The Ties UnitedHealth Failed to Disclose

For years, the health insurer didn’t tell investors about personal and financial links between its former CEO and the "independent" director in charge of compensation

by Jane Sasseen

In its 1999 proxy statement, UnitedHealth Group made sure investors knew of a few small relationships between its directors and the company. While reassuring shareholders that all the directors on its compensation committee were independent of management, it pointed out that the insurer paid immaterial amounts for insurance policies bought from the company headed by one director, while the law firm of Walter Mondale, another board member, was also the company's corporate counsel.

Following the New York Stock Exchange's 2004 imposition of stricter standards for director independence, UnitedHealth (UNH) had eliminated even those minor ties by the time the 2005 proxy was filed. This time, it told investors that all the members of its comp committee met the NYSE's independence test, and that no relationships or ties existed between directors and the company.

How nice of them to share. Of course, what the proxy neglected to mention were significant personal and financial ties between ousted CEO William McGuire, and William Spears, a New York investment adviser and long-time head of UnitedHealth's compensation committee.

Controversial Agreement

Those ties were outlined in a report, released Monday, prepared for the UnitedHealth board by William McLucas, a former head of the SEC's enforcement division and now with the Washington, D.C., law firm of Wilmer Cutler Pickering Hale & Dorr. According to the report, Spears has served as a trustee since 1992 for two trusts set up for McGuire's children. And from 1994 to mid-2006, he also acted as an investment manager for McGuire, overseeing assets ranging from $15 million to $55 million in 2006.

In June, 1999, the CEO even invested $500,000 in Spears's money-management firm when he bought it back from the larger conglomerate that then owned it. Several months later, Spears was the company's point person in negotiating what proved to be a highly lucrative, highly controversial employment agreement for McGuire.

Nor is McGuire the only company executive with a financial relationship with Spears. Stephen Hemsley, who was named Oct. 16 to succeed McGuire as UnitedHealth's chief executive, also hired Spears to manage his money. Starting with a $12 million account in 2001, by 2006, Spears was managing $52 million of Hemsley's money as well. As a result of the probe, Spears has agreed to leave UnitedHealth's board (see BusinessWeek.com, 10/16/06, "Hard Times for UnitedHealth").

Declaration of Independence

All of which has raised an obvious question: Just how could a director with those substantial—and presumably remunerative—ties to key officers be considered independent? And why weren't those ties made clear to shareholders? "It's a real stretch to say this guy is independent," says Jacob Frenkel, a securities lawyer and former SEC enforcement official. "The company and its principals will be hard pressed to justify a rationale for not disclosing that relationship."

The answer appears to lie in how independence is defined. Before 2004, when the disputed grants occurred, the standards in place were vague. Legal experts say it's unclear whether Spears would have met them. But in the wake of Enron, WorldCom, and other corporate scandals, both the NYSE and Nasdaq strengthened the rules concerning independent directors for the companies listed on their exchanges. The SEC vetted those rules but has no separate requirements for independence of its own.

At the NYSE, where UnitedHealth's stock is listed, all directors on a compensation committee must be independent, meaning they should have no material relationship with the company. A director or an immediate family member can't have been an employee of the company within the last three years, for example, or have been an executive officer of any other firm that has either made payments to, or received payments from, the company in excess of $1 million.