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What’s Market? Are Non-Binding Auditor Ratification Votes “Required?”

    Client Alerts
  • April 25, 2012

At annual meetings across the country this Spring, an overwhelming majority of public companies will request a non-binding vote to ratify the company’s selection of its independent public accounting firm. Although the vote is not binding and not required by statute or rule, this item of business has been a mainstay on public company annual meeting agendas for many decades. Have you ever wondered why?

It is well settled that submitting a company’s selection of its auditor to shareholders for ratification is a “best practice.” A recent study by the American Accounting Association found that when public companies give their shareholders a vote on the selection of an external auditing firm, they are less likely to make a financial restatement than those that don’t. The difference is dramatic – firms that forego shareholder ratification are nearly 75% more likely than others to have to issue restatements serious enough to have a negative effect on the company’s stock price. To be fair, this is likely more a case of correlation than causation, but the results are hard to ignore.

The less obvious, but increasingly important, rationale stems from NYSE and NASDAQ rules. Beginning in 2010, exchange rules were revised to allow brokers to vote shares without their customers’ direction only for “routine” matters when the proposal is supported by management, but were prohibited from voting for “non-routine” matters. The election of directors was specifically defined as non-routine. The NYSE rules, particularly, were tightened further in January 2012, when the following matters were designated as non-routine: proposals to de-stagger the board of directors, majority voting in the election of directors, eliminating supermajority voting requirements, providing for the use of consents, providing rights to call a special meeting and certain types of anti-takeover provision overrides. Auditor ratification, however, will continue to be a routine matter for which brokers may vote uninstructed shares.

Because both exchanges preclude brokers from voting uninstructed shares for matters that were previously considered routine, their votes cannot count towards a quorum at meetings limited to routine matters. Therefore, companies risk not receiving a quorum for their annual meetings unless a routine matter is included on the ballot (e.g., auditor ratification). In today’s climate where retail voter participation has fallen to all-time low levels, including a routine matter on the ballot to enable the company to count these broker-votes towards the quorum is all but required.

Annual meeting agendas have become more congested due to Say on Pay and Say on Frequency votes. Nevertheless, public companies are left with no choice but to continue to submit its auditor selection to its shareholders for ratification because it is a best practice and, quite frankly, a quorum may not be obtained otherwise.


Additional Articles from the Spring 2012 Public Company Forum:


Doug's Note: The JOBS Act

"Don't Pay Me, or Else!": Extorted or Culturally Compelled Payments to Foreign Officials

What’s New With Stock Buybacks?

Say on Pay: We Got an “A+.” Should We Still Worry?

Dodd-Frank Act Progress Report: Spring 2012