HealthSouth Agrees to Board Makeover

December 2, 2003 ( - The embattled HealthSouth Corp. has agreed to replace five longtime directors who were on the board when the health-care giant became entangled in a huge accounting fraud.

The changes will be made beginning this month under an agreement to settle a lawsuit filed by the teachers pension system in Louisiana, a major HealthSouth investor, HealthSouth announced. The departing directors are Larry Striplin Jr., Charles Newhall III., C. Sage Givens, George Strong and John Chamberlin. All have been members since at least 1999 and all five will be off the board by August. 31, 2004 the company said.

A lawyer for the $10.5-billion Teachers Retirement System of Louisiana said the fund’s goal was to remove the directors who presided over HealthSouth’s plunge into scandal. “Regime change was desperately needed at HealthSouth,” Stuart Grant, a partner in Wilmington, Delaware-based Grant & Eisenhofer, the law firm that represented the fund, told the Associated Press (see  Louisiana Retirement System Sticks HealthSouth With Lawsuit ).

Interim chairman Joel Gordon will remain along with three directors who joined the board after the company’s finances began unraveling: interim CEO Robert May, Jon Hanson and Lee Hillman. Fired chief executive Richard Scrushy has refused the board’s call to resign and remains a director in name only.

In a statement, HealthSouth said a search for four new directors will begin immediately. The board will shrink in size from 10 people to nine, and the Louisiana pension system and as many as three major institutional investors will have a say in the search for replacements. Under the settlement, the company agreed to hold an annual meeting within 60 days of its next release of audited financial statements. HealthSouth canceled its last shareholders meeting as the scandal broke.

Scrushy is free on $10 million bond after being indicted on charges of directing a fraud that allegedly resulted in HealthSouth earnings being overstated by some $2.7 billion to meet Wall Street forecasts (see .

Scrushy pleaded not guilty, but 15 other former executives have pleaded guilty to charges of helping in the scam. Prosecutors have said HealthSouth is cooperating with the investigation. Based in Birmingham, Alabama, HealthSouth is the largest US provider of outpatient surgery, diagnostic imaging and rehabilitation services. The company has almost 1,700 sites in all 50 states and abroad.