Image: William McGuire
AP file
Even if UnitedHealth repriced its stock, it might not put a dent in the $1.8 billion in exercisable options ex-CEO William McGuire is walking away with.
updated 10/18/2006 2:29:48 PM ET 2006-10-18T18:29:48

William McGuire ran UnitedHealth Group Inc. like his personal fiefdom, allowing the former CEO and his cronies to gain tremendous wealth with few internal controls to stop them.

That’s the startling conclusion of a board-mandated probe of how the health insurance giant timed its stock-option grants over the last decade. But the review headed by former SEC top cop Bill McLucas ends up telling a much more important story: That of a controlling leader who put his personal interests ahead of the welfare of the company’s shareholders.

Such revelations led to McGuire’s “retirement” this week after a 15-year tenure. Quite a convenient way to go, given the damage he has caused the company and its investors.

This certainly wasn’t the send-off that many had expected for McGuire, who joined the company in 1989 and rose to chairman and CEO in 1991. He has been lauded for engineering UnitedHealth’s rise from a regional health insurer into one of the largest managed care companies in the country.

But those achievements have been overshadowed in recent months by allegations that the company manipulated the grant dates of stock options to executives to when the company’s share price was depressed. The backdating of options documented in the report allowed executives to pocket unfair and potentially illegal profits that they never disclosed to shareholders.

More than 135 companies have disclosed in Securities and Exchange Commission filings that they are under government investigation or conducting internal reviews of their option programs, leading to the ouster or resignations of 34 top executives at 17 companies so far.

Minnetonka, Minn.-based UnitedHealth got swept up in the scandal in March when The Wall Street Journal detailed how McGuire had received options on the days the company’s stock price hit yearly lows in 1997, 1999, and 2000, and that other options grants had occurred on low spots in the company’s share price. Statistically, that was nearly impossible unless the options were granted retroactively.

That spurred the company’s board to hire an outside law firm to conduct a review. Its findings, released Sunday, provided a detailed look at how the stock-option grants to McGuire and others were likely manipulated, allowing the former CEO amass exercisable options that had soared to a value of $1.6 billion by the end of 2005.

‘A blank check’
“This shows how a board stopped managing a CEO and just cheered him on,” said Patrick McGurn, executive vice president and special counsel to Institutional Shareholder Services, a proxy advisory firm. “They just wrote McGuire a blank check.”

The probe by McLucas’ law firm, Wilmer Cutler Pickering Hale & Dorr, examined 29 grants made by the company from 1994 through 2006, totaling nearly 450 million split-adjusted shares of common stock. That accounted for about 85 percent of the total number of options issued during that time.

McGuire’s stock options often got a boost in value because they were issued on one day but priced as though they had been issued earlier, when the stock price was lower, the report said. In the 27 grants between 1994 and August 2002 under review, eight were given at the lowest price of the quarter in which they were dated. Some others were close to the lowest price.

Highlighted in the report was a 1999 special grant in which McGuire received one million options. They carried an effective date of Oct. 13, 1999, but they weren’t approved by the board until Nov. 5, 1999 and his employment agreement was not signed until December of that year, the report shows.

That’s not all. Consider that the director heading up the negotiations over the 1999 grant had a financial link to McGuire. William Spears, according to the report, served as a trustee for McGuire’s children’s trusts and an investment manager for McGuire and his family, with the amount of assets under management growing to $55 million in 2006. In addition, McGuire invested $500,000 in Spears’ investment firm in June 1999, the report said.

Both men said that the board was aware of their relationship, according to the report, and UnitedHealth’s top lawyer sent an e-mail to outside counsel outlining the relationship and saying some disclosure had taken place. But there is no documentation to confirm that and no directors recall being told about their link.

There’s plenty more in this 14-page report. Board-meeting minutes seemed to omit important option discussions. Accountants weren’t accounting; lawyers weren’t lawyering. The company misrepresented its option grants in its financial filings with securities regulators.

The report even says that “certain facts run contrary” to McGuire’s assertion that the grant dates were selected without the benefit of hindsight.

“An appropriate tone at the top, adequate controls and discipline over the option granting process, and management transparency with the board and its committees on executive compensation” were lacking, the report said. Top executives “failed to ensure that the option granting practices were appropriate.”

When the allegations over options first hit UnitedHealth, McGuire said that he acted appropriately. We know now something far different about the way this CEO enriched himself.

In ‘appreciation’
Too bad the company still seems blinded by McGuire’s success. In announcing his departure, the company spoke of its “appreciation for the extraordinary contributions made by Dr. McGuire over the past 15 years.”

UnitedHealth also touted that its revenues grew from about $600 million to more than $70 billion during McGuire’s tenure and its stock price has gained 8,500 percent, more than 30 times the growth of the Standard & Poor’s 500 stock index.

Try telling that to the shareholders who bought last December and have now watched their stock plummet by more than 20 percent since the first of the year.

The company also said McGuire has agreed to reprice all the options issued to him from 1994 through 2002. That could cut millions of dollars from their value but might not dent the $1.8 billion in exercisable options he holds today, according to The Corporate Library, independent governance research firm.

And should the company uphold his employment agreement, he is still entitled to a golden parachute since he technically is retiring — not being fired. He could collect $5.1 million a year in supplemental retirement benefits as well as a lump sum of $6.4 million, and that’s on top of a list of cushy perks including an office, secretary, life and disability insurance premiums and health care for his family, according to The Corporate Library.

The McGuire era may be over, but it seems shareholders may long remember it and not always fondly.

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