Giant Insurer Decided To Oust Hugely Successful CEO
By James Bandler and Charles Forelle
The Wall Street Journal
Thursday, December 7, 2006
Over the past 15 years, the board of UnitedHealth Group Inc.
couldn't have been more supportive of its chairman and chief
executive, William McGuire. Directors lavished close to $2
billion in compensation on him, counting stock options, as
he built UnitedHealth into one of the country's largest
Some directors moved with him in social and charity
circles. "We're so lucky to have Bill," director Mary
Mundinger said earlier this year. "He's brilliant."
Last week, Dr. McGuire left his job, following a vote by the
same board to dump him. It acted unanimously in October
after concluding that his explanations for a pattern of
unusually well-timed stock-option grants didn't add up. Dr.
McGuire thus became one of the biggest casualties in the
options backdating scandal, which so far has swept away more
than 60 corporate officials, including 16 CEOs.
How did one of America's most pliant boards turn on its star
chief executive? Dr. McGuire's support slowly leached away
over the course of a six-month internal investigation.
Documentation that could support his defense was sparse. A
board-ordered statistical analysis undercut his arguments.
And his closest board ally was sidelined by a conflict of
interest that unsettled other directors. In the end,
directors felt pressure after their lawyer told them federal
regulators appeared likely to charge the UnitedHealth chief.
Now, Dr. McGuire and the board are girding for tense
negotiations over how much of his giant cache of stock
options, many still unexercised, he'll be able to take with
him. He has already agreed to surrender about $200 million
of those options' value, and people close to the situation
say the company hopes to get back at the very least $250
million more. He is still likely to end up with more than
$1 billion, although last week a federal judge hearing a
shareholder lawsuit temporarily barred him from exercising
any options or receiving any retirement pay.
Dr. McGuire's lawyer, David Brodsky, said, "While neither a
lawyer nor accountant, Dr. McGuire believed that the
processes by which options were granted were transparent,
appropriate and approved. Indeed, experts who reviewed
these processes never raised concerns at the time about the
stock options program." Dr. McGuire himself declined to be
Dr. McGuire's troubles began in March, when The Wall Street
Journal published an article raising questions about
exceptional patterns of stock-option grants at a number of
companies, including UnitedHealth. In three separate
instances, the article found, Dr. McGuire had received
options at UnitedHealth stock's lowest closing price of the
That made them especially valuable, since options typically
convey a right to buy the employer's stock in the future at
the price on the grant date. The formula means a recipient
can profit only if the stock rises. But it turns out many
companies cheated by granting options on one date and
pretending they had been issued earlier, when the stock was
cheaper. Besides Dr. McGuire's grants at yearly lows, a
number of his other grants were dated just before price
After the article, Dr. McGuire initiated an internal
investigation. In early April, the board formed a special
committee. It hired William McLucas, a former Securities
and Exchange Commission enforcement director, now at the law
firm of Wilmer Cutler Pickering Hale & Dorr.
At the outset, Dr. McGuire could draw on a big reservoir of
goodwill from directors. A former pulmonologist, he helped
coordinate care when the wife of one director, William
Spears, fell ill. Dr. McGuire's family foundation and the
company gave generously to charities some directors were
involved with. And directors had made millions from their
UnitedHealth options as the stock soared more than 50-fold
during Dr. McGuire's tenure. That enormous rise accounted
for most of the millions Dr. McGuire earned.
Of 10 outside directors, the CEO had strong support from at
least four: Mr. Spears, a New York money manager and
friend; Ms. Mundinger, dean of Columbia University's
nursing school; Thomas H. Kean Sr., a former New Jersey
governor and chairman of the 9/11 commission; and Gail
Wilensky, a specialist in health-care policy. The first
three had served on the compensation committee during much
of the period under scrutiny, making their own conduct an
issue in the internal probe.
But Dr. McGuire's core allies would have little role in
shaping the investigation. That fell to the special
committee, led by James Johnson, a former chief of mortgage
giant Fannie Mae who recently served as an adviser to Sen.
John Kerry's presidential run. Also on the panel was
Douglas Leatherdale, a former chief of insurer St. Paul
Cos., and Richard Burke, a founder and retired CEO of
UnitedHealth, who was friendly with Dr. McGuire. The
committee closely supervised the lawyers and accountants
doing the actual digging. Other directors were filled in
later and less frequently.
Complicating matters was that the board had given Dr.
McGuire broad latitude to issue options to subordinates as
well as to a right to choose when he wanted option grants to
himself made. After picking a date, he had to get approval
from the compensation committee. The key question the
WilmerHale lawyers faced: Did the board committee really
approve Dr. McGuire's grants on the dates reflected in
company regulatory filings? Or might they have been
backdated to low-price days that would make them more
Directors asked for records to show the options were
approved on recorded grant dates. Management came up
largely empty-handed. Some minutes of
compensation-committee meetings were missing. Others didn't
mention approval of any grants near a period in question.
