More Shareholder Say on Auditors

An unrelated regulation has prompted more companies to give their investors a vote on accounting firms.

Shareholders have weighed in on companies’ choices for outside accounting firms in higher numbers this year. The uptick comes after a Securities and Exchange Commission rule went into effect that had nothing to do with how companies pick which audit firms will review their financials every year.

Rather, the rule — which became effective for all 2010 shareholder meetings — prohibits brokers from voting in director elections without their customers’ direction. After the SEC approved the rule last summer, lawyers and proxy advisory firms predicted that companies would see a lower retail-vote turnout, prompting them to add routine matters to their ballots to reach a quorum. (Brokers can still cast discretionary votes on routine items, such as the ratification of accounting firms.)

“It’s a technicality,” explains Frederick Lipman, a partner at Blank Rome LLP and president of the Association of Audit Committees. “Everyone will have shareholders voting on auditors for this reason [to reach a quorum] alone.” Indeed, during this year’s proxy season, 66% of companies held such a vote, compared with 52.9% in 2009, according to data compiled by corporate-governance advisory firm RiskMetrics Group and shared with CFO.

To be sure, rarely do shareholders ever vote against an accounting firm. For the past three years, just about 99% of the votes have been in support of the auditor-ratification proposals for companies in the Russell 3000 Index that held shareholder meetings between January and mid-March, according to RiskMetrics. “The ratification is not binding, but it can be used by investors to send the message to the company about dissatisfaction with the audit process,” says Carol Bowie, who heads RiskMetrics’s Governance Institute.

The SEC’s decision to eliminate broker discretionary voting in director elections approved a New York Stock Exchange proposal “designed to enhance corporate governance and accountability,” according to an SEC press release. It also was intended to quell long-held criticism that uninstructed broker votes had distorted director elections, as brokers tended to automatically side with management’s wishes. The change put more onus on companies — particularly those with a large retail base — to reach out to their shareholders by encouraging them to participate in upcoming elections, and made it more difficult to reach the minimum number of votes needed for a valid election.

The Sarbanes-Oxley Act gave audit committees the authority to hire and fire external accounting firms, although the decision is largely based on input from company management, including CFOs. Nearly two years ago, a Department of Treasury advisory committee suggested that more companies have their shareholders vote on auditors, as a way to keep audit committees more accountable to their oversight duties.

Another perceived benefit: such an allowance gives shareholders a tool in their back pockets if they suspect problems. “Most shareholders favor [the item] on the ballot,” says Bowie. “They consider it a communication mechanism.”

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