UPDATE: UnitedHealth Holders Seek More Say On Governance

UnitedHealth's former chairman and chief executive, William McGuire, agreed to leave the company last year after an independent probe found that many of the largest stock-options grants made to officers and employees over several years likely were backdated to improve their value.

UnitedHealth earlier this year reduced past financial results by more than $1 billion to account for backdated options and has adopted various corporate-governance initiatives. Those policies include separating the roles of chairman and chief executive, filling five board seats with new independent directors over the next three years, and strengthening director-independence requirements. The company also implemented new stock-ownership guidelines for directors and executive officers.

Activist shareholders, however, want more of a hand in governance. CalPERS says a UnitedHealth advisory committee that gives large shareholders a role in setting director qualifications doesn't go far enough in assuring that investors can place their nominee choices on the ballot.

"Today at UnitedHealth, only the board is empowered to put a director nominee up for election on the proxy statement," CalPERS' board president, Rob Feckner, said in a statement this month. "We believe boards that control their own membership can lead to a culture characterized by unaccountable and entrenched directors," which may result in abusive executive-compensation practices, fraud or other misconduct.

A similar proposal gathered substantial support at Hewlett-Packard Co.'s (HPQ) annual meeting this year, although it didn't win a majority of the votes cast.

CalPERS has started a Web site to push its proposal, and noted there that the idea has the backing of two major proxy advisory services - Institutional Shareholder Services and Egan-Jones Proxy Services. ISS last week issued a report supporting all four proposals advanced by UnitedHealth shareholders, including the CalPERS plan.

The California State Teachers' Retirement System, the second-largest public pension fund in the U.S. and owner of 5.5 million UnitedHealth shares, has sent a letter urging other investors to support the CalPERS measure.

"This proposal will add value for UnitedHealth's shareowners while enhancing the company's reputation as a model of fair and transparent governance," CalSTRS Chief Investment Officer Christopher J. Ailman said in a statement last week.

A UnitedHealth spokesman didn't immediately return a call for comment.

UnitedHealth's board said in a proxy statement that the CalPERS proposal "would result in disruptive, divisive and expensive director elections without benefit to the shareholders as a whole," and is unnecessary because company policies and procedures already provide investors the opportunity to participate in the process of nominating and electing directors.

Meanwhile, U.K. activist investor Hermes Investment Management Ltd. wants UnitedHealth to permit shareholders to cast an advisory vote each year on the proposed compensation package for the health insurer's most senior executives.

Hermes Chief Executive Mark Anson, in a letter to UnitedHealth shareholders this month, urged support for Hermes' proposal asking the managed-care provider to allow such a vote each year. Anson called the proposal an important governance reform.

"Any such vote would be non-binding and advisory, but we believe that it would foster an important dialogue between shareholders and the board of directors about executive pay policy, and help ensure that pay is closely tied to performance," Anson wrote.

Hermes has experience with advisory votes on compensation in the U.S. and Australia, and with binding votes on pay in Scandinavian countries and the Netherlands.

"Compensation programs are one of the most powerful tools available to a company to align management interests with the long-term interests of shareowners. UnitedHealth Group has, in the past, experienced issues with its incentive-based compensation and accountability to shareowners in that regard," Anson said.

"This is evidenced by the fact that options granted to (UnitedHealth's) former chairman and CEO were worth $1.6 billion by the end of 2005, a value that was inflated due to the backdating of stock options," he said. An advisory vote would address those concerns and ensure that pay is appropriately linked to performance, improving value for shareholders, he added.

UnitedHealth's board opposes the Hermes proposal.

"The company believes that its compensation policies and programs effectively serve the interests of shareholders and the company and are appropriately balanced and competitive to accomplish the crucial task for recruiting, motivating and retaining talented senior executives," UnitedHealth said in its proxy.

UnitedHealth's board opposes all four shareholder proposals on the agenda for the annual meeting.

The American Federation of Labor and Congress of Industrial Organizations proposes that a significant portion of future equity compensation grants to senior executives be shares of stock that require the achievement of performance goals as a prerequisite to vesting.

The Egan-Jones proxy service supports the CalPERS and Hermes proposals, as well as another shareholder proposal, from the Massachusetts Laborers' Pension Fund, to limit benefits provided by the supplemental executive retirement plan. The agency opposes the AFL-CIO proposal linking executive performance to vesting of shares, saying it could place the company at a competitive disadvantage in compensating management.

-By Dinah Wisenberg Brin, Dow Jones Newswires; 215-656-8285; dinah.brin@dowjones.com