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CVS-Caremark Board Under Fire

A proxy adviser renews its attack.

Critics of the controversial


(CVS) - Get CVS Health Corporation Report

merger have taken aim at two company directors.

The CtW Investment Group, an organization tied to union-affiliated pension funds, is urging investors to withhold votes for Roger Headrick and Lance Piccolo at CVS' annual meeting next month. Both are legacy Caremark directors tainted by past stock option grants.

CVS failed to return a phone call from

on Monday.

Headrick ranked as Caremark's lead independent director, chairing the audit committee and serving on the compensation committee, during his tenure at the company. If elected, Headrick will continue to chair the audit committee at the combined CVS-Caremark.

But CtW claims that Headrick has failed shareholders on a number of fronts already and should be removed from the company's board. For starters, CtW notes, Headrick took off -- despite his prominent role at Caremark -- during a critical period in the company's history.

"As lead independent director since 2004, Mr. Headrick was best positioned to assert the kind of independent board leadership lacking in the merger negotiations with CVS," CtW insists. But "he was in New Zealand when Caremark was the subject of an escalating bidding war and had been there for an undisclosed period of time."

In contrast, CtW claims, Headrick was readily available to approve -- and pocket -- well-timed stock options in the past. Specifically, CtW notes, Headrick scored options priced at or near Caremark's lowest closing price during three separate years.

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Critics doubt that he was just lucky.

"In effect, he hit the jackpot three times -- all while on the compensation committee," CtW declares. "Erik Lie, the University of Iowa professor whose research is largely responsible for uncovering widespread backdating at U.S. public companies, submitted an affidavit ... which statistically demonstrates that there is less than a 1% chance that certain Caremark options were issued on the date claimed."

CtW holds Headrick and Piccolo especially responsible. The firm says that both directors served on the audit committee when Caremark's board approved questionable stock option grants and that they even collected some of those options themselves.

Indeed, CtW notes, Piccolo scored a huge grant -- of 400,000 options -- on one of those dates alone. Moreover, the firm says, Piccolo was collecting generous consulting fees on the side. After serving as Caremark's CEO until 1996, the firm explains, Piccolo earned millions of dollars under an extended consulting contract with the company that ended just last year.

Ultimately, CtW portrays Piccolo as a conflicted director who would add no value to CVS-Caremark's board.

"We question whether


former Caremark director is qualified to represent CVS-Caremark shareholders," CtW admits. But certainly, "there is no need for two former Caremark CEOs to serve on the CVS-Caremark board."

CtW sees more reasons to keep Caremark's latest CEO, Mac Crawford, around instead. Crawford currently serves as chairman of the combined company.

Even though Crawford landed the biggest windfall from the merger -- while already ranking as one of the nation's best-paid CEOs -- CtW concedes that he could provide some important guidance right now.

Still, CtW feels that Crawford needs more oversight.

"The experience at Caremark demonstrates that a truly independent board will be required to keep Mr. Crawford in check," the firm states. "Thus, the continued board service of directors who failed to exercise independent oversight of Mr. Crawford while at Caremark is just not justified."