Backdating Options,
Frontloading Fortunes

The ongoing stock option scandal has claimed what some see as its biggest victim yet, the top exec at America's most powerful health insurer. But 'victim' may not be quite the right word. We explain why.

October 23, 2006

You won’t find anything terribly original in the corporate career of William McGuire, the veteran CEO kicked into retirement last week by insurance mega giant UnitedHealth.

McGuire didn't do much to break new ground over 14 years as the company’s top exec. He simply followed the standard contemporary American CEO playbook. He merged, he purged, he gouged, and he cheated his way to personal fortune.

The cheating — on stock options — has now come back to bite McGuire. On his way to pocketing over $520 million in compensation from 1992 through 2005, charges a law firm report commissioned by UnitedHealth last spring and released a week ago Sunday, McGuire had his options repeatedly “backdated.”

Three different times McGuire picked up massive option grants from the UnitedHealth board that gave the CEO the right to buy company shares at what turned out to be the stock’s lowest price of the year. Nice coincidence.

Another time, McGuire had the UnitedHealth board “suspend” 750,000 of his options after the company’s share price slumped. The board then kindly replaced the suspended options with new options, all much more potentially profitable. Months later, after a spike in the UnitedHealth share price, the board “reactivated” the suspended options. Bottom line: an extra $250 million for McGuire.

McGuire, of course, didn’t spend all his time as CEO conspiring with the UnitedHealth board to supersize his personal net worth. He did devote time to actually running the company. That work, in large part, revolved around plotting a series of mergers that turned UnitedHealth into the 800-pound gorilla of America’s medical marketplace.

One in six Americans, the Washington Post noted last week, now pay insurance premiums to UnitedHealth.

These one in six Americans aren’t benefiting particularly much from the “economies of scale” that mergers in the health insurance industry were supposed to create.

Back in 1987, as New America Foundation health policy director Len Nichols noted last week at a forum on the at-risk American middle class, premiums for a typical family health insurance policy ate up 8 percent of the income for a typical American family. That same policy today chomps away 19 percent of typical family income.

Health insurer mergers, on the other hand, have worked wonders for companies like UnitedHealth. During McGuire’s CEO tenure, for instance, the UnitedHealth share price soared over fifty-fold.

For this fine performance, McGuire will continue to be rewarded, despite the backdating scandal. On December 1, the day he steps down as CEO, McGuire will walk away with retirement payouts, options, and assorted other benefits worth a potential $1.1 billion.

McGuire will likely need need some of that largesse for legal fees. State and federal prosecutors are now investigating McGuire — and over 140 other CEOs across the country — on possible crimes connected to their serial backdating.

Almost all these investigations involve backdating shenanigans that took place before the Sarbanes-Oxley corporate reform legislation went into effect in 2002. Sarbanes-Oxley, many observers feel, has made backdating ancient history.

But we may still be living in ancient times. Last Wednesday, the McAfee anti-virus software company “retired” CEO George Samenuk and “terminated” President Kevin Weiss for manipulating stock options granted in 2004 and 2005.

“In 2004, the grants came just days after an earnings report that disappointed analysts,” notes the San Jose Mercury News, “while the grant the following year was issued shortly before upbeat news that pushed the stock higher.”

The CEO chase after jackpot windfalls, in other words, continues. And top executives will continue to cross ethical — and legal — lines so long as these windfalls go unlimited.

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