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Tuesday, October 17, 2006

Backdating and Bad Governance

UnitedHealth Group, the people who bring you UnitedHealthcare, has forced out its CEO, its general counsel, and a board member because of stock option backdating.  The company reported the news on its website here.  UH Group's actions come in the wake of a report by WilmerHale about backdating at the company.  There are articles in the NYT and the W$J; an NPR report featuring Mississippi law professor and Fund Democracy founder Mercer Bullard can be found here.

A few thoughts:

  • The WilmerHale report is another in a continuing series of board-commissioned reports on corporate governance scandals.  Such reports seem to becoming more prevalent, and web access has made them incredibly easy to obtain.  It will be interesting to see how the report affects civil actions and potential criminal prosecutions.
  • The option grants to the top folks seem to have been very rounded numbers: 1 million, 500,000, etc.  This supports my view that backdating allowed for inflated pay: if you're going to get 1 million options no matter what the strike price, choosing the date of the lowest price allows you to get more than if you chose the date at random or at a set time each year.  The WilmerHale report also notes that the compensation committee only focused on the size of the grants and not the date of their issuance. (p. 11)
  • UnitedHealth supports Vic Fleischer's view that backdating may reflect a governance culture of noncompliance.  The WilmerHale report uncovered troubling conflicts of interest between CEO McGuire and William Spears, a director and chair of the compensation committee.  Spears had served as trustee and investment manager for McGuire and his children, and in 1999 McGuire gave a $500,000 investment  to Spears that allowed Spears to repurchase a money management firm that bore his name.  The other UnitedHealth directors did not know about this relationship until it was revealed during this investigation.  The report also found inadequate internal controls for the stock option grant process.

Posted by Matt Bodie on October 17, 2006 at 08:21 AM in Corporate | Permalink


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