In interviews with the WilmerHale lawyers and in phone calls
with directors, Dr. McGuire said he hadn't backdated
anything but, rather, had chosen to receive grants when the
stock was low after a decline, according to people briefed
on the conversations. He expressed disappointment that
there wasn't more corroboration and that underlings hadn't
kept proper paperwork.
Dr. McGuire also stated that as a man of high ethical
standards, he wouldn't have fabricated anything. He said
that after picking a date for his grants, he would seek
approval from Mr. Spears, head of the compensation
committee, or occasionally another panel member.
The main person who could verify this account was Mr.
Spears. He told the board's lawyers that while he recalled
conversations with Dr. McGuire, he couldn't be sure when
they actually took place. Phone records showed the two
talked frequently, often around the times of some grants,
but these records proved little because the two were close
Mr. Spears's value as a witness soon suffered a blow. The
money manager told the lawyers he had handled more than $55
million of the McGuire family's fortune and had accepted a
$500,000 investment in his own business from Dr. McGuire.
Mr. Spears maintained he had disclosed this conflict of
interest to the board before. Two 1999 documents supported
that account: an email and an executive's handwritten
meeting minutes. But among the directors, only Mr. Kean
thought it was possible he could recall having been told of
the relationship, say people familiar with the matter; the
others said they had no idea.
Many directors were "incredulous" when they learned of the
financial tie at a meeting in the spring, according to
someone who was there when the board was briefed. While
directors felt Mr. Spears was honest, the entanglements
tainted any defense he might have made of Dr. McGuire.
Aware of fellow directors' feelings, Mr. Spears stayed on
the debate's sidelines in later meetings, says someone
familiar with the gatherings.
Dr. McGuire expressed frustration that his reputation was
being hurt by a scandal he considered hyped. "He indicated
that this was way blown out of proportion and unfair," says
Irwin Redlener, a friend and co-founder of the Children's
Health Fund, a not-for-profit group UnitedHealth supported.
On June 25, Mr. McLucas brought some compelling data to the
board's special committee. His presentation showed that
grants were regularly dated at or near the stock's lowest
prices for the quarter, a suspicious pattern. Later,
directors learned that after the mid-2002 passage of new
federal rules requiring almost immediate disclosure of
option grants, there wasn't a single quarter in which the
large grants customarily given to top executives were dated
at a quarterly low.
The point: After rules had made backdating impossible, Dr.
McGuire's purported ability to pick propitious grant dates
vanished. That juxtaposition wounded a key line of defense
and "made everyone in the room sit up and focus," says one
person close to the situation.
Mr. Johnson was becoming convinced the CEO would have to
depart. The former Fannie Mae chief was well aware of how
negative perceptions can hurt a company. In a 2004
accounting scandal that brushed close to him, Fannie Mae
suffered a stock-price decline, congressional grilling and
the loss of its chief executive at the time. One person
recalls Mr. Johnson saying in June or July that it was
unlikely Dr. McGuire would be able to survive.
On July 11, directors convened for a regular meeting in
Minneapolis. Dr. McGuire made a pre-emptive move. He sent
directors a five-page memo suggesting a series of steps to
deal with the options problem, say people familiar with its
contents. He said the board could reprice any tainted
options, name a chief administrative officer to remedy
deficient record-keeping and make other changes to
processes. Deep in the memo, Dr. McGuire said he would be
ready to leave if the board thought that was in the
company's best interest.
The board didn't want to act before the full scope of the
problem was known. It took no action.
In late August the lawyers running the probe made another
unsettling finding. In late 1999, the board had approved
new options for Dr. McGuire and others to replace a batch
that were temporarily worthless. That is, their exercise
price was higher than the current stock price because of a
stock decline after they were issued. In granting the
replacements, the company had suspended, rather than
canceled, the old ones, largely for accounting reasons.
Mr. McLucas learned that in August 2000, the suspended
options had been reactivated, meaning that the recipients,
including Dr. McGuire, effectively got a huge second
helping. For Dr. McGuire, the profit embedded in the extra
options -- the difference between their exercise price and
UnitedHealth's market price -- is now around $250 million.
The maneuver skirted disclosure requirements and potentially
violated accounting rules, WilmerHale lawyers concluded.
Mr. McLucas brought the issue to the special committee and
eventually to other directors. Lawyers later said two
directors recalled some discussion in 2000 of reactivating
suspended options for other employees, but no compensation
committee member recalled intending such a lucrative award
for Dr. McGuire himself. "Alarm bells were going," says a
person close to the board.
Skirmish Over Math
Meanwhile, a side skirmish broke out over math. The Wall
Street Journal's analysis had found that the odds of Dr.
McGuire's highly favorable pattern of awards occurring by
chance were one in 200 million or greater. Some directors,
including Ms. Mundinger, who has a doctorate in public
health, criticized the Journal's methodology. The result
was a lengthy statistical discussion among directors that
After word reached directors that Dr. McGuire had hired a
statistics firm to help him rebut the Journal's findings,
the WilmerHale lawyers decided to bring in their own numbers
experts. In a board meeting on Oct. 2, the lawyers
presented an analysis from a firm called Lexecon Inc. It
said there were many ways to crunch the numbers, each
yielding different probabilities. But all the odds were
very long. In the end, Dr. McGuire never presented
statistical data to directors.
