Let's vote for the audit committee.

• Author: HINSEY, JOSEPH, IV
• Position: Brief Article

Not the auditors. That is, if the objective is to provide shareholders closer linkage with the audit process and related financial oversight.

ANOTHER PROXY SEASON is now upon us -- one that will doubtless bear with it another round of mindless solicitations seeking shareholder approval (or ratification) of the outside auditors for the corporation's current fiscal year. Dare I breach polite corporate governance conversation by asking the question: Why do so many corporations clutter up their annual meeting agendas with this meaningless shareholder action?

Some might answer -- and actually believe -- it is done to satisfy a legal requirement. That response would be misguided, for no U.S. corporate statute calls for shareholder action endorsing the auditors. (It is conceivable that a particular corporation's charter or bylaws could contain such a requirement -- but unlikely.) Others might reply that maintaining this ballot referendum is good corporate practice. Before pursuing that concept let me speculate that, in most cases, the real answer in all likelihood is: "We have always done it."

In the early 1900s, some probably believed that shareholder approval of the outside auditors would somehow relieve board members of their oversight responsibilities. If that were the motivation, the goal went unfulfilled, since the evolving principles of corporate law never embraced the idea. Underlying the tradition, as carried forward into current practice, is presumably the assumption that giving shareholders the opportunity to approve the outside auditors links them more directly with the audit process.

Illusory objective

In reality, accomplishing that objective is illusory. The unfettered power of decision making lies with the audit committee, which either selects the auditors or recommends their appointment to the full board; the shareholders' vote is a pro forma gesture bereft of actual consequence. The outside auditors named in the proxy statement are going to perform the forthcoming audit, even if the shareholders vote them down. As a matter of good corporate governance, the outside auditors' selection is properly the sole responsibility of the audit committee and their informed judgment as to that selection must be final.

But if the objective is to provide shareholders -- in particular, the proactive institutional investors -- closer linkage with the audit process and related financial oversight, why not let them register their approval of the...