October 17, 2006

UnitedHealth’s Latest Revelation: Compensation Committee Chair Handled CEO’s Money

As the mainstream media drools over the imminent departure of UnitedHealth’s CEO for option backdating, I was stunned to see that one of the company’s directors, William Spears, resigned in the wake of revelations that Mr. Spears was handling some of Dr. McGuire’s financial investments at the same time he was presiding over the company’s compensation committee. The details of the financial entanglements are laid bare in this 14-page Special Committee Report prepared by Wilmer Hale (but this relationship was not disclosed in the company’s latest proxy statement).

One area where the plaintiffs’ bar continues to press in lawsuits is the lack of director independence. For example, the In re Viacom Inc. Shareholder Litigation case is scheduled to go to trial in January after New York Supreme Court Justice Charles Ramos denied Viacom’s motion to dismiss this past June. As you might recall from an earlier blog, this case is different than Disney because a finding that the board wasn’t independent likely would change the standard against which to measure the board’s conduct – from a “business judgment” standard to the more challenging “entire fairness” standard. An entire fairness standard would put the onus on Viacom’s directors to prove that they acted fairly in determining the amount of compensation.

And even if directors are not conflicted, they might be treated as a conflicted persons if they are “dominated” by someone who has a conflict, including an executive or another director. Based on recent caselaw, a court would probably investigate the extent to which other directors were dominated by Mr. Spears or Dr. McGuire – and perhaps apply a “director-by-director” analysis as done in Emerging Communications and Emerald Partners.

What about personal liability for those directors who went along with Mr. Spears, as head of the compensation committee? Personal liability requires greater culpability than a mere lack of independence. However, there are claims that could be brought (for example, corporate waste) that could give rise to personal liability – at which point, tricky indemnification and D&O insurance issues are raised. And remember that other issues are raised by lack of a compensation committee’s independence, such as the loss of the exemption under Section 16(b) – see our “Director Independence” Practice Area for more analysis.

Yesterday, the UnitedHealth board announced this series of actions it intends to take (including a pat on the rump for Director Spears). After the plaintiffs’ bar is through with them, me thinks this list will grow a wee bit longer…

A Conference Recap

I was pleased to be quoted in Sunday’s NY Times article by Gretchen Morgenson (who also cited both last week’s “3rd Annual Executive Compensation Conference” and our 2nd Annual Conference as well), but I didn’t agree with the characterization of Fred Cook as someone who has caused many of the compensation problems that we now face. At a time when quite a few compensation consultants are still afraid to step up to the plate and provide responsible advice to their clients, Fred Cook remains a bright beacon who is not afraid to say what he thinks is right, regardless of what those that defend the status quo might think.

For example, Fred has spoken about internal pay equity as an alternative benchmark at our past two conferences. Very few consultants are willing to speak on the topic, perhaps because they view it as an admission that their long-standing reliance on peer benchmarking was in error.

I was happy to speak to a few consultants in our audience who said that they were “coming around” and now recognize the utility of internal pay equity. I wouldn’t be surprised for internal pay equity to become as ubiquitous as tally sheets over the next few years.

Mourning for Larry the Mailroom Guy

The SEC is mourning the loss of one of the true great characters on the Staff. I had countless conversations with Larry during my two tenures at the SEC and he always brightened my day. Below is a note from Chairman Cox to the Staff:

“This is a grim day for the SEC, because we are mourning the loss of one of our community. Larry Levine, whose passing late Tuesday has saddened all of us, in many ways exemplified what is best about our organization.

At death we remember and celebrate life — and there was much about Larry’s life worthy of remembrance and celebration.

Despite being born with a developmental disability and being legally blind as an adult, Larry earned an AA degree at Montgomery College. He then made a career here at the SEC, for 28 years. Larry didn’t just put in his time here, but reveled in the fact that he was part of our mission. Like all of us, he was honored to wear the SEC badge. At times when the agency had early departure — whether because of inclement weather or building malfunction — Larry wouldn’t leave. He would just say to a supervisor or colleague, “brother, I have work to get out.”

Larry was a dedicated worker who never lost sight of how important his task was. In nearly three decades his sense of duty never wavered. His excitement carried over to his personal life — including a love of horse racing, and the Dallas Cowboys. He loved his family, and was a loyal son to his parents Frances and Albert, a dedicated brother to sister Cindy and brother Rusty, and an adoring uncle to his niece.

Larry overcame the odds and served his country, and America’s investors, with distinction. His example of transcending difficulty and meeting life’s challenges with enthusiasm will remain an example to us all.”