Features | April 3, 2018

What’s the fiduciary duty of index investors when it comes to gun companies?

ImpactAlpha and Rick Alexander
The team at


Guest Author

Rick Alexander

Guns are big business, with lots of investors. Weapons sales in the US last year totaled $12.4 billion, up from $10.3 billion in 2016. It’s the fiduciary duty of the diversified investment manager to look beyond the performance of a handful of weapons companies to how gun sales affect the broader economy.

Take BlackRock. The world’s largest asset manager ($6 trillion) recently noted that its gun investments were all in index funds, widely owned funds that track an index of stocks created by third parties. Think Standard & Poor’s and its S&P 500 Index. BlackRock cannot sell shares of an individual company in the index, even if it is worried about that company’s performance. Their only affirmative option is talking, a process they have initiated with gun makers.

This seems noncontroversial. It is natural that BlackRock, a fiduciary for its investors, would ask gun manufacturers to review their practices after the significant public reaction to February’s deadly school shooting in Parkland, Florida.

And the reaction has been strong. Dick’s Sporting Goods stopped selling assault-style weapons and high-capacity magazines, and said it would no longer sell guns to those under 21. Soon afterward, Walmart matched the age requirement. YouTube, owned by internet giant Google, banned videos that show how to build guns. Citigroup, MetLife, Hertz, Enterprise, Delta and United Airlines and others have distanced themselves from the industry or the National Rifle Association.

Fiduciary duty

But all this corporate action still leaves a fundamental question unanswered: What if the actions that are best for schoolchildren are not the actions that are best for shareholder return? According to the New York Times’ Andrew Ross Sorkin, the answer is clear: Fiduciaries answer only to financial value.

“BlackRock is a fiduciary so it must make a financial case for such changes — showing that taking those steps would turn out to be more profitable in the end. It can’t simply press for such action on moral grounds.”

By this reckoning, BlackRock has a legal obligation to support the companies in selling as many assault rifles as they can, regardless of how many school children die, if this course produces the highest return. It’s the company’s “fiduciary duty.”


Systemic impact

Our financial system is permeated with the idea that shareholders’ interests should be paramount for a corporation. But the idea that investment managers are legally compelled to insist that each separate company in a portfolio to create as much shareholder return as possible is doubly wrong.

First, it’s wrong in the simple factual sense of “incorrect.” All the shares that BlackRock owns in gun makers are held in index funds. The performance of indexed investors is based on how the indexed market performs, not how one company performs.

Index funds should focus on how gun sales gun affect the systems on which all of the companies in the index depend. This is no small point. By 2025, it is estimated that half of the stock market will be held index funds. Even most non-indexed investments are held in diversified portfolios that are largely dependent on overall market returns.

Investors should be asking how much gun violence costs the economy in medical care and lost wages. How much of our educational budget is spent on protection? How is the tourism industry affected? Can gun makers alter these outcomes? The answers will determine the effect of gun sales on the economic, educational, and social systems in which all companies operate.

These metrics — rather than the stock performance of a single company — are much more likely to affect the financial return to a diversified investor. Moreover, investors are people and may be directly affected by systemic costs and risks (or stray bullets). An investment steward — a fiduciary — must think systemically in order to serve the interests of investors, and sometimes that fiduciary can forgo a gain at an individual company to preserve systemic value, and the value of an entire portfolio.

Human investing

This simple, factual error is joined by a second “wrong” — the moral one.

Consider a corporation with reprehensible practices that are legal, systemically neutral, and provide the best return for its shareholders. For instance, a retailer’s use of the cheapest supply chain, knowing it includes facilities like the garment factories in the Rana Plaza building in Bangladesh, which collapsed in April, 2013 and killed more than 1,100.

I cannot believe that we will continue to tolerate an investment regime that imposes a duty on BlackRock to encourage such behavior, even if it offered the best financial return. In the words of Cornell Law Professor Lynn Stout, the law does not reduce investors “to their lowest possible human (or perhaps subhuman) denominator … psychopathically indifferent to others’ welfare.”

BlackRock and other large investment managers, like State Street and Vanguard, should continue to engage portfolio companies on issues that affect our planet, its inhabitants, and future generations. These include weapons sales, but also resource use, carbon emissions, investment in workers, and human rights issues within their supply chains.

In our interconnected world, preserving these systems is the only way for investors to earn a competitive return over the long term. Just as importantly, it is the only way to do business in a civilized society.

Rick Alexander is an expert in corporate governance and the head of legal policy at B Lab.