Gretchen Morgenson: A new standard for recovering executive pay
NEW YORK: 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 companys option backdating mess.
Not only is the number big and round - by far the largest giveback by U.S. 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 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 about where it was in March 2006 before a Wall Street Journal article first questioned the timing of option grants made to Dr. William McGuire, UnitedHealths longtime chief executive.
So it seems only appropriate that 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.
Dont fret for 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 its 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 Blatz, former chief justice of the Supreme Court of Minnesota, and Edward 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 committees 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, New York.
That was the committees forgiving treatment of two UnitedHealth directors and members of the compensation committee who oversaw McGuires option grants and employment agreement. They are Thomas Kean, the former governor of New Jersey, and Mary Mundinger, dean of health policy at Columbia Universitys 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 arent held accountable in some shape or form and arent at least heavily criticized in the special litigation committee report, that is a mixed message,” Foley said. “That you can have a situation this bad, with write-offs and tax impacts and recoveries this big, and the directors still arent liable - what does that say about their accountability?”
Don Nathan, a UnitedHealth spokesman, said that neither Kean nor Mundinger would comment. But Nathan said the board had set up a committee of representatives from four of the companys 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 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.”
