UnitedHealth Group, Minnetonka, Minn., faces potentially negative reactions from customers and possible fallout from federal investigations because of stock options granted to Chairman and Chief Executive Officer William McGuire and other senior executives. Still, the health insurer is likely to record 15% to 20% annual earnings growth, an analyst said. UnitedHealth announced that McGuire stepped down as its chairman and will retire as its CEO by Dec. 1, following a company-ordered investigation into stock options. McGuire agreed to re-price options awarded to him from 1994 through 2002 to their annual-high share price. During that period, McGuire was granted options 27 times, for a total of more than 300 million options, according to a report by an outside law firm and a board-appointed committee. The report concluded that options granted to McGuire were likely backdated to increase their value, that the company had inadequate internal controls related to options, and that senior management failed to ensure the process for granting options was adequate. In a research note, Thomas Carroll, an analyst at Stifel Nicolaus Capital Markets, said the backdating raises several potential issues, including possible loss of customers and lowered earnings expectations by new leadership.
The insurer named its founding CEO Richard Burke as new board chairman (Burke has been a board member since 1977) and said President and Chief Operating Officer Stephen Hemsley will become CEO when McGuire departs. While stock options granted to Hemsley were likely backdated as well, Hemsley played little or no role in the process, according to the report. He also agreed to re-price options. Two other officials -- General Counsel and Secretary David Lubben and director William Spears -- also resigned. Spears was chairman of UnitedHealths compensation committee and worked as an investment manager for McGuire and his family. Lubben was aware of the possible conflict but may not have discussed it with the audit committee, according to the report. Read the report. -- by Joseph Mantone
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