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
"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
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
"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.
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?"
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
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
"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."
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.