Tuesday, August 22, 2006

Options Scandal, Part II

Bloomberg has a story out about United Health's CEO and Board of Directors accumulating $2 Billion (I've rounded down) in stock, mostly due to stock options:

UnitedHealth Group Inc. Chairman William McGuire sparked outrage among some stockholders over his $1.8 billion in potential stock-option gains. Turns out, the board of directors that granted those options got a share of the wealth, too. UnitedHealth's 10 non-executive directors held $230 million in stock as of March 21, according to the health insurer's most recent proxy.

A company spokesman tried to put those numbers in context. For example, a big part of the size and scope of those holdings reflect the fact that the stock has been a fabulous investment (up 7,000% during the CEO's tenure). Also, the folks with the largest positions accumulated their stock over a long period of time.

I've got no problem with that. If you invested or were granted a sum commensurate with the job- or maybe you just got lucky, being in the right place at the right time- and now the stock has gone up in a meteoric fashion, hey, that's the American dream...

... uh, wait... hold on... it might turn out to be more than luck.

Once again, the more you read the more complicated it gets:

UnitedHealth yesterday said it delayed its second-quarter earnings report while it determines whether it will have to restate results because of inappropriate options accounting. A board committee is reviewing 45,000 separate option grants made to 15,000 people over 13 years, the company said in a statement.

UnitedHealth shares fell $1.65, or 3.4 percent, to $47.33 at 4 p.m. in New York Stock Exchange composite trading, bringing their decline this year to 24 percent. Standard & Poor's Ratings Services revised its outlook for UnitedHealth to ``negative'' from ``stable,'' and A.G. Edwards & Sons Inc. downgraded the stock to ``hold'' from ``buy,'' citing the filing delay.

The step ``is significant evidence that there are real problems with United Healthcare's stock-option accounting,'' said analyst J. Paul Newsome in St. Louis in a note to day. ``It also increases, in our view, the likelihood that its well-regarded CEO will be pressured to leave.''

And as I've said before, it's not just bookkeeping errors... we now find they gave the CEO the equivalent of a blank check each time options were awarded:
Critics cite one board policy: McGuire was formerly allowed to pick his own option-grant dates. His Oct. 13, 1999, employment contract says: ``The annual options shall be granted on such date or dates as executive requests by oral notification to the chair of the compensation and human resources committee.''

So now investigations have spawned more investigations, as well as an internal probe. And this time the big shareholders are filing lawsuits.

Meanwhile, despite the company's vigorous defense of the program, they are cutting and/or dumping a long list of benefits:

After the revelations in April about McGuire's options, the board revised its own pay policies on May 1, reducing its compensation by 40 percent. That came on top of a 20 percent reduction in the number of options they could get after the shares were split, in May of last year. The board also discontinued equity grants to McGuire and other executives, capped supplemental retirement benefits for the executives, eliminated perks like life-insurance premium payments and set the annual meeting as the grant date for all options for existing employees.


This raises the same questions all over again: was it fair and responsible? Does anyone expect the internal probe to turn up "bookkeeping errors" that favored the shareholders?

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