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Scrushy Faced Revolt By Investors In October

Apr 14, 2003 | FT.COM

Richard Scrushy, founder and chairman of HealthSouth, faced a rebellion of almost half the company's shareholders last October, nearly seven months before he was accused of a $1.4bn accounting fraud at the US hospital operator.

Investors had pressed Mr Scrushy in a conference call about a lack of independence on the board and financial relationships between the group, its executives and companies in which they had an interest.

Providence Capital, a money manager that organised the meeting, said 42 per cent of HealthSouth's shares were represented by almost 160 fund managers. The investor pressure highlights how financial scandals prompted shareholders to take a more active role in improving corporate governance.

The accusations against Mr Scrushy, the company and nine other former employees are the first federal actions to use the Sarbanes-Oxley Act, passed by Congress in the wake of the scandals at Enron and WorldCom. Regulators say the act's greater penalties for white collar crime have encouraged employees to come forward enabling them to expose fraud more quickly.

In the October conference call, the normally domineering Mr Scrushy was forced to listen to a list of shareholder concerns, including an account of executive share sales ahead of bad news.

The shareholders' action was prompted by a profits warning in August. But people on the call said they did not suspect fraud.

In January, the company announced moves to find more outside directors and look at governance. That effort has become crucial as HealthSouth's new management tries to convince creditors the company is worth saving. But one new board member has quit and another possible candidate has delayed his decision to stand for the board.

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