NU Online News Service

An independent review team has found major problems with a stockoption program that a large managed care company used to compensateexecutives.

The board of UnitedHealth Group Inc., Minnetonka, Minn., hasresponded to the report by announcing that Dr. William McGuire, anexecutive who in just 15 years built the company into one of theUnited States' biggest health insurers, already has given up hisseat 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 leavesto assist in an orderly transition to new leadership, the boardsays.

"The company is engaged in discussions with Dr. McGuireconcerning the terms of his departure from the company," theUnitedHealth board says.

The board notes in the announcement of McGuire's departure thatrevenue increased to $70 billion per year, from $600 million, underMcGuire's leadership, and that the stock price has increased 8,500%since he started running the company.

The UnitedHealth board also says the company probably will delayfiling of its Form 10-Q quarterly financial report with the U.S.Securities and Exchange Commission for the third quarter toincorporate the option program report findings in the quarterlyreport.

"The company has not yet determined whether any restatements ofpreviously filed financial statements will be required," theUnitedHealth board says.

In April, the UnitedHealth board hired lawyers at Wilmer CutlerPickering Hale and Dorr L.L.P., Boston, to investigate pressreports suggesting that the company might have inflated executivecompensation by backdating stock option grants.

The lawyers interviewed all living individuals who served on theUnitedHealth board from 1994 to 2006 and reviewed many boxes ofdocuments.

The review indicates that the measurement dates used byUnitedHealth for most of the option grants issued to key officersand other employees under review "were incorrect, and many of theoption grants were likely backdated."

McGuire said he did not select the dates for option grants withthe benefit of hindsight, and Hemsley played a more limited role inthe option granting process, the team writes in its report.

McGuire said the grant dates typically coincided with amemorandum reflecting that some process was under way concerning agrant, or with a phone call, meeting or discussion about a grantdate with at least one member of the compensation committee, theteam writes.

"On or around many of the grant dates, there is evidence ofphone calls or communications involving Dr. McGuire and a member ofthe compensation committee," the team writes. "The existence ofthese events is cited by Dr. McGuire as support for each of thegrant dates. While Dr. McGuire acknowledges that it is now clearthat all of the appropriate, formal, corporate actions necessary toauthorize a grant were not taken on the grant date, in his view thegrant dates were selected without the benefit of hindsight."

But many of the documents and e-mails seem to clash withMcGuire's position, and, out of 29 grants reviewed, "there arerelatively few instances in which there is either direct orcircumstantial evidence to establish that a grant date was selectedon that particular day," the team writes. "The first writtenmention of either the grant date or the corresponding price oftenappears weeks after the grant date."

Statistical analysis shows that the "option grant datesgenerally corresponded to prices at or near the lowest price forthe quarter or year," the review team writes.

The review team also questions certain aspects of McGuire'srelationship with William Spears, a UnitedHealth board member,noting that Spears, who negotiated an employment agreement for theboard with McGuire in 1999, served as a trustee for 2 trusts forthe benefit of McGuire's children.

During the period reviewed, United Health "lacked appropriatesystems 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 neededto determine an accurate measurement date was not provided to theaccounting department."

Moreover, "the legal department failed to prepare adequateminutes of meetings of the board of directors, the compensationcommittee and the ad hoc committee," and the minutes rarely saymuch about stock option grant discussions, the review teamcontends.

The findings suggest that UnitedHealth might need to correctpast financial filings, the review writes.

In addition to announcing the departure of McGuire, theUnitedHealth board has announced other executive and policy changesrelated to the release of the independent review team report.

Spears is leaving the board, and Richard Burke, the founding CEOof UnitedHealth and a director since 1977, is now the company'schairman, the UnitedHealth board says.

Dr. Stephen Hemsley, who has been UnitedHealth's president andchief operating officer since 1999, will succeed McGuire as CEO,the UnitedHealth board says.

David Lubben, the company's general counsel and secretary, hasretired from those posts, and the company will be dividing his jobinto separate chief legal officer and secretary positions.

Under the new system, "the sole responsibility of the secretarywill be to support the activities of the board and of itscommittees, including ensuring that the board's activities andrecordkeeping are in line with corporate best practices," theUnitedHealth board says.

UnitedHealth also will add 5 independent directors to its boardover the next 3 years, the company says.

McGuire, Hemsley and most other UnitedHealth senior executiveshave voluntarily agreed to reprice the options they have receivedto eliminate "any possible financial benefit from options datingissues" identified in the independent review team's report.

The board is requiring all audit committee members to befinancial experts; limiting the number of boards on which directorsmay serve; reducing board compensation by 40%; discontinuing equityawards to the CEO, president and some other senior executives; andeliminating "certain perquisites including life insurance anddisability premium payments not generally available to otheremployees and company-funded post-retirement health insurance."

The board says it also plans to strengthen controls over stockoptions and other equity awards by eliminating all delegatedauthority to management to make equity awards and by requiring thatbroad based equity awards to the company's executives and employeesoccur annually and be approved at the board meeting that generallycoincides with the company's annual meeting.

A link to the Wilmer Cutler report is on the Web athttp://www.unitedhealthgroup.com/assets/shared/Wilmer_Hale_Report.pdf