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UnitedHealth Promises Changes

The board responds to mounting pressure on the options front.

UnitedHealth Group

(UNH) - Get Free Report

has promised to cure its corporate governance problems and hopes to save some of its embattled directors in the process.

The giant health insurer this week laid out plans to halt future stock option grants and other perks to well-rewarded executives, including its billionaire CEO William McGuire. The company has come under heavy fire in recent weeks for lavishing McGuire with cheap stock options that are now worth well over $1 billion. UnitedHealth has said it believes it acted appropriately but has promised to investigate and to share findings with investors.

The UnitedHealth move comes as



, a California chip company probing options issues of its own, plunged 24% Thursday on news it would have to restate earnings going back three years. UnitedHealth dropped 3% Thursday.

In a letter to shareholders on