Audit Committee Bulletin: October 2013
Spotlight on audit committees
Shareholder activism has changed and non-executive directors need to rethink their engagement and communication practices.
The list of “hot” issues likely to provoke investor discontent has extended beyond the familiar topic of executive pay to include issues relating directly to the audit committee.
Percentage of proposals per theme with high dissent
Source: Institutional Shareholder Services 2012 Voting Results Report: Europe.
Pay isn’t the only issue
Executive pay proved the main issue provoking investor concern last year, and pay stories grabbed the headlines. But shareholders flexed their muscles on other issues, too.
Top among them were poor corporate performance, failing transactions, worries about succession planning and company-specific factors.
Shareholders will become increasingly focused on board composition, environmental and social responsibility and audit committee oversight of external auditor, an area where they’ve shown little interest in the past.1
Investor spotlight on audit committees
The European Commission submitted its proposed regulations and directives related to audit policy to the European Parliament in 2012. The text is expected to be voted after due process in 2013 or early 2014. In September 2012, one shareholder group weighed in on the issues with an open letter to the Financial Times. Other groups will make their views known as the reforms take shape.
These activities will likely get more shareholders thinking about audit issues, and questioning more companies about their policies. “We’ve decided that audit is a priority area for us in 2013,” said one investor interviewed for our study. “We’ll let companies know that if they do not meet our requirements, we’ll take action.”
Policy proposition published by the European Commission, the European Parliament, the UK audit regulator and the Dutch Senate suggest that two questions will dominate: for how long has the company used the same audit firm and what other services does the auditor provide?
Dealing with investor concerns
Audit committees can take the following actions to prepare for increased shareholder scrutiny:
- Communicate your approach: review disclosures on "hot" issues, such as executive pay, so that the audit committee's position and reasoning is clear.
- Let investors know where you stand on policy debates: engage in relevant policy debates, for example, about audit policy reform. Be able and willing to explain and justify your current practice to shareholders.
- Get more involved in executive pay: this is the remuneration committee's territory, but the audit committee can review proposed disclosures and provide oversight on key remuneration decisions to ensure they are linked to shareholder value.
- Talk to shareholders: written disclosures can only give shareholders a limited sense of the audit committee's position on complex policy issues. Now could be the time for more face-to-face dialogue.
- Enhance audit committee reporting: Include more information on the audit process, the audit committee's interactions with the CFO and internal audit and its oversight of risk governance.2
1. Proxy season 2013 preview: InSights on topics of investor focus and expectations of engagement, EY, 2013.
Questions for the audit committee to consider:
- How might audit committee reports change to give a better explanation of the audit committee's role, work and oversight of the external auditor?
- Is your company's stance on proposed audit reform well known? Is it persuasive? Has your audit committee commented directly?
- Is the audit committee formally involved in the review of remuneration metrics and disclosures?
- How frequently do audit committee representatives engage with shareholders? Has the frequency changed in recent years? How should they prepare for the aengagement?