Financing Firearms

Guns, banks and shareholder democracy

Jun 03, 2022

I have attempted on several occasions to write about the increasing role of social issues in the corporate governance process, but have never found quite the right angle. Until now. Last week’s school shooting in Uvalde demonstrates yet again the consequences of our collective failure to address the issue of gun violence in America. But it also raises some interesting questions about the role of business corporations, banks and other financial institutions in addressing controversial social issues as part of the corporate governance and shareholder voting process, and how public authorities should respond.

Should businesses and financial institutions take explicit corporate policy positions on controversial social issues or should they generally attempt to stay out of the fray? In making this determination, how should corporate managements and boards respond to the diverse and often conflicting views of various corporate constituencies, including shareholders, customers and employees? To what extent should “politics” be part of this discussion, implicitly or explicitly? What is the proper role of the state in regulating not only the process but also the content of corporate policymaking, in particular with respect to hot button culture war social issues like guns?

The purpose of today’s post is not to debate the issue of gun violence in America, or attempt to resolve the culture wars, although I have included below links to some interesting articles on these important and timely topics. Rather I would like to explore some of the ways in which banks and other financial institutions (eg asset management firms) have addressed the issue of guns in this country, and how some red state politicians and governments have responded to what they perceive as an increasingly left-leaning social agenda being promoted by (or forced upon) corporate America and the big banks in particular.

For years now, large US financial and non-financial corporations have been pressured by various corporate constituencies—shareholders, employees and customers — to take a stand on a range of social issues including guns, most notably following the 2018 school shooting in Parkland. For various reasons, gun control advocates have concentrated much of their corporate lobbying on the banking industry, and individual banks have responded in different ways. JP Morgan, Citi and BofA have adopted explicit policies limiting their banking activity with certain gun manufacturers and retailers, but have stopped short of terminating all their business with the firearms and ammunitions industry. Wells Fargo on the other hand has taken a somewhat different approach, conspicuously declining to scale back its guns business and continuing actively in its role as “banker to the NRA”.

Each of these banks has no doubt won and lost some amount of customer business as a result of their corporate policies on guns, although the direct financial impact on the banks has likely been modest given the large size of the banks relative to the amount of banking business generated by the firearms industry. But the policy position which these banks have taken on guns has now become part of their corporate branding and culture, which is likely more important to them than the money they might have made or lost by doing or not doing business with the gun industry or particular firms.

This diversity of corporate policies is what we should expect to see (and I think should welcome) in a free-market economy with defined constitutional, legal and customary limitations on the power of the state to regulate business and other private sector activity, including corporate speech and political activity. Within certain limits, business corporations and banks should be generally free to decide what business they wish to do and with whom, and what social causes they will or will not support, with as little state interference as possible. And this includes the decision on whether to do business with the firearms industry and specific firms. It is a good thing, I think, that we seem to have JP Morgan on one side of the gun debate and Wells Fargo on the other. This allows shareholders, customers and employees who care fervently about the guns issue to decide freely with whom they wish to do business. And I for one would like to see this process continue to play out in the corporate boardroom and in the market economy with as little state involvement as possible.

This may be a somewhat naive hope, however, and it does not seem to be the direction in which things are now heading, at least not in red state America.

We are all familiar with some of the recently publicized controversies in which large business corporations have taken highly visible public positions on hot button social issues, which were not universally welcomed across the states: Dick’s Sporting Goods (gun retailing nationally), Delta and Coca Cola (voting rights in Georgia), Uber and Lyft (abortion rights in Texas) and Disney (gay rights in Florida). The Disney case in Florida is particularly noteworthy because of the state’s targeted legislative response—and the Governor’s whole hearted embrace of it—which although likely to generate more PR impact than legal consequence, is troubling nonetheless.

And now something similar appears to be happening with JP Morgan and other big banks in Texas on the issue of firearms financing.

