American Outdoor Brands (NASDAQ:SWBI) shareholders rejected a proposal from activist investors to require the gunmaker to take on the "human rights impacts" of its business while also rejecting an increase to CEO James Debney's pay.

It seems shareholders want the company focusing on what it does best: making firearms that are popular with gun owners and enthusiasts. But with the gunmaker stuck in a steep, multi-year decline, investors aren't willing to pay execs more until those leaders prove they can get the job done.

Padlocked handgun.

Image source: Getty Images.

Unlimited liability risk

It was only a year ago that shareholders made the Smith & Wesson firearms owner issue a report on the risks the gunmaker faced, financial and otherwise, due to crimes involving its products. While management objected to the exercise, it eventually issued a detailed report outlining the greater risk it would confront if it strayed from its mission.

That obviously factored into the rejection shareholders handed the activist investors, who covered a lot of the same ground in their new proposal but wanted American Outdoor to frame it in terms of "human rights" -- an amorphous, undefined phrase. Management argued it would open up the company to unlimited legal liability, and a Reuters report said a transcript of the shareholder meeting showed the proposal was not approved, though by what margin was not indicated.

The proxy question failure suggests investors are satisfied the gunmaker knows its business best and wants management to stay focused on it, but they're not willing to pay up for management until said business gets back on track. They also rejected American Outdoor's compensation plan for the CEO and other executives.

An expensive proposition

Debney's base pay was raised 2% in April to almost $750,000. He also received stock awards of $1.2 million -- some 13% less than he received in 2018 -- but he was also granted $1.7 million in incentive bonuses that raised his total compensation to $3.8 million. That's about 70% higher than last year since he got no incentive bonus then.

According to Reuters, both proxy firms Glass Lewis and Institutional Shareholder Services (ISS) opposed the compensation package and recommended investors vote against it. ISS reportedly felt American Outdoor had lowered the bar considerably for the performance goals necessary to trigger the incentive bonuses, which it felt generated "above-target awards."

Institutional investors own nearly three-quarters of the gunmaker's stock. Vanguard is the largest holder with some 4.9 million shares, or 9% of the total, followed by Dimensional Fund Advisors with 4.7 million shares and BlackRock with 4.4 million.

Earlier this year, ISS supported activist investors that targeted directors on Sturm, Ruger's (NYSE:RGR) board, recommending shareholders withhold support from chairman Marc Jacobi and the directors who chair the gunmaker's governance and risk oversight committees. However, it did endorse Sandra Froman, who was opposed by the activists because she serves as a director of the National Rifle Association. Glass Lewis supported all directors.

An advisory opinion

While the proxy firms and shareholders voted against the pay measure, American Outdoor Brands doesn't actually have to follow the outcome. Under the Dodd-Frank Act's say-on-pay provision, investors can offer a nonbinding opinion on compensation, but the company has no obligation to follow through.

It's unknown whether the gunmaker will come up with a new compensation package for its CEO and other named executives, though boards risk being targeted with additional action if they ignore the will of their investors.

The gunmaker is down 53% so far in 2019, and shares are down more than 60% over the last 12 months, as sales and profits have fallen during the longest gun industry slump on record.