The SEC staff has advised several companies that it will not recommend enforcement action if the company excludes from its proxy materials a shareholder proposal that would require the audit committee to periodically solicit proposals to perform the company’s audit. Consistent with its longstanding view that the selection and engagement of a company's independent auditor is a matter relating to the company's ordinary business operations, the staff permitted these companies to omit a resolution submitted by Qube Investment Management Inc., a Canadian investment advisory firm, that provides: “RESOLVED - That the Board of Directors shall require that the Audit Committee will request proposals for the Audit Engagement no less than every 8 Years.”
Qube reportedly submitted its shareholder proposal to 28 companies. In support of its proposal, Qube stated in its submission to the targeted companies:
“Having the audit committee issue a regular request for proposal on the audit engagement is a compromise to a forced rotation. It continues to empower the audit committee, but asks them to perform a genuine cost/benefit analysis on a potential change in auditor. The audit committee decides if a rotation brings benefit that outweighs its cost. It is our belief that competitive market forces will prevail, audit fees will reduce (or at least hold constant), while valuable governance and oversight will increase.”
In a series of letters issued during January, the SEC staff advised 11 of the companies that it would not oppose exclusion of Qube’s proposal. In a 1998 release discussing the shareholder proposal rule, the SEC explained that it does not require a company to include in its proxy materials shareholder proposals that impinge on ordinary business operations. The Commission explained that “certain tasks are so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight” and that such proposals may to an unacceptable degree seek “to ‘micro-manage’ the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.” The SEC staff has traditionally viewed proposals relating to the selection, retention, and oversight of the auditor as falling into this category and applied that approach to the Qube proposal.
Comment: PCAOB Chairman Doty’s support for mandatory audit firm rotation, coupled with the European Union’s decision to require rotation, are likely to mean that interest in whether audit committees should periodically change – or consider whether to change – auditors will remain active in the United States, notwithstanding the PCAOB’s decision to discontinue its efforts to require rotation. Absent a fundamental change in SEC philosophy, shareholders are not however able to use shareholder proposals as a vehicle to force audit committees to change auditors or solicit tenders. The issue is more likely to be addressed through disclosure. As noted in several prior Updates (see, e.g., December 2015 Update, October-November 2015 Update, and July 2015 Update), there is considerable pressure for expanded audit committee disclosure, either through voluntary initiatives or possible SEC rulemaking. Disclosure concerning the audit committee’s reasoning regarding retention of the auditor and whether or when to consider alternatives is likely to be a more productive approach than forced rotation or proposal requests.