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New York Times, December 9, 2007 column


The New York Times




December 9, 2007
Fair Game

Sharper Claws for Recovering Executive Pay

INVESTORS everywhere should applaud the deal struck last week by the UnitedHealth Group to recover nearly $1 billion in pay from former executives involved in the company’s option backdating mess.

Not only is the number big and round — by far the largest giveback by corporate executives ever — but the recovery sets a standard of behavior for other companies and boards when performance pay is later shown to have been based on ephemeral earnings.

UnitedHealth shareholders have certainly suffered. The company restated 12 years of earnings in the amount of $1.5 billion as a result of the backdating and said it had struck a $55 million settlement with the Internal Revenue Service. The stock is just about where it was in March 2006 before a Wall Street Journal article first questioned the timing of option grants made to Dr. William W. McGuire, UnitedHealth’s longtime chief executive.

So it seems only appropriate that Dr. McGuire will cough up options worth $418 million in addition to the almost $200 million in options he has already forfeited. The agreement also bars him from joining the board of a public company for 10 years.

Don’t fret for Dr. McGuire, though. He still holds options worth around $800 million. In a statement, he said he was happy to have the matter resolved; he neither admitted nor denied the backdating accusations.

Even more significant about this deal is that it will force boards to institute clawback provisions in all employment agreements with top officers and then enforce them.

“Every single time another executive agrees to a clawback or another board insists on one — especially if it’s made public — it just makes it harder for other executives not to agree to them or other boards not to insist on them,” said Michael Melbinger, a partner at Winston & Strawn and head of its executive compensation practice.

The UnitedHealth case is also an example of the value of an effective special-litigation committee. Many such committees, convened by boards in response to accusations of impropriety at their companies, often seem most interested in whitewashing questionable actions. They rarely work as hard as the committee at UnitedHealth did to get to the bottom of the mess.

The committee members were Kathleen A. Blatz, former chief justice of the Supreme Court of Minnesota, and Edward C. Stringer, a former justice of that court.

Both were unusually eager to get shareholders’ views on the problems at UnitedHealth, said Chad Johnson, a partner at Bernstein, Litowitz Berger & Grossmann, one of two law firms that represented nine public pension funds that sued UnitedHealth and 20 of its officers and directors over the backdating.

Indeed, the committee’s 80-page report said that while UnitedHealth had genuinely tried to resolve weaknesses in option-granting practices and other oversight breaches, the pension fund plaintiffs had provided proposals aimed at keeping the company in the forefront of transparency and accountability. The committee urged UnitedHealth to consider them seriously.

“We have an important governance aspect of this case that is still the subject of negotiation,” said Karl Cambronne, lead counsel at Chestnut & Cambronne in Minneapolis.

One aspect of the UnitedHealth settlement and litigation committee report disturbed Brian Foley, an independent compensation consultant in White Plains. That was the committee’s forgiving treatment of two UnitedHealth directors and members of the compensation committee that oversaw Dr. McGuire’s option grants and employment agreement. They are Thomas H. Kean, the former governor of New Jersey, and Mary O. Mundinger, dean of health policy at Columbia University’s nursing school.

The litigation committee called their performance on the compensation committee “disappointing,” but decided not to take legal action against them.

“If the directors aren’t held accountable in some shape or form and aren’t at least heavily criticized in the special litigation committee report, that is a mixed message,” Mr. Foley said. “That you can have a situation this bad, with write-offs and tax impacts and recoveries this big, and the directors still aren’t liable — what does that say about their accountability?”

DON NATHAN, a UnitedHealth spokesman, said that neither Mr. Kean nor Ms. Mundinger would comment. But he said the board has set up a committee of representatives from four of the company’s long-term institutional investors to advise on director candidates and qualifications. That, too, is a step in the right direction; most boards shut out investors on the topic of director nominees.

Even so, that the outcome of the UnitedHealth case is so remarkable is a distressing indication of how far shareholders still have to go to hold executives and directors accountable. Luckily, some are up to the task.

“We think this is a really important case,” said Kevin B. Lindahl, general counsel for the Fire and Police Pension Association of Colorado, one of the plaintiffs. “We think it is important for major shareholders to stand up against corporate abuse and to improve company governance on behalf of all shareholders.”


Copyright 2007 The New York Times Company




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