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Financial Times, October 30, 2006 article

 

 FT Home
 
Activist investors to probe backdating
By Francesco Guerrera in New York

Published: October 30 2006 02:00 | Last updated: October 30 2006 02:00

 

 

Activist investors, including Hermes of the UK, have teamed up to tackle the growing problem of options backdating among US groups, in a move designed to stave off regulatory and shareholder action.

The alliance is part of efforts to encourage more UK-style dialogue between US management and shareholders and avoid the aggressive confrontations and legal actions that characterise American corporate governance battles.

The move comes as 150 US companies have been embroiled in a scandal over the backdating of executives' stock options, which could trigger a regulatory crackdown and lawsuits from shareholders.

Under the programme, to be announced today, the group of investors, which includes New York-based Amalgamated Bank and also the mutual fund Delaware Investments, will invite up to 10 companies to discuss their options policy with shareholders.

The aim is to enable the chosen companies to agree on governance principles and practices aimed at preventing a repeat of the scandals that have plagued the US markets.

"The option backdating situation has all the makings of becoming quite a disruptive process with calls for actions and regulatory moves," said Paul Mann, director of the equity ownership service at Hermes, which provides voting and corporate governance services to investors with about £45bn ($85bn) in assets."Our experience in Europe and the UK is that we can have quite a constructive dialogue with companies."

Governance experts say that unlike the UK, where many large long-term institutional investors talk to management about thorny issues, major shareholders in the US rarely do so.

"In the US, either shareholders don't talk to management at all or go for the entrenched, litigious approach," said a New York-based fund manager.

Company participation will be voluntary and designed to offer managers investors' input into governance matters.

"We want a wide range of companies that can offer wisdom about both what does and what doesn't work, " said Gary Lutin, the independent corporate governance expert who will chair the programme. "I'm sure we'll find a few good examples of enlightened leadership among the 150 companies that have learned something from backdating investigations."

Con Hitchcock, outside counsel for Amalgamated Bank's LongView Funds, which have attacked companies involved in the backdating probes, said that after scandals such as Enron, investors wanted to know more about companies' governance: "Backdating seems to have been a virulent strain at several companies. The idea is to understand how it became so widespread and whose bright idea it was".

 

 

 

 

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