Companies Fire Back at Backdating Report

The Corporate Library takes heat from companies it ties to the stock-options scandal — and decides to add a clarification.

Confronted with errors and criticized for unfairly implicating executives and companies in the stock-options scandal, officials at The Corporate Library are standing behind the firm’s recently issued report, “The Spread of Backdating: A Closer Look at the Boards and Directors Involved,” which purports to reveal that a web of board connections underlies the current wave of backdating misdeeds.

Some of the firms mentioned in the report, which found that companies entrenched in the backdating scandal are likely to share directors, say the governance-research firm’s claim is flawed by incorrectly implying that the board members listed served simultaneously. That would have substantiated The Corporate Library’s theory that “the practice of backdating stock options may have been spread by word of mouth, through the conduit of directors sitting on the boards of more than one company.”

In fact, the tenure of the directors listed in the report varies from terms spent during the dates in question — the late 1990s through 2001 — to terms that began less than two years ago. Moreover, some of the people listed are not directors at all, but officers of their company.

The Corporate Library plans to clarify that not all of the people listed are directors of all the companies listed, the organization’s co-founder Nell Minow wrote in an E-mail sent to the public relations firm representing Novellus Systems, one of the companies mentioned prominently in the report. Ninety-five percent of the people listed in the report are directors, estimates Paul Hodgson, The Corporate Library’s senior research associate, who worked on the report with two other researchers.

Companies that are not being probed by the Securities and Exchange Commission or the Department of Justice told that it is unfair to group them with organizations that have received formal inquiries from the SEC and the DoJ.

“The report seems to suffer from inaccuracies,” Blue Coat Systems spokesman Steve Schick told The Corporate Library includes the technology company in its table of “51 linked scandal companies sorted by director” by showing that Blue Coat CFO Kevin Royal is a director of both his company and Novellus Systems.

In fact, Royal does not serve on either board. He was the CFO at Novellus from 2002 to April 2005, a period after the time that its practices of granting stock options have been questioned, Novellus said in a response to the study that the company E-mailed to on October 25. While Royal joined the company in 1996 and held several financial positions before becoming the finance chief, he never served on the Novellus board. Royal declined to comment.

The authors of The Corporate Library study repeatedly use the word “director” in describing the kinds of individuals that are under discussion. Purporting to cover a group of companies with “a total of 1,440 directors,” they discuss such things as “the level of interconnectedness between directors sitting on the boards of companies implicated in the scandal” and “directors who sit on more than one board in the group.” A column in the report’s tables refers to “Director name.”


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