Last year, Texas adopted S.B. 19, a law which prohibits banks from doing business with the State of Texas unless the bank can certify that it does not “discriminate” against the firearms industry. The term “discriminate” is defined somewhat narrowly in the statute and allows banks to decline business with individual firearms firms as long as that decision is not based “solely” on the customer’s status as a firearms firm, a fine distinction that may turn out to have less significance in practice than it does in the statutory language. Banks which fail to certify that they do not ‘discriminate’ against the firearms industry are ineligible for state-awarded banking business, and banks which are determined to have provided false certifications may be criminally prosecuted after the fact. And of course state officials responsible for awarding banking business can as a practical matter decline to give mandates to banks they consider too ‘liberal’ on guns (or other hot button social issues), regardless of the banks’ legal compliance with the provisions of SB 19.

According to the author of SB 19, this law was adopted because “large banks and other financial institutions in our country have quietly enacted policies to restrict gun sales and exert pressure on the firearm industry. These institutions hold our money and attempt to use financial pressure to infringe upon our Second Amendment rights. This is unacceptable…..This bill will ensure that any company in Texas with a policy that attempts to restrict gun or ammunition sales will not be allowed to benefit from tax dollars through state contracts.”

Texas is the first state to adopt such a Firearms Nondiscrimination (FIND) law, but other states are considering adopting their own FIND laws and may well extend this legislative approach to other culture war social issues beyond guns. (Next up, abortion rights.) Indeed, what is happening now with SB 19 in Texas seems to be only one part of a broader organized political attack on the private sector corporate governance process and policy outcomes, led by prominent red state Republicans including several individuals preparing to run for President.

Last week, the Wall Street Journal published a guest editorial by Mike Pence, “Republicans Can Stop ESG Political Bias”, in which former VP Pence claims that recent corporate policy decisions on social issues—what he calls “woke capitalism”— have been “entirely manufactured by a handful of very large and powerful Wall Street financiers promoting left-wing environmental, social and governance goals (ESG), and ignoring the interests of businesses and their employees”. In response, Pence encouraged the Republican Party—which historically considered itself the pro-business and free markets party— to accelerate its efforts to employ the coercive power of the state to reverse the outcome of shareholder votes on social issues which they find too “woke”.

The impact of ESG activists in the corporate boardroom is a real phenomenon, and some large corporations, banks and financial services firms have indeed been dragged into the culture wars against their will, as Pence asserts. But however one feels about social impact investing and its influence in the corporate boardroom, it stretches credulity to characterize business leaders like Jamie Dimon or Larry Fink as radical lefties out to destroy the free market economy or as corporate leaders who care more about their own left-leaning social or political agendas than the interests of their companies’ customers, employees and shareholders.

In the end Texas SB 19 (like the Disney law in Florida) may well turn out to be a big nothing burger, passed primarily for partisan political PR reasons with little practical impact on business and banking, or gun ownership in Texas for that matter. But it is still troubling, I think, that “conservative” politicians like Mike Pence, Ron DeSantis and Greg Abbott seem so eager to enlist the coercive power of the state to intervene in private sector decision making and the public company shareholder voting process, at least when the votes don’t go their way.

Mike Pence was right about one thing, however. (Two if you include January 6th.) Some of the social issues addressed by ESG activists, including guns, should ideally be resolved through the political process rather than in the corporate boardroom. But this is not the world we live in, at least not today, and until this changes banks and financial institutions had better get used to the culture war battles being fought on their turf.

Links:

US Gun Deaths (2020), Pew Research

Wells Fargo: Top Banker to the NRA and Gunmakers, LA Times, March 7, 2018.

Banks Tried to Curb Gun Sales; Now Republicans are Trying to Stop Them, NY Times, May 25, 2018.

Guns in the Boardroom, LSE Newsletter, July 2018

Banks and Guns: Social Activism Following the Parkland Shootings, UNC School of Law, June 2019

The Texas Law That Has Banks Saying They Don’t Discriminate Against Guns, NY Times Dealbook, May 28, 2022

Text of Texas SB 19, adopted July 2021

After Another Massacre, Daniels Defense Maintains a Familiar Silence, Washington Post, May 29, 2022

After Uvalde, Texas Democrats Again Push for Gun Control Measures, Texas Tribute, May 30, 2022

After Uvalde, Texas Republicans Dismiss Gun Control and Push for More Armed Teachers and Police in Schools, Texas Tribune, May 24, 2022

Canada Proposes to Freeze Handgun Sales and Buy Back assault Weapons, Washington Post, May 28, 2022