Medical Device Daily

Boston Scientific (Natick, Massachusetts), in an apparent attempt to add more corporate accountability, said last week that it will adopt a majority voting standard for the election of directors in uncontested elections.

Under the new standard, nominees not elected by a majority of votes will be required to tender their resignations.

The medical device maker also said it is recommending that shareholders approve an amendment to the company’s bylaws that would declassify the company’s board and cause each member to be elected annually for a one-year term. Currently, directors are elected to three-year terms.

In another proposed corporate governance reform, the company said it will require its major executives to “significantly invest” in the company

The company will require its CEO to own at least 240,000 shares. Executive VPs must own a minimum of 75,000 shares and senior VPs must obtain at least 20,000 shares. The shares will be worth five times the base salary of the CEO, three times the executive VPs’ salary and one times the base salary of senior VPs.

Executives will be required to reach stock ownership levels within five years from the date the guidelines were adopted or the date they became an executive officer, whichever one is later, the new company guidance said.

“Boston Scientific is committed to constantly improving its corporate governance,” said company Chairman Pete Nicholas in a statement. “As a company, we believe in strong corporate governance practices, which build trust and credibility with investors. We will continue to review our corporate governance practices in an ongoing effort to increase the value of our company and manage our business in the best interests of our shareholders.”

Boston Scientific is recommending shareholders approve its proposals at its annual meeting May 8.

The board will act on the governance committee’s recommendation no later than 90 days following the date of the shareholders’ meeting at which the election occurred and will publicly announce whether it accepted or rejected the resignation offer and the reasoning behind its decision.

The company did not detail the reasoning behind the corporate governance reforms, and did not return Medical Device Daily’s phone calls on the matter.

In another Boston Scientific-related matter, a regulatory filing showed that the company’s president /CEO, Jim Tobin, received total compensation valued at more than $23 million in 2006.

About $15 million of Tobin’s total came from deferred stock that could potentially prove worthless unless his company’s stock price rebounds from a 30% drop last year amid investor concerns about the company’s $27.2 billion acquisition of Guidant (Indianapolis).

Tobin received a $927,000 salary last year, up 3% from 2005, according to a company proxy filed with the Securities and Exchange Commission. He also received an annual cash incentive of $324,100, and $311,822 in other compensation, including $264,265 for private use of company airplanes.

The majority of his 2006 compensation came from restricted stock awards. Tobin potentially stands to receive up to 2 million in performance-based deferred stock units, which carried an estimated value of $15.4 million when they were awarded on Feb. 28, 2006.

Half of those units would be issued at the end of this year if the company’s share price rises to the range of $35 to $75 per share, which appears highly unlikely at this point, and the other half would be issued a year later depending on whether the stock reaches that range.

The company’s stock, which traded as high as $45 three years ago, has stagnated over the past 52 weeks, ranging between $14.43 and $23.96.

The stock began trading in 2006 at a price of $24.56 and ended the year at $17.18. On Friday it closed at $15.77, up 1.94%, on the New York Stock Exchange.

The filing shows Tobin was awarded another 250,000 deferred stock units valued at $6.1 million on Feb. 28 of last year. Half of those shares would vest if Tobin remains at Boston Scientific through the end of this year, with the remainder vesting if he stays on through 2009.

The $324,100 that Boston Scientific’s board approved as an annual cash incentive amounted to 35% of his target payout level of $927,000 for 2006.

Boston Scientific spokesman Paul Donovan told the Associated Press that Tobin “recommended to the board that they give him a reduced bonus, because the company’s performance fell below expectations.”

Other top executives received performance incentive awards at or slightly above their payout targets, including COO Paul LaViolette, who received a bonus of $616,400, above his $561,000 target.

For 2006, Boston Scientific reported a loss of $3.6 billion compared with a profit of $628 million in 2005. Most of last year’s loss resulted from a $4.2 billion charge recorded from the Guidant buy.

The company has been hurt by investor concerns about product recalls and safety warnings involving Guidant’s defibrillators and pacemakers, as well as legal liability for those problems and debt from the Guidant deal.

According to a recent regulatory filing with the SEC, the company reported that lawsuits were piling up over problems with Guidant’s heart rhythm devices, recently growing at a rate of nearly three new cases per day (Medical Device Daily, March 6, 2007).

Boston Scientific currently faces more than 1,100 individual and 75 class-action lawsuits over recalls and safety warnings issued in 2005 and 2006 involving Guidant’s implantable defibrillators and pacemakers, the company said in its 2006 annual report, released late last week.

Although the lawsuits are still pending in various courts, the company said it had set aside $485 million “for legal matters that are probable and estimable” as of Dec. 31, primarily related to products made by Guidant. That’s up from $35 million at the end of 2005, and $384 million at the end of last September.

Additionally, Boston Scientific said that Guidant has been informed of more than 4,500 claims of individuals that “may or may not mature into filed suits.”

Boston Scientific has said the short-term risks of the Guidant buy are offset by the long-term increase in sales it expects from acquiring Guidant’s defibrillators and other medical devices. The company has said it also sought to diversify its product portfolio amid new competitive challenges for the Taxus drug-eluting stent.

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