Director Ties Linked to Options Scandal

The notion of backdating "may have been spread by word of mouth, through the conduit of directors sitting on the boards of more than one company," The Corporate Library concludes.

Editor’s note:
This story has been corrected and updated to reflect information brought to CFO.com’s attention by Novellus Systems Inc. in an October 25 response to The Corporate Library’s study, “The Spread of Options Backdating.”

A company mired in the options backdating scandal is likely to have something in common with other companies caught in the scandal: a director who sits on the board of at least one other implicated company.

That’s the finding of a new study by The Corporate Library, which concludes 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.”

Since the governance information company’s first study on the subject in June 2006, the number of companies implicated grew from 51 to 120 as of the end of September, the governance consultancy reported. (The Washington Post reported this week that that number had swelled to 135.) Through the end of last month, the number of companies being probed that have director-based links has grown even faster, from 11 to 51, according to the study, “The Spread of Options Backdating.”

Twenty-seven of the 120 companies, in fact, have more than one dual-board director. Just three such companies popped up in the Corporate Library’s earlier study. The director group comprises a total of 49 board members, with 43 sitting on the boards of two implicated companies and six sitting on three of them. In all, the 120 companies have 1,440 directors.

The Securities and Exchange Commission is apparently on the case. In fact, the SEC is investigating whether directors who sit on more than one company board may have spread the practice of backdating stock-option grants, Bloomberg reported.

“We are looking at the interrelationship between directors on boards of companies that may have problems,” Timothy England, an SEC assistant director of enforcement, told the wire service in an interview.

While SEC spokesperson John Nester told CFO.com that the quote was accurate, he downplayed its importance. “This is not unique to backdating,” he said, noting that the commission routinely looks at the interrelationships among boards during its investigations. “We would look to see where else a board member has served,” he added.

The study also found that three companies have six directors who sit on more than one implicated company board—Comverse, Verint Systems, and Ulticom. Comverse is the controlling stockholder of Verint, the Corporate Library notes.

Verisign has five dual-board directors, while Juniper Networks and Xilinx have four. According to the study, two directors in the network of option-scandal boards—William H. Kurtz and Scott G. Kriens—connect the most boards. The Corporate Library’s study incorrectly reported, however, that Kurtz is a member of the board of Novellus Systems Inc.

It also incorrectly reported that Kevin Royal is a member of Novellus’s board. The two errors trigger other errors in the study, which presents tables listing numbers of directors with multiple board memberships that the Corporate Library considers to be implicated in the options-backdating scandal.

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