UnitedHealth's stock drops after announcement of McGuire's departureby Mark Zdechlik, Minnesota Public Radio
UnitedHealth Group stock closed down about 2.5 percent on Monday, the first business day after the company announced CEO Dr. William McGuire is stepping down. McGuire and other company executives have been caught up in a high-profile, stock option back-dating investigation.
St. Paul, Minn. — William McGuire took the helm as UnitedHealth Group's CEO in 1991 and is credited with transforming the for-profit company into an industry leader. The value of United's stock increased 8500% under McGuire's leadership.
McGuire earned a reputation as one of the nation's most highly paid executives, with much of the compensation coming from various stock options. On Sunday, the Minnetonka-based company announced McGuire will no longer serve as Chairman of the Board and he'll be gone from the company by December first.
McGuire alone massed nearly $1.8 billion in unexercised stock options, according to estimates cited in the Wall Street Journal.
"A simple way to state this is corporate looting," says Randall Heron, Associate Professor of Finance at Indiana University.
Heron says option back-dating allows executives to buy stock after the fact, so they can pick and choose the most favorable prices.
"...You're choosing the time that makes the grants the most favorable, providing the most value to you and simultaneously misleading the firm's true owners, the shareholders, misleading them and their financial reports and also misleading the IRS and taking tax benefits you shouldn't be receiving," he said.
McGuire's resignation coincided with the public release of a report commissioned by the company. The report found the effective dates for most of the option grants reviewed were wrong and many options were likely backdated. Grants of a million shares to McGuire and half a million to Chief Operating Officer Stephen Hemsley in 1999 were likely backdated. Grants to new hires and people receiving promotions were backdated as a matter of policy.
Questions about the practice at United came to light in March of this year in a Wall Street Journal article entitled, "The Perfect Payday."
The newly released report concludes United lacked adequate internal controls for granting stock options.
Hemsley, United's President and Chief Operating Officer, will take over as CEO on or before December 1st. The company also instituted several changes to its corporate governance structure, including the creation of a new Chief Legal Officer position and senior-level ethics and administrative officers.
McGuire and others caught up in the backdating, including the new CEO have or are expected to agree to re-price their stock options to annual market highs for each of the years in question. The purpose of the re-pricing is to eliminate financial benefit from the backdating.
University of Minnesota Professor Roger Feldman, a healthcare economist, views the developments at United as positive for investors, particularly the move to re-price the stock options in question.
"This is good for the shareholders in two ways. Number one, it simply means that the company's profits are going to be higher and number two, it helps to remove the taint of the backdating scandal. So I think that was a positive step," he says.
It is unclear how McGuire's departure and the other changes might effect shareholder lawsuits against the company and several investigations including one by the Securities and Exchange Commission. Jacob Frenkel a former SEC attorney now in private practice, says those involved face several potentially serious legal problems.
"The outstanding question is whether the SEC will bring civil cases against them, whether federal prosecutors (will bring cases) against them or possibly the state attorney general also bringing cases," he says.
The UnitedHealth Group case has become one of the most prominent stock option back-dating cases in the nation not only because of the amount of money involved, but also because United operates in the health care industry where costs have been sky rocketing.
Analysts point out that unlike other corporate scandals involving companies such as Enron, the back-dating controversy is not related to United's core business which most analysts predict is likely to remain strong.
- All Things Considered, 10/16/2006, 5:20 p.m.