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UnitedHealth Group (UNH)
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UNH » Topics » Disclosure

This excerpt taken from the UNH 8-K filed Oct 16, 2006.

Disclosure

The Company made disclosures in various SEC filings that its option grants were made at the fair market value of the Company’s stock on the dates of the grants and that no compensation expense was recognized. In light of our findings above, the disclosures with respect to stock option practices and related accounting were not accurate in certain respects. Accounting and disclosure implications that flow from the option granting practices of the Company are being considered by the Company and its auditors and will be addressed and/or corrected, as necessary, in the Company’s financial statements and filings.

18 This was the closing price on October 25, 1999.

 

19 This was the closing price on July 31, 2000.

 

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III. SUMMARY OF CONCLUSIONS

In summary:

 

  •   The measurement dates used by the Company for most of the 29 option grants we reviewed were not correct, and many of these grants were likely backdated.

 

  •   The option grants made to newly-hired employees and employees receiving promotions were backdated as a matter of policy.

 

  •   The grants to Dr. McGuire of 1 million options and to Mr. Hemsley of 500,000 options, dated October 13, 1999, in connection with their respective employment agreements, were likely backdated.20

 

  •   The full extent and nature of the financial relationships between Dr. McGuire and Mr. Spears, a member (and Chairman) of the Compensation Committee, that existed during the period when Dr. McGuire’s 1999 employment agreement was renegotiated and that created a conflict of interest, likely were not disclosed to the Ad Hoc Committee or to the Board at the time.

 

  •   A 1999 supplemental grant of options to employees and to senior management, which replaced previously issued options that were “suspended” (and later reactivated), was likely backdated. This supplemental grant amounted to a “repricing” of the suspended options, which caused an adverse accounting consequence that was not recognized by the Company.

 

  •   The reactivation of the suspended options amounted to a substantial new grant of options at a significant discount to many officers and employees. Given the size and unusual nature of this transaction, there should have been clear, written communications to the Compensation Committee expressly setting forth the amounts to be received by management in the “reactivated” grant, the rationale for this grant, and the accounting effect. The minutes should have reflected clearly the Committee’s deliberations on this important matter.

 

  •   UnitedHealth’s internal controls related to option grants were inadequate.

 

  •   Senior management failed to ensure that the option granting practices were appropriate.

 

  •   Although it might have been better if members of the Compensation Committee had asked for an explanation for why decisions made at meetings were addressed in Written Actions and had focused more on the prices at which options were granted, the Directors were entitled to presume that matters brought before them for action were procedurally proper and consistent with applicable legal and accounting standards.

An appropriate tone at the top, adequate controls and discipline over the option granting process, and management transparency with the Board and its committees on executive compensation matters are basic and critical to the integrity of option grants. As described above, there were various failings in these areas.

20 See note 5. Mr. Hemsley had little or no role in the negotiation of, or the process leading up to, the option award in his contract.

 

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