June 13, 2012
How Does Advisory Nature of Auditor Ratification Jibe with Say-on-Pay?
– Broc Romanek, CompensationStandards.com
On TheCorporateCounsel.net’s “Q&A Forum” last year, Dave answered a question (#6407) that I thought was worth repeating:
Question: While the say-on-pay and say-on-frequency proposals are now being described as advisory, why aren’t companies doing the same thing re the auditor ratification proposal? This proposal really is also advisory as most companies describe in the proposal that if shareholders do not ratify the appointment the Audit Committee will consider that fact in determining whether to select new auditors (and vice versa – if the selection is ratified e AC may nonetheless determine to select new auditors).
This issue is especially pronounced when companies include disclosure in Q&A or another section at the beginning of the proxy statement regarding the various proposals included in the proxy statement and describe the say on pay and say on frequency as advisory but not auditor ratification. This implies to me that auditor ratification must then be considered binding by these companies. My guess is that is not really the case.
If you ask shareholders to ratify the selection and ratification is not approved by a majority of the shares, it doesn’t mean the audit committee has to select new auditors (i.e., the auditor’s selection is not conditioned on shareholder ratification). Given this, isn’t it necessarily advisory even if “advisory” is not in the title of the proposal? Any views?
Dave’s Answer: I agree, this is a good point, it is in reality an advisory vote cast as ratification of the auditor. I think that leads to the language included in the proposal which describes the advisory nature in that the Audit Committee may determine that it is not advisable and in the best interests of the stockholders to replace the auditor if the ratification is not obtained. I guess I wouldn’t go as far to say that if the proposal language is adequate as to the meaning of the vote, you necessarily would need to indicate in the title of the proposal or otherwise that the vote is advisory.