An independent review team has found major problems with a stock option program that a large managed care company used to compensate executives.
The board of UnitedHealth Group Inc., Minnetonka, Minn., has responded to the report by announcing that Dr. William McGuire, an executive who in just 15 years built the company into one of the United States’ biggest health insurers, already has given up his seat on the company’s board and his post as chairman.
McGuire will leave the company completely on or before Dec. 1, but he will continue to be chief executive officer until he leaves to assist in an orderly transition to new leadership, the board says.
“The company is engaged in discussions with Dr. McGuire concerning the terms of his departure from the company,” the UnitedHealth board says.
The board notes in the announcement of McGuire’s departure that revenue increased to $70 billion per year, from $600 million, under McGuire’s leadership, and that the stock prices has increased 8,500% since he started running the company.
The UnitedHealth board also says the company probably will delay filing of its Form 10-Q quarterly financial report with the U.S. Securities and Exchange Commission for the third quarter to incorporate the option program report findings in the quarterly report.
“The company has not yet determined whether any restatements of previously filed financial statements will be required,” the UnitedHealth board says.
The UnitedHealth board hired lawyers at Wilmer Cutler Pickering Hale and Dorr L.L.P., Boston, in April to investigate press reports suggesting that the company might have inflated executive compensation by backdating stock option grants.
The lawyers reviewed all living individuals who served on the UnitedHealth board from 1994 to 2006 and many boxes of documents.
The measurement dates used by the company for most of the option grants issued to key officers and other employees under review “were incorrect, and many of the option grants were likely backdated,” the review team concludes in its report.
McGuire said he did not select the dates for option grants with the benefit of hindsight, and Hemsley played a more limited role in the option granting process, the team writes in its report.
McGuire says the grant dates typically coincided with a memorandum reflecting that some process was under way concerning a grant, or with a phone call, meeting or discussion with at least one member of the compensation committee, the team writes.
“On or around many of the grant dates, there is evidence of phone calls or communications involving Dr. McGuire and a member of the compensation committee,” the team writes. “The existence of these events is cited by Dr. McGuire as support for each of the grant dates. While Dr. McGuire acknowledges that it is now clear that all of the appropriate, formal, corporate actions necessary to authorize a grant were not taken on the grant date, in his view the grant dates were selected without the benefit of hindsight.”
But document of the documents and e-mails seem to clash with McGuire’s position, and, out of 29 grants reviewed, “there are relatively few instances in which there is either direct or circumstantial evidence to establish that a grant date was selected on that particular day,” the team writes. “The first written mention of either the grant date or the corresponding price often appears weeks after the grant date.”
Statistical analysis shows that the “option grant dates generally corresponded to prices at or near the lowest price for the quarter or year,” the review team writes.
The review team also questions certain aspects of McGuire’s relationship with William Spears, a UnitedHealth board member, noting that Spears, who negotiated an employment agreement for the board with McGuire in 1999, served as a trustee for 2 trusts for the benefit of McGuire’s children.
During the period reviewed, United Health “lacked appropriate systems to ensure adequate communications among the accounting, legal and HR departments pertaining to the option grant process,” the review team writes. “Without such controls, information needed to determine an accurate measurement date was not provided to the accounting department.”
In addition, “the legal department failed to prepare adequate minutes of meetings of the board of directors, the compensation committee and the ad hoc committee,” the review team contends. The minutes and other board materials rarely give detailed information about stock option grant discussions, the team writes.
UnitedHealth financial filings stated that the company did not need to recognize compensation expense related to option grants, but “in light of our findings above, the disclosures with respect to stock option practices and related accounting were not accurate in certain respects,” the review team writes, adding that the filings may need to be corrected.
In addition to announcing the departure of McGuire, the UnitedHealth board has announced many other executive and policy changes related to the release of the independent review team report.
Spears is leaving the board, and Richard Burke, the founding CEO of UnitedHealth and a director since 1977, is now the company’s chairman, the UnitedHealth board says.
Dr. Stephen Hemsley, who has been UnitedHealth’s president and chief operating officer since 1999, will succeed McGuire as CEO, the UnitedHealth board says.
David Lubben, the company’s general counsel and secretary, has retired from those posts, and the company will be dividing his job into separate chief legal officer and secretary positions.
Under the new system “the sole responsibility of the secretary will be to support the activities of the board and of its committees, including ensuring that the board’s activities and recordkeeping are in line with corporate best practices,” the UnitedHealth board says.
UnitedHealth also will add 5 independent directors to its board over the next 3 years, the company says.
McGuire, Hemsley and most other UnitedHealth senior executives have voluntarily agreed to reprice the options they have received to eliminate “any possible financial benefit from options dating issues” identified in the independent review team’s report.
The board is requiring all audit committee members to be financial experts; limiting the number of boards on which directors may serve; reducing board compensation by 40%; discontinuing equity awards to the CEO, president and some other senior executives; and eliminating “certain perquisites including life insurance and disability premium payments not generally available to other employees and company-funded post-retirement health insurance.”
The board says it also plans to strengthen controls over stock options and other equity awards by eliminating all delegated authority to management to make equity awards and by requiring that broad based equity awards to the company’s executives and employees occur annually and be approved at the board meeting that generally coincides with the company’s annual meeting.
A link to the Wilmer Cutler report is on the Web at Document Link