By early October, the investigative work was all but
finished. A squadron of lawyers and accountants had plumbed
millions of pages of documents and conducted interviews with
more than 80 witnesses. After discussing Mr. McLucas's
findings, special-committee members agreed that the
situation was serious and the CEO's departure was a likely
It fell to Mr. Burke, the former UnitedHealth CEO, to travel
to Minnesota to tell his old comrade the bad news. But to
the surprise of some committee members, Mr. Burke proposed a
solution short of Dr. McGuire's departure. He suggested the
CEO temporarily step aside until the options tempest calmed,
according to people familiar with the matter. Dr. McGuire
rejected the idea out of hand, two people close to the
situation say. If the board wanted him to leave, he said,
Outside directors set Friday, Oct. 13, as the day for a
critical meeting at WilmerHale's Washington offices. The
agenda: a review of the investigative report and a
discussion of Dr. McGuire's fate. At that point, some
directors hadn't yet made up their minds.
The meeting began around 10 a.m. in a large room filled with
directors and their lawyers. Directors not on the special
committee received the 14-page report for the first time
that morning, a person close to the board says. The
strongly-worded report concluded it was likely that
backdating had occurred and that Dr. McGuire played a
central role. Citing the CEO's claim that he didn't
backdate any stock options, the report dryly said, "Certain
facts run contrary to this assertion."
The report didn't suggest any complicity by directors on the
compensation committee. It said it "might have been better"
if they had paid more attention to the granting process and
asked more questions.
Seated around the conference-room table, the directors took
about a half hour to read through the report. No one spoke.
Directors asked Mr. McLucas for his assessment. According
to several people, he said that he thought it was likely the
SEC would bring charges against Dr. McGuire, and that the
agency could seek to bar him from serving as an officer or
director of a public company.
Mr. McLucas told directors they should make their decisions
based on Dr. McGuire's conduct. But he also said they would
be in a difficult spot if they voted to keep him and the SEC
sought a short time later to remove him. UnitedHealth has
since given the results of its probe to federal prosecutors
and the SEC, neither of which has taken action.
At about 4 p.m., a subdued Dr. McGuire addressed directors.
He spoke somberly, without notes, for about 40 minutes,
talking about how much the company meant to him and how
proud he was of its success. He said he believed he had
acted ethically and appropriately, say people familiar with
the meeting. "I apologize to everyone for putting the
company through this trauma," one person recalls him saying.
Some directors couldn't meet his gaze. "It was an
anguishing event," said another person in the room who had
been close to Dr. McGuire.
Dr. McGuire's lawyer, Mr. Brodsky, of Latham & Watkins, made
a brief presentation, saying the WilmerHale report had given
short shrift to evidence of his client's innocence. Mr.
Brodsky, a former federal prosecutor, said the CEO's
money-management relationship with Mr. Spears had been
properly disclosed, citing a company lawyer's 1999 email
saying "the full board" had been apprised of financial
Mr. Brodsky also contested the report's treatment of a
McGuire memo that counted against him. In it, the CEO wrote
to the compensation committee on Oct. 22, 1999, about a
grant that "should be awarded." Despite his use of the
future tense, this stock-option grant ultimately bore an
earlier date: Oct. 13, the day the stock closed at its
lowest price that year. Mr. Brodsky called this
meaningless. He said the memo was a rewrite of an earlier
draft, and Dr. McGuire merely hadn't fixed the verb tenses.
Dr. McGuire and his lawyer left the room, and directors
asked Mr. McLucas for his impression of the defense. "I
don't think there's anything we've heard that would change
our assessment," one person recalls the lawyer saying.
Directors took no action that Friday. On Sunday, the board
had scheduled a meeting in Minnesota. Exhausted, they
changed plans and convened instead in Washington. Dr.
McGuire didn't attend.
Mr. Spears, the compensation-committee member who managed
some of Dr. McGuire's money, arrived at the meeting. He
then submitted his own resignation from the board and left.
At the meeting, directors took a vote on a 14-step plan to
deal with the options issue. It included Dr. McGuire's
immediate departure as chairman and his resignation as chief
executive by Dec. 1. The vote was unanimous. Mr. Burke
traveled to Minnesota to deliver the news.
Later, several directors called Dr. McGuire to express their
gratitude for his service and their sadness over the way
things had ended. Dr. McGuire was distressed, said a person
familiar with one of these conversations. "He continues to
believe he did nothing wrong, which makes it all the more
Last Thursday was the last day Dr. McGuire reported to his
10th-floor office. A private man, he left that day without
emotional goodbyes. Said one person close to the matter,
"He slipped out without anyone noticing."
Write to James Bandler
email@example.com and Charles Forelle at