UnitedHealth's Options Scandal Shows Familiar Symptoms

You might say that Hemsley comes honestly to his lack of focus and ethical sensitivity. Before coming to UnitedHealth -- I'm not making this up -- he'd spent the previous 23 years at Arthur Andersen, rising to chief financial officer. That's the same accounting firm that helped bring you Enron, WorldCom and Freddie Mac. And, you'll be shocked to learn, it's the same Arthur Andersen that served as a consultant to Spears and other members of UnitedHealth's compensation committee.

Around the same time that UnitedHealth directors were rubber-stamping McGuire's employment contract, they also approved another of McGuire's stock option initiatives. The company stock was in a slump, making worthless many of the options held by company executives, including 750,000 by McGuire. As McGuire explained it, morale was suffering and it was getting harder to retain key employees. Some companies had addressed this problem by "repricing" options -- lowering the strike price so the options were magically valuable again. But, as the WilmerHale lawyers put it so delicately, there were "disadvantageous accounting and disclosure ramifications" to repricing. Translation: bad publicity and a hit to earnings. So McGuire came up with the cute idea of having the board simply "suspend" the old options and issue new ones with a lower strike price.

The directors agreed. But the following August, after the stock price had risen substantially, the board also agreed to McGuire's request to "reactivate" the suspended options, essentially doubling the number of stock options issued. The motivation was unclear, but according to WilmerHale, these actions were never properly accounted for or reported to shareholders. Translation: accounting and securities fraud. And this little bit of double dipping added another $250 million to McGuire's net worth, the Journal reported.

One of the more interesting revelations from the WilmerHale report is that these and other outrages at UnitedHealth pretty much stopped following the 2002 passage of the Sarbanes-Oxley law, requiring directors and outside auditors to ensure that companies had adequate internal controls. The U.S. Chamber of Commerce and other business groups have been running around the country, complaining the law has overreached, stifling American risk-taking and innovation. I wonder if backdating stock options is the sort of risk-taking and innovation the chamber has in mind.

In response to these revelations, you'd think UnitedHealth directors would at least have had the manners to apologize to shareholders, if not to resign. Instead, they've followed the well-worn path of insisting they did nothing wrong while taking steps to ensure it won't happen again.

After praising him for his "leadership, energy and vision," the board allowed McGuire to retire with his full pension and all his options. The good doctor graciously agreed to reprice his options from the most favorable to least favorable dates -- a concession that could cost him $200 million.

Hemsley was rewarded for his lack of focus by being named to succeed McGuire as chief executive. He was also directed to root out the senior executives in the legal, accounting and personnel departments who provided the bad advice on which the board and chief executive now say they have relied. Hemsley, too, has volunteered to reprice his options.

Spears announced his resignation from the board, which expressed "gratitude for his many contributions during his 15 years of service."

And, in a stunning example of the barn door and the departed horse, UnitedHealth's directors declared they would no longer award stock or stock options to top executives.