Holder Demands a Meeting Over Option-Grant Timing; A Threat to Withhold Votes

The California Public Employees' Retirement System is demanding a conference call with the compensation committee of the board of UnitedHealth Group Inc. over its disclosure practices, and is threatening to withhold votes for board directors seeking re-election. 

In a letter sent to James A. Johnson, chairman of the UnitedHealth board's compensation committee, Calpers board President Rob Feckner demanded a conference call ahead of Tuesday's UnitedHealth shareholders meeting to discuss what he called "serious threats to the credibility, governance and performance of UnitedHealth." Specifically, the letter criticized the company's failure to explain how it determined stock option grant dates for Chief Executive William McGuire and a handful of other executives in past years, and its "inconsistent" disclosure of its option-granting program.

The move by Calpers increases the scrutiny of the process by which Dr. McGuire received some of the $1.6 billion in unrealized gains he holds in company stock options. Calpers holds 6.55 million shares, or 0.5%, of UnitedHealth's outstanding stock. The pension fund, known for its strong stances on corporate governance, could spur other investors to join in its criticism. The move also increases pressure on UnitedHealth's board to more fully explain its past option-award practices soon, even though its board only launched a probe into them earlier this month.

In a statement, UnitedHealth said it would welcome a meeting with Calpers representatives to explain its equity-based compensation, "which was designed to minimize any impact on costs for UnitedHealth's clients, while aligning the interests of employees and shareholders." But it didn't elaborate on whether it would discuss how it determined option award dates and other practices under review by its board.

Four current UnitedHealth directors are seeking re-election at the company's annual shareholders meeting Tuesday. Calpers, which is also the country's third-largest purchaser of health-care benefits after the federal government and General Motors Corp., said it's considering withholding its votes to re-elect Mr. Johnson and Mary Mundinger, both compensation committee members, as well as Dr. McGuire as chairman.

"We're leaning that way," said Pat Macht, Calpers assistant executive officer of public affairs, "unless they can convince us otherwise."

UnitedHealth's market value has risen roughly 10-fold since 1998, and Dr. McGuire has gotten much of the credit from shareholders for that increase. Withholding a vote for him would go one step further than the recommendations last week by proxy advisory firm Institutional Shareholder Services. The firm advised shareholders to withhold votes for Ms. Mundinger and Mr. Johnson but to keep Dr. McGuire as chairman. It also recommended re-electing Douglas W. Leatherdale, the fourth director whose term is up.

Dr. McGuire's compensation has come under fire after a review of filings showed that he and at least 10 other top executives frequently received options just before big run-ups in the company's stock price or at its lowest point in the year. The pattern, first reported3 in The Wall Street Journal last month, has raised questions over whether the options were backdated to maximize their value, and the company says it has since received a call from the Securities and Exchange Commission.

UnitedHealth said in its statement that the $1.6 billion paper stock option gains held by Dr. McGuire are largely the result of the company's extraordinary stock price appreciation over the past several years. Had UnitedHealth shares performed in line with the S&P 500-stock index from the dates of the grant of his shares, the unrealized gains would be only $23 million as of December last year, the company said.

Last week, Dr. McGuire said he also had recommended that the board stop or suspend future stock awards and some other forms of compensation for certain long-serving senior executives.