UnitedHealth in Shake-Up Over Options

Times Staff Writer

The chief executive of one of the nation’s largest health insurance companies retired under pressure Sunday, the latest executive to fall in an options-based pay scandal that is unfolding at scores of companies nationwide.

UnitedHealth Group Inc. announced that William McGuire, 59, was leaving -- along with a director who oversaw executive compensation and the firm’s top lawyer.

The announcement came in the wake of a board-commissioned investigation that found that stock option grants were “likely backdated” to allow insiders to maximize financial gains.


President and Chief Operating Officer Stephen Helmsley was tapped to replace McGuire. He said little about the stock options controversy in a statement released Sunday.

“In light of the recently completed investigation, I have determined that it is in the best interests of the company that I assist Steve Helmsley in an orderly transition to succeed me as CEO,” McGuire said.

UnitedHealth doubled its presence in California last year when it bought Cypress-based PacifiCare Health Systems Inc. for $9.2 billion.

During McGuire’s 15-year tenure, UnitedHealth’s share price increased fiftyfold and he amassed a potential fortune in unexercised stock options. Now, U.S. and state regulators are probing the dating of the stock options.

An investigation by a law firm hired by UnitedHealth’s board concluded that 1.5 million options -- most of which were granted to McGuire as a part of his 1999 compensation package -- were “likely backdated.”

The results of that investigation -- given to board members last week and made public Sunday -- were viewed as creating pressure on McGuire to leave.

Yet, because the investigation had been underway for more than six months, there was a sense among investors until only recently that McGuire would survive the scandal, said Sheryl Skolnick, an analyst at CRT Capital in Stanford, Conn.

“I don’t think anybody expected Bill to be forced to retire,” she said.

McGuire’s departure was announced only days after the leaders of two technology companies stepped down, all signs of the growing scope of a scandal over once-hidden stock option practices designed to pad insiders’ compensation packages.

Various government investigators have drawn more than 100 companies into their crosshairs, and analysts said the shake-ups in the executive suites suggested corporate boards were rushing to clean house before potential crackdowns by federal regulators or prosecutors.

“If there’s a problem, and it’s traced to the CEO, then boards have to take the appropriate action,” Skolnick said.

McGuire, who also served as chairman of the Minnetonka, Minn.-based company, relinquished that post as well Sunday. The company said he would remain CEO as late as Dec. 1 to assist in the transition.

The terms of McGuire’s parting, “including other options issues and financial benefits,” were still under discussion, the company said.

McGuire also agreed to reprice all stock options awarded to him from 1994 through 2002 to the annual high share price for each year to eliminate any financial benefit from backdating.

Before the repricing, McGuire’s options were reported to be worth more than $1.6 billion.

Helmsley, who the investigation’s report said received 500,000 of the questionably timed options, also agreed to reprice his options.

The scandal was touched off by a Wall Street Journal report in March. It questioned whether UnitedHealth and other companies had dated executives’ options, after they were granted, to when the shares dipped particularly low in order to maximize the recipients’ gains.

The newspaper reported that McGuire received options on the days UnitedHealth’s share price hit annual lows in 1997, 1999 and 2000 -- timing that was all but impossible by chance.

The legal and tax problems surrounding backdating involve inadequate disclosure. UnitedHealth said in May that because of a “significant deficiency” in its handling of options, it may have to restate as much as $286 million in earnings for 2003, 2004 and 2005.

In its report, the law firm that investigated the options granting at UnitedHealth found that the board’s compensation committee was kept in the dark about details such as the dating of options.

Another problem, it said, was that the board was not informed of the full extent of financial relationships between McGuire and William Spears, who was chairman of the compensation committee at the time the CEO’s 1999 compensation package was put together.

“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 matters are basic and critical to the integrity of option grants,” the report said. “There were various failings in these areas.”

General counsel David J. Lubben and Spears also are leaving, the company said.

Analysts said investors still had to worry about lawsuits and whether the government probes would find criminal wrongdoing by individuals or the company.

McGuire, a trained physician from Texas who towers over most colleagues, ascended to the helm of what was then a regional healthcare company in 1989.

Through a series of acquisitions, he turned UnitedHealth into an managed-care leader with nearly 30 million enrollees across the country.

In a note to employees, McGuire took pride in his role in UnitedHealth’s transformation.

“We have made significant advances in improving access to care, fostering greater affordability and enhancing the quality of healthcare for all individuals,” he said. “At the same time, we have built a vital and sustaining company serving a diverse group of customers, healthcare providers, and certainly shareholders.”

One of UnitedHealth’s latest acquisitions was last year’s purchase of PacifiCare. But the ownership change may have gone largely unnoticed by patients because the company kept the PacifiCare name in the state.

With the acquisition of PacifiCare’s Secure Horizons HMOs, UnitedHealth vastly expanded its slice of the rapidly growing Medicare market.

But that government business could be at issue if prosecutors seek criminal charges against the company. In the event of a conviction, the government could move to have UnitedHealth excluded as a Medicare and Medicaid contractor, analysts said.

The board announced a series of operating and governance changes Sunday and installed UnitedHealth founding CEO Richard Burke as chairman.

Options scandals are roiling across the corporate landscape. More than two dozen executives have quit or been fired amid probes over the backdating of stock option grants to enrich corporate insiders.