(Updates with non-binding nature of nominating proposal
in third paragraph, and similar proposal introduced at Hewlett-Packard
in ninth paragraph.)
UnitedHealth Group Inc. (UNH) shareholders want a
greater voice in governance at the giant managed-care company, which has
been trying to shake the dust from a stock options-backdating scandal.
Investors are pushing proposals, to be considered at
UnitedHealth's annual meeting on May 29, that could give shareholders an
important role in nominating directors and a say in endorsing or
opposing executive pay.
The California Public Employees' Retirement System, the
nation's largest public pension fund and a holder of roughly 6.4 million
UnitedHealth shares, has proposed that investors who have held at least
3% of the stock for more than two years be allowed to nominate two
directors. The proposal, if approved, wouldn't be binding on the
CalPERS cited the independent, company-commissioned
investigation last year that exposed compensation-related problems at
UnitedHealth's former chairman and chief executive,
William McGuire, agreed to leave the company last year after an
independent probe found that many of the largest stock-options grants
made to officers and employees over several years likely were backdated
to improve their value.
UnitedHealth earlier this year reduced past financial
results by more than $1 billion to account for backdated options and has
adopted various corporate-governance initiatives. Those policies include
separating the roles of chairman and chief executive, filling five board
seats with new independent directors over the next three years, and
strengthening director-independence requirements. The company also
implemented new stock-ownership guidelines for directors and executive
Activist shareholders, however, want more of a hand in
governance. CalPERS says a UnitedHealth advisory committee that gives
large shareholders a role in setting director qualifications doesn't go
far enough in assuring that investors can place their nominee choices on
"Today at UnitedHealth, only the board is empowered to
put a director nominee up for election on the proxy statement," CalPERS'
board president, Rob Feckner, said in a statement this month. "We
believe boards that control their own membership can lead to a culture
characterized by unaccountable and entrenched directors," which may
result in abusive executive-compensation practices, fraud or other
A similar proposal gathered substantial support at
Hewlett-Packard Co.'s (HPQ) annual meeting this year, although it didn't
win a majority of the votes cast.
CalPERS has started a Web site to push its proposal,
and noted there that the idea has the backing of two major proxy
advisory services - Institutional Shareholder Services and Egan-Jones
Proxy Services. ISS last week issued a report supporting all four
proposals advanced by UnitedHealth shareholders, including the CalPERS
The California State Teachers' Retirement System, the
second-largest public pension fund in the U.S. and owner of 5.5 million
UnitedHealth shares, has sent a letter urging other investors to support
the CalPERS measure.
"This proposal will add value for UnitedHealth's
shareowners while enhancing the company's reputation as a model of fair
and transparent governance," CalSTRS Chief Investment Officer
Christopher J. Ailman said in a statement last week.
A UnitedHealth spokesman didn't immediately return a
call for comment.
UnitedHealth's board said in a proxy statement that the
CalPERS proposal "would result in disruptive, divisive and expensive
director elections without benefit to the shareholders as a whole," and
is unnecessary because company policies and procedures already provide
investors the opportunity to participate in the process of nominating
and electing directors.
Meanwhile, U.K. activist investor Hermes Investment
Management Ltd. wants UnitedHealth to permit shareholders to cast an
advisory vote each year on the proposed compensation package for the
health insurer's most senior executives.
Hermes Chief Executive Mark Anson, in a letter to
UnitedHealth shareholders this month, urged support for Hermes' proposal
asking the managed-care provider to allow such a vote each year. Anson
called the proposal an important governance reform.
"Any such vote would be non-binding and advisory, but
we believe that it would foster an important dialogue between
shareholders and the board of directors about executive pay policy, and
help ensure that pay is closely tied to performance," Anson wrote.
Hermes has experience with advisory votes on
compensation in the U.S. and Australia, and with binding votes on pay in
Scandinavian countries and the Netherlands.
"Compensation programs are one of the most powerful
tools available to a company to align management interests with the
long-term interests of shareowners. UnitedHealth Group has, in the past,
experienced issues with its incentive-based compensation and
accountability to shareowners in that regard," Anson said.
"This is evidenced by the fact that options granted to
(UnitedHealth's) former chairman and CEO were worth $1.6 billion by the
end of 2005, a value that was inflated due to the backdating of stock
options," he said. An advisory vote would address those concerns and
ensure that pay is appropriately linked to performance, improving value
for shareholders, he added.
UnitedHealth's board opposes the Hermes proposal.
"The company believes that its compensation policies
and programs effectively serve the interests of shareholders and the
company and are appropriately balanced and competitive to accomplish the
crucial task for recruiting, motivating and retaining talented senior
executives," UnitedHealth said in its proxy.
UnitedHealth's board opposes all four shareholder
proposals on the agenda for the annual meeting.
The American Federation of Labor and Congress of
Industrial Organizations proposes that a significant portion of future
equity compensation grants to senior executives be shares of stock that
require the achievement of performance goals as a prerequisite to
The Egan-Jones proxy service supports the CalPERS and
Hermes proposals, as well as another shareholder proposal, from the
Massachusetts Laborers' Pension Fund, to limit benefits provided by the
supplemental executive retirement plan. The agency opposes the AFL-CIO
proposal linking executive performance to vesting of shares, saying it
could place the company at a competitive disadvantage in compensating
-By Dinah Wisenberg Brin, Dow Jones Newswires;