A More Entangled Web: the UnitedHealth Case

More issues are surfacing regarding the question of whether stock options given to top executives of UnitedHealth Group were back-dated. We have posted frequently on this topic, most recently here (and see links within to earlier posts.

According to multiple news sources, (see, for example, this article by Melissa Davis in TheStreet.com), UnitedHealth has delayed its latest quarterly report "due to possible accounting changes that could prove material in nature. The changes, if necessary, would reflect the rising value of options issued to company employees -- including massive grants to CEO William McGuire -- and drive up reported expenses as a result." Several analysts proposed that this delay indicates more severe problems with the stock options than were heretofore anticipated.

Bloomberg News noted that the board of directors that approved the huge grants of stock-options to UnitedHealth CEO Dr William McGuire was itself particularly well compensated, especially in terms of stock options.

UnitedHealth's 10 non-executive directors held $230 million in stock as of March 21, according to the health insurer's most recent proxy. Director Richard Burke, who joined the board in 1977, had $169 million in shares, while Douglas Leatherdale owned $47 million. The directors, including former New Jersey Governor Thomas Kean and former Fannie Mae chief executive officer James Johnson, held more than 3.1 million stock options, whose underlying value is about $175 million.

Each UnitedHealth director makes at least $400,000 a year, counting pay and exercisable options, according to Jesse Fried, a professor at the law school of the University of California at Berkeley. The Corporate Library, a Portland, Maine-based governance group, says UnitedHealth had the eighth-best- compensated board in the nation in 2004, with total compensation of $5.4 million.

The outside directors are paid in a combination of cash and options grants. According to the April 7 proxy, they get an annual cash retainer of $30,000, plus payments for each board and committee meeting attended. They also get an initial one-time option to buy 58,000 shares, plus quarterly options to buy 8,000 shares, or 32,000 options a year for each year they serve.

The initial grants are exercisable over three years, while the quarterly grants can be exercised immediately. The price of the initial options is set by the closing price of UnitedHealth stock on the day the director is elected, which is at the annual meeting. The price of the quarterly options is set by the closing price of UnitedHealth shares the first business day after the quarter ends, the proxy says.

As of March 21, the three members of the compensation committee -- Johnson, 62, the chairman, Mary Mundinger, 68, dean of Columbia University's school of nursing, and William Spears, 67 -- held a total of more than 1.1 million options, the company's proxy shows. Spears also held $3.7 million in stock and Mundinger held $1.8 million.

Some commentators suggested a discrepancy between the magnitude of the board members' compensation and the extent of their efforts supervising McGuire and other top executives. For example, Patrick McGurn, Executive Vice President of Institutional Shareholder, said,

This is the no-show board of all time in terms of the job they did in overseeing compensation.

They handed the reins over to management and played the roles of cheerleader.

Finally, the Pioneer Press has been investigating other potential conflicts of interest affecting the UnitedHealth board of directors. These conflicts are important because,

With options under scrutiny at more than 80 companies so far, regulators and prosecutors haven't the resources to conduct full-blown forensic probes of every company. They often rely on companies' own internal inquiries to do the initial digging that helps authorities decide whom to pursue most vigorously. In addition, the companies rely on these internal probes, either to show the public they've been diligent or to defend against shareholder suits.

In these probes, 'if the government catches wind of issues affecting independence, they will naturally be more skeptical and less trusting of the process and the results,' said W. Scott Sorrels, an Atlanta attorney who has conducted investigations for corporate boards in the past. Sorrels, not speaking of any particular company, said, 'We advise companies to avoid any appearance of impropriety so you don't have the situation blow up in your face six months down the road after the investigation is done.'

One conflict affected board of directors member Thomas H. Kean, former governor of New Jersey, who was a member of the compensation committee.

The same day as the [May 1] board meeting, some UnitedHealth directors and executives were supporting a campaign by Kean's son for a U.S. Senate seat from New Jersey. Some of them attended a fundraiser for Tom Kean Jr. that day, in UnitedHealth's home state of Minnesota.

It isn't clear whether McGuire and his wife attended but each donated $2,000 to the cause. So did Richard T. Burke, who sits on a special board committee that is overseeing the options investigation. All told, UnitedHealth-affiliated donors have contributed $25,000 to the campaign.

When the donations to the Kean Senate campaign were described to former SEC Chairman Harvey Pitt, he said they struck him as 'ill-advised and strange' and something that could be seen as an attempt to influence a witness because of the senior Kean's role on the compensation committee.

A spokeswoman for the Kean campaign said the fundraising came at a 'UnitedHealth breakfast' hosted by Minnesota Republican Sen. Norm Coleman, and there was absolutely no effort to curry favor with the elder Kean. The former New Jersey governor didn't return calls seeking comment.

Another involves board compensation committee member William Spears,

One longtime UnitedHealth comp-committee member, William Spears, is a money manager with the New York firm Spears Grisanti & Brown LLC. The firm appears to manage money for McGuire's family foundation. In tax filings covering two recent years, the foundation put the name of Spears' firm atop a list of its securities transactions. A partner in the firm, Christopher Grisanti, said privacy regulations barred him from saying whether the foundation was a client. Spears didn't return messages seeking comment.

Another involves board compensation committee member Mary Mundinger. We have previously posted about Mundinger, since she is also a Professor and Dean of the School of Nursing at Columbia University. We proposed that Mundinger's fiduciary duties to the shareholders of UnitedHealth may be at odds with her duty to uphold the mission of Columbia University and its School of Nursing. The university's academic medical center must undoubtably deal with managed care organizations that compete with UnitedHealth, or with UnitedHealth directly.

Another longtime member of the health insurer's compensation panel is Mary Mundinger, dean of the Columbia University nursing school. Mundinger has championed the idea that nurse practitioners can provide high-quality primary care, and in the mid-1990s she shepherded a pioneering project to create a nurse-practitioner clinic in New York. The support of health insurers was critical to getting patients to use it, and UnitedHealth was among several insurers to sign on. In media interviews at the time, UnitedHealth officials spoke approvingly of her project.

The anecdote again illustrates the complex relationships between Mundinger's academic work and her duties to UnitedHealth.

There are at least two major issues here for health care.

One is the continued and ever more glaring contrast between UnitedHealth Group's stated mission, to

* Improve access to health and well-being services;

* Simplify the health care experience;

* Promote quality; and,

* Make health care more affordable.

and the largesse it granted to its top leaders, executives and board members.

The second is the more and more apparent web of conflicting interests that entangles many health care organizations who are ostensibly supposed to be operating at arms' length. This web is of particular concern when it entangles leaders of academic medicine with simultaneous duties to uphold the interests of corporate stockholders. The interests of the stockholders may be at variance with the missions of the academic leaders' institutions. (And note that the UnitedHealth Group board of directors includes Donna Shalala, the President to the University of Miami, and hence the leader to which the university's medical school and academic medical center reports, and Gail Wilensky, a well-known health services researcher at Project HOPE.)