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The Carpenter Funds addressed two important topics of activism that have been important themes for the Funds in the past decade: majority voting in director elections and audit firm independence. In the early 2000’s, both issues were central to the Funds’ advocacy, as numerous accounting scandals highlighted serious shortcomings in the company-audit firm relationship and the need for governance changes to strengthen board accountability.
The Funds’ majority vote advocacy continued nearly a decade of work on the issue designed to improve board composition and accountability. A majority vote standard requires that board nominees in uncontested director elections receive a majority of the votes cast in order to be elected or re-elected. The Funds’ auditor rotation and auditor independence report proposals addressed the important auditor independence issue.
A decade ago, a key threat to audit firm independence was the high level of non-audit fees that audit firms were earning from their corporate audit clients. Concerned that disproportionately high non-audit fees were threats to audit firm independence, the Funds sponsored proposals to limit the level of non-audit and consulting fees that a company could pay its audit firm. Today, long-tenured corporation – audit firm relationships that commonly span decades challenge audit firm independence.
The 2012 proxy season was the ninth proxy season in which the Carpenter Funds were the leading advocate for majority voting in director elections. Since the 2003 proxy season, the Carpenter Funds have submitted hundreds of majority vote proposals and successfully advocated for the adoption of the vote standard at nearly a 500 large-cap corporations.
The 2012 Majority Vote Target List included companies that have persistently resisted the adoption of a majority vote standard. As the 2012 proxy season ended, 83% of the S&P 500 Index of companies had a majority vote standard.
Carpenter Funds submitted 20 majority vote proposals, with 9 of the proposals being settled for agreements to adopt a majority vote standard, while 8 of the proposals were voted on at company annual meetings. The proposals received an average support level of 52.6% with 3 of the proposals receiving majority vote support.
Two separate proposals, an Audit Firm Rotation Proposal, and an Audit Firm Independence Report Proposal that sought enhanced disclosure on the audit firm–corporate client relationship, were developed to address concerns about audit firm independence at large cap companies.
The companies targeted for the proposals (Audit Firm Rotation and Audit Firm Independence Report Proposals Target Lists) were those that had long-tenured relationships with their audit companies and provided little disclosure on that relationship. The non-binding Audit Firm Rotation Proposal called for an audit firm rotation requirement after seven years of engagement. At many large companies, it is not uncommon to find an audit firm–corporate client relationship that spans decades. The Audit Firm Independence Report Proposal outlined a set of proxy statement disclosures, including the year of the initial engagement of the audit firm and the aggregate fees paid the audit firm since that date.
The full set of suggested disclosures was designed to provide shareholders a level of disclosure that would enable them to assess an audit committee’s efforts to protect auditor independence.
The two auditor independence proposals prompted considerable corporate opposition. The initial recipients of the Audit Firm Rotation Proposal quickly sought no-action letter relief from the U.S. Securities and Exchange Commission (SEC).
(A SEC staff no-action letter indicates to a company that the SEC will not proceed against the company if it chooses to omit the particular shareholder proposal from its proxy materials for an upcoming annual meeting of shareholders.) The seven companies that sought no-action relief successfully argued to the SEC Division of Corporation Finance Staff that the rotation proposal represented “ordinary business” and thus was not appropriate for a shareholder vote. (See Deere & Company, November 18, 2011).
Likewise, several companies challenged the Audit Firm Independence Report Proposal at the SEC and received no-action letters. (See Dell Inc., May 3, 2012).
Rather than seek SEC no-action relief, several companies, including H.J. Heinz, The J. M. Smucker Company, Legg Mason, Medtronic, Inc., and Supervalu Corporation, engaged in constructive dialogue on the Independence Report Proposal.
The outcome of those discussions was an agreement that the companies would provide shareholders additional audit firm independence disclosure in the audit firm ratification vote narrative of their proxy statements. The agreed upon Auditor Independence Statement, included the following disclosures thatprovide shareholders insight into the efforts of the respective companies’ board audit committees to protect audit firm independence: