UnitedHealth Group (UNH)

Governance

Insofar as the backdating of options is concerned, the Compensation Committee members focused on the size of the proposed option grants and their dilutive effect on shareholders, and on which senior managers would receive grants. They did not focus on the dates associated with the grants brought before them because, among other things, the options were part of long-term compensation and as such, the grant dates were not thought to be a significant issue. Mr. Spears also recalls nothing that came to his attention suggesting that the grant dates were a problem. Although it might have been better if members of the Compensation Committee had asked for an explanation of why decisions being made at meetings were addressed in Written Actions instead of the minutes and focused more on the prices at which options were granted, it is not at all clear that such an inquiry would have led the Directors to discover that some grants were likely backdated. Moreover, directors are entitled to presume that matters brought before them for action will be procedurally proper and consistent with applicable legal and accounting standards. Here, those in management charged with ensuring that the option grant process was handled in

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an appropriate fashion and that the Directors were informed of actual or possible adverse consequences failed the Board and the Compensation Committee.

The supplemental grant on October 13, 1999 to employees and officers raises other difficult governance issues. The grant, premised on management’s belief that it was best for the Company to replace “out of market” options above $46.50 per share with options at $40.125, was likely approved at a meeting on October 26, 1999, when the share price was already at $48.94.¹⁸ Additionally, the August 2000 reactivation of the previously suspended options was the equivalent of a new grant of over 2 million options to officers and employees with exercise prices between $46.50 and $61.1875 when the Company’s stock was trading at $81.81.¹⁹ In Dr. McGuire’s case, this amounted to a new grant of 750,000 shares at an average share price of $47.21.

It is difficult to assess the Compensation Committee’s approval process with respect to the making of the supplemental grant or the later reactivation of the suspended options due to the virtual absence of any written materials prepared for or as a result of any Board or Compensation Committee meeting on this subject and the fading of memories of those involved over time. While the two directors present for the August 1 meeting recalled that there was a discussion of the reactivation at that meeting, no member of the Compensation Committee in 2000 specifically recalled that Dr. McGuire was the intended recipient of such a large grant of options only 10 and one half months after receiving the 1,000,000 options in connection with his employment agreement. Nor did we find any documents in which this grant to Dr. McGuire and other employees was explained to the Compensation Committee. 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 and the rationale for this grant. The minutes should have reflected clearly the Committee’s deliberations on this important matter.