions, though it hired an independent third-party organization to scour news reports, which found that stories about gun violence were "largely an unbranded conversation," and don't tend to center around a single manufacturer. 

A targeted response

The activists did not like Ruger's response, leading Majority Action -- a group that bills itself as a platform that "empowers individuals and groups to organize for progressive causes," along with the Interfaith Center on Corporate Responsibility (ICCR), one of the groups behind last year's proxy fight -- to attempt to penalize Ruger chairman Michael Jacobi and director Sandra Froman. Froman also serves as a director of the National Rifle Association (NRA), where she has held several executive positions, including president between 2005 and 2007.

The activist organizations are calling for shareholders to withhold their votes from the nominees at the May 8 annual meeting, a gesture that would be mostly symbolic.

Because the nominees are running unopposed and are elected by a plurality, meaning they would need just one vote in favor to be seated, a vote "against" a nominee is seen as wasted. While voting to "withhold" a vote would have the same effect, the lack of support could influence board decisions in the future, though that seems unlikely with Sturm, Ruger.

Partnership with NRA called into question

The activists might not receive the same support they did last time, though. While institutional investors like BlackRock and corporate governance outfits Institutional Shareholder Services and Glass Lewis supported the original measure, this time the activists' proposal is driven in part by animus against the NRA, which they contend actually works at times against the interests of the firearms industry.

The proposal points to the time Smith & Wesson agreed to work with then-President Bill Clinton on developing smart gun technology and almost went bankrupt because of the backlash it received from gun owners, a frenzy purportedly whipped up by the NRA.

It also posits an unhealthy relationship between Ruger and the organization due to contracts it has with the NRA for promotional and advertising activities. Ruger paid the group almost $10 million over the past three years, though the majority of the total was paid in 2016.

The activists also say a conflict exists because Froman serves on the NRA's board of directors. Despite declining sales and profitability for two consecutive years, along with total shareholder returns dropping nearly 13% since the 2016 presidential election, Sturm, Ruger may be working against the interests of shareholders because it is beholden to the NRA, the ICCR says.

Relitigating the issue is wasteful

The divisive nature of the gun control debate may mean there will never be common ground between those who believe in the right to private ownership of firearms and those who seek to limit or ban it. But requiring firearms manufacturers to repeatedly respond to such shareholder challenges is ultimately wasteful of the company's resources and counterproductive.

Although Ruger management didn't agree with conducting the research report, the good-faith effort that went into compiling it for shareholders and the comprehensive nature of its findings may make the latest initiative fall flat. The gunmaker fulfilled its fiduciary responsibilities to its shareholders, and seeking to punish its officers because of disagreement over the findings and the professional affiliations of its directors may not get the same sort of broad-based support this time around.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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