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October 03, 2003
Walden Asks Companies to Allow Shareowners to Ratify Auditors
    by William Baue

Walden Asset Management wrote letters to 45 companies asking them to allow shareowners to ratify the board's choice of auditor, a procedure that is routine.


Auditors are supposed to verify the accuracy and reliability of corporate accounting and reporting. But when they fall asleep at the wheel, debacles such as the corporate governance scandals that drained investor confidence over the past few years can result. Given the fact that many auditors facilitated malfeasance and some profited from it, shareowners may understandably be concerned about the integrity of the auditors certifying their companies' financial health.

While many US companies allow shareowners to ratify the choice of auditor made by the board's auditing committee, approximately half do not, according to Boston-based socially responsible investment (SRI) firm Walden Asset Management.

"Every company for which I've ever worked or represented when I was in private practice customarily submitted the auditor to a shareholder vote," said Robert Lamm, corporate secretary and director of corporate governance for Computer Associates (ticker: CA), which has allowed such ratification since it went public two decades ago.

"Auditor ratification is one of the most important functions at a company on an annual basis, and shareholders have a right to be heard," Mr. Lamm told SocialFunds.com.

Recently, Walden Senior Vice President Tim Smith sent letters to 45 companies in its portfolio that do not allow shareowners to ratify auditors, asking them to reverse this policy.

"While just a year or two ago such matters might have been considered routine business and not necessary to present to shareowners for confirmation, we believe there has been a significant paradigm shift that necessitates a change in thinking about this traditional practice," wrote Mr. Smith in the letter. "No longer should a company assume the selection of auditors is a routine matter best left to the Audit Committee to decide with no opportunity for input from owners."

The request specifically did not ask for shareholder input on selecting auditors, "a job which is properly the domain of the Audit Committee," Mr. Smith wrote.

Companies contacted include Dover (DOV), Dell (DELL), Emerson Electric (EMR), Fannie Mae (FNM), Intel (INTC), Microsoft (MSFT), and State Street (STT). Responses fall into three categories, according to Mr. Smith.

"A number of companies wrote back honestly to say they hadn't been considering this, and they would bring it to their audit and governance committees to take under consideration," Mr. Smith told SocialFunds.com. "The letter becomes a prompt for the company to review the issue."

Some companies reacted more defensively.

"Our auditing process is independent, we trust our auditing committee, it's just fine the way it is," some of the companies replied, according to Mr. Smith.

Almost a month later, many companies have yet to reply.

"That tells you something, too," said Mr. Smith. "For me, all of these letters are tests on new governance: do companies understand that when shareholders write about a governance matter, they should get an answer?"

"A 'no answer' tells you how company prioritizes responding the shareholders," he added. "This is a very small sample, a snapshot of how companies respond both on this issue and on corporate governance in general."

While the Sarbanes-Oxley Act and proposed changes to listing requirements for the New York Stock Exchange contain many reforms, shareowner ratification of auditors is not one of them.

"This is on no legislative or regulatory bodies' agenda as a reform, so in the short term, it's going to be up to investors to encourage companies to do the right thing," said Mr. Smith. "We're not going to hold our breath and wait for the regulators."

Other fund managers, such as Citizens Funds, agree that shareholder ratification of auditors is a basic right, and are writing companies in their portfolios that do not allow this practice.

"My hope is that they we will get a small groundswell of investor interest that will result in companies changing their behavior and putting their auditors up for ratification." Mr. Smith said.

 

 
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