CONAGRA FOODS, INC.
ConAgra Foods, Inc.
One ConAgra Drive
Omaha, Nebraska 68102-5001
TEL: 402-595-5315
Owen C. Johnson
Executive Vice President
Organization and Administration
and Corporate Secretary
September 7, 2005
Via Email
Institutional Shareholder Services
Martha Carter [martha.carter@issproxy.com]
Patrick McGurn [patrick.mcgurn@issproxy.com]
Kathryn Cohen [kathryn.cohen@issproxy.com]
Patricia Tiller [patricia.tiller@issproxy.com]
Rajeev Kumar [rajeev.kumar@issproxy.com]
RE: ConAgra Foods, Inc.
Ladies and Gentlemen:
We appreciated the opportunity to talk to you yesterday and welcome the
opportunity to put forth in writing the matters which we discussed. During our
conversation, we discussed your views that (1) there is a potential for the
appearance of a conflict of interest between the Company's Audit Committee
Chairman and the newly appointed auditor due to his previous employment at KPMG
which ended more than three years ago, and (2) the Company could have disclosed
more information about the process by which potential audit firms were
interviewed and evaluated resulting in the selection of KPMG.
Mr. Butler's Independence
Stephen Butler has been a member of the Company's Audit Committee since May
2003 and Audit Committee Chairman since May 2004. Mr. Butler is a certified
public accountant with extensive auditing experience. He was an employee of KPMG
and its Chairman and CEO until his retirement in June 2002. Mr. Butler ceased to
be an employee of KPMG on the date of his retirement in June 2002. Mr. Butler
has not had an employment relationship with KPMG since that date.
Three specific rules and regulations are applicable to this particular
situation: (1) SEC (S-X regulation 2.01(c)(2) and Rule 10A-3), (2) NYSE (listing
standard 303A.02) [each have specific codified standards for determining the
independence of directors who formerly had relationships with a public company's
independent auditor], and (3) PCAOB standard (interim independence rule 3600T)
for determining auditor independence. Mr. Butler qualifies as independent under
all three of those standards. In addition, a fourth standard is also relevant:
your preliminary proxy analysis indicates that Mr. Butler also qualifies as
independent under your standards.
Audit Committee Independence
ConAgra Foods has four Audit Committee members, all of whom have been
designated as audit committee financial experts pursuant to SEC regulations.
Each is independent, and that fact is not in question.
KPMG Independence
The new engagement partner for KPMG on the ConAgra Foods' account has never
reported to Mr. Butler nor worked directly for him. In fact, the new engagement
partner did not have any prior significant interaction with ConAgra Foods or Mr.
Butler until the recent ConAgra Foods' process for evaluating independent
auditor proposals.
Process of Auditor Selection
The process of auditor selection is something that public companies, as a
matter of good governance, engage in from time to time. Public companies are
currently encouraged to review the selection process more frequently and more
vigorously.
In the ConAgra Foods case, the most senior member of the Audit Committee,
the former Audit Committee Chair Robert Krane, suggested on his retirement in
September 2004 that in due course the Audit Committee should consider evaluating
the field of potential auditors. Mr. Krane noted that while auditors had been
considered from time to time, Deloitte & Touche had served as the Company's
auditors since 1977.
Three months later, Frank Sklarsky joined ConAgra Foods in December 2004 as
Executive Vice President and Chief Financial Officer. John Gehring had recently
become ConAgra Foods' Senior Vice President and Controller in July 2004. Given
the suggestion of retiring Audit Committee Chairman Krane, and the presence of
new financial management, the Company elected to seek proposals from major
accounting firms for the following fiscal year in order to evaluate whether to
retain the current auditor or to make a change. As part of this process,
financial management recommended to the Audit Committee that the process should
seek to enhance the audit team's talent and experience for the fiscal year
beginning in June 2006, including additional national-level resources and
specialized expertise.
The Audit Committee reported the foregoing matters to the board of
directors and recommended an evaluation process which would include the services
and staffing available from the "Big 4" accounting firms. The board of directors
was in favor of the process and thereafter the Audit Committee process began. As
reported by the company in its proxy statement for the annual stockholders
meeting on September 22, 2005, three of the "Big 4" independent auditing firms
were requested to submit proposals for the conduct of the company's fiscal 2006
audit. Proposals were received from Deloitte & Touche LLP, KPMG LLP and
PriceWaterhouseCoopers LLP. A proposal from Ernst & Young was not requested,
since that firm was already providing substantial tax services to the company.
The Company's senior financial management, including its Chief Financial
Officer, the Controller, and the Vice President of Internal Audit held extensive
due diligence sessions with each firm to respond to questions and to review
qualifications, staffing and proposals. There were significant staffing
variations in each of the respective proposals. For example, KPMG and Deloitte
had offices in Omaha; PWC proposed locating a partner in Omaha but not staffing
an office in the city. KPMG was the only firm to propose to have one of its SEC
review partners serve as the lead engagement partner, a partner with significant
packaged food and consumer product company audit experience who would devote
substantially full time on site to the audit. Deloitte and PWC each disclosed
that their respective lead engagement partners would not be as fully dedicated
to the company's audit. As a result, the Company's senior financial management
unanimously recommended KPMG to the Audit Committee as the firm they viewed as
having the best qualifications and expertise.
The Company's Audit Committee conducted its own independent review of the
proposals following financial management's assessment. Deloitte, KPMG and PWC
each made detailed presentations to the Audit Committee in July 2005. Each firm
had access to each of the Audit Committee members. Each accounting firm made on
site presentations for several hours in Omaha and participated in face-to-face
exchanges with the Audit Committee members. After completing its review of the
proposals and conducting reference checks, the Audit Committee deliberated and
based its unanimous selection of KPMG on the comparative qualifications and
commitments of the respective firms. The Audit Committee shared its
observations, as well as the qualifications and commitments of KPMG, with the
entire board of directors. While the selection of the independent auditors was
solely a function of the Audit Committee, the Audit Committee did seek the
guidance and approval of the board of directors. The board endorsed the
selection of KPMG.
ISS Recommendation
ConAgra Foods believes any company would be fortunate to have an Audit
Committee Chairman of the experience and quality of Stephen Butler. Mr. Butler
is a highly qualified Audit Committee Chairman by anyone's standards.
Moreover, on a comparative basis, premised on the face-to-face interviews
and presentations of the three auditing firms which made proposals, ConAgra
Foods also believes that the qualifications and expertise of the new KPMG audit
team exceeded those of the other audit firms which made proposals for the
ConAgra Foods' account.
We do not believe it would be in the best interests of ConAgra Foods'
stockholders to lose the professional skills, expertise and services of Mr.
Butler as Audit Committee Chair or any of the Audit Committee members, or to
lose the professional skills, expertise and services of the new KPMG audit team
as our independent auditors. We believe the loss of Mr. Butler's services or the
loss of KPMG's services would be counterproductive for our stockholders and
contrary to the current objectives of quality corporate governance.
We encourage ISS to take all of these factors into consideration when
recommending its voting positions. ConAgra Foods conducted a full and open
evaluation process in which the three major accounting firms submitted their
best respective proposals. We believe the processes followed by ConAgra Foods in
deciding to seek proposals from auditors, and selecting KPMG as the new auditor,
puts ConAgra Foods in the forefront of good corporate governance.
Yours very truly,
/s/ Owen C. Johnson
OWEN C. JOHNSON
cc: Bruce Rohde
Frank Sklarsky
John Gehring
Dave Hefflinger
Jason Benson