Corporate Governance

The SEC, Rule 14a-8, and Shareholder Approval of the Auditor: Time for a Change in Policy (The Unexplained Shift) (Part 4)

By J Robert Brown Jr.

It seemed clear, therefore, that proposals seeking to induce companies to submit the auditor to shareholders for approval could not be deleted under the "ordinary business" exclusion.  The exclusive authority of the board in this area was not ordinary.  Indeed, the "ordinary" practice was to allow for shareholder approval. 

Things changed, however, in the new millennium, without explanation.  In 2004, shareholders submitted a series of proposals that requested boards adopt a policy providing that 'the selection of the Company's independent auditor be submitted to the Company's shareholders for their ratification at the Company's annual meeting."  A number of companies asked the staff for permission to omit the proposals.  The staff unexpectedly agreed, without analysis, determining that the proposals fit within the 'ordinary business' exclusion.  By 2005, companies routinely received no action relief authorizing the exclusion of these sorts of proposals. 

A year later, shareholders tried to bring the matter to with the Commission.  The New York City Pension Fund submitted a proposal to Rite Aid Corporation seeking ratification authority.  The staff authorized the exclusion without opinion. The Fund appealed, tactfully noting that the earlier letters had allowed for the exclusion of auditor ratification proposals 'without the benefit of any proponent opposition.'  The Fund also stressed the public importance of shareholder approval, something evidenced by the adoption of SOX.  Rite Aid pointed to the decision by Congress in SOX to give selection authority not to shareholders but to the independent directors on the audit committee. Without explanation, the staff denied the appeal and reaffirmed that auditor selection fell within the 'ordinary business' exclusion.

The last post will provide some thoughts on this issue.  The topic is developed more fully in Essay: The Politicization of Corporate Governance: Bureaucratic Discretion, the SEC, and Shareholder Ratification of Auditors.?

Full post as published by The Race to the Bottom on March 25, 2011 (boomark / email).