McGuire out at UnitedHealth amid options scandal

by Annie Baxter, Minnesota Public Radio

One of the country's highest-paid executives has stepped down from his position amidst allegations of stock options backdating. Minnetonka-based UnitedHealth Group announced on Sunday that Dr. William McGuire will no longer serve as chairman of the board and will retire from the company by Dec. 1. The company named UnitedHealth President and Chief Operating Officer Stephen Hemsley to be the new CEO. McGuire is one of the most prominent CEOs to lose his job over the backdating of stock options.

St. Paul, Minn. — After months of questions surrounding UnitedHealth Group's stock options practices, the weekend brought a major shakeup in the company's leadership. In addition to announcing the retirement of CEO Bill McGuire, the company also says a board member and the company's general counsel will retire.

Both McGuire and his replacement have agreed to reprice their stock options to eliminate any gain from backdating. Backdating involves using the benefit of hindsight to select the effective date and price of an option. Choosing a date back when the share price was lower makes the option more profitable if the company's share price rises.

The upheaval at UnitedHealth Group comes a few days after the company's board members saw the damning conclusions of an investigation by an outside law firm looking into backdating. The report found the effective dates for most of the option grants reviewed were wrong, and many options were likely backdated.

Grants of one million shares to McGuire and half a million to Hemsley in 1999 were likely backdated. Grants to new hires and people receiving promotions were backdated as a matter of policy.

Despite McGuire's contention that grant dates were chosen without benefit of hindsight, the report says "facts run contrary to this assertion."

A company spokesman would not comment on any aspect of the findings, instead deferring to the report and a press release.

But Thrivent Financial analyst David Heupel says the report sheds light on why McGuire is stepping down, given his apparent knowledge of the options back-dating.

"It seems as though it was completely determinate by him; he had complete and total control over the when and the amounts of these awards, which is very counter to how a company should work," Heupel says.

Dozens of companies have been scrutinized for their stock options granting practices in the wake of a Wall Street Journal article published last spring, which highlighted the issue. Since then, UnitedHealth has been in the media spotlight on the matter.

McGuire is one of the country's highest paid executives, having amassed nearly $1.8 billion in unexercised stock options, according to estimates cited in the Wall Street Journal.

And McGuire is a celebrated steward of the company. In his 15-year tenure at UnitedHealth, the company says its revenues have grown from about $600 million annually to $70 billion. And UnitedHealth's stock performance has similarly exploded, though the share price has tumbled about 20 percent so far this year amidst allegations of options backdating.

Thrivent analyst David Heupel says McGuire's departure could get UnitedHealth's stock performance back on track. And he doubts McGuire's departure will unglue the company.

"It's never easy to replace someone who's been such an integral part of a company's success, but they have a very talented group of senior managers. And I think in some companies where you have a clear visionary leave and there's no one to replace that void, I think this will not be the case at United," he says.

And, Heupel says, UnitedHealth is certainly not alone in dealing with this stock options problem, so its reputation might not be charred.

Just in the past week, 10 companies' corporate leaders, including four CEOs, have left due to options backdating questions. That worries Stephen Crimmins, a Washington, D.C.-based attorney specializing in securities regulation. He's skeptical that the options scandals are being handled in the best way.

"Is it really in the shareholders' interest to wipe out so many of the CEOs or CFOs? Is there perhaps some middle ground that might be more appropriate to take with these senior officers and the backdating issue?" he asks.

Crimmins also says with the potential for thousands of additional options backdating cases coming to the attention of the Securities and Exchange Commission, he wonders how the agency will manage the workload.

That workload is not diminished by the leadership overhaul at UnitedHealth. The agency is looking into the options scandal at the company, as are federal prosecutors and Minnesota Attorney General Mike Hatch. Hatch says McGuire's departure doesn't do a thing to change the course of his investigation.

Broadcast Dates

• Morning Edition, 10/16/2006, 7:49 a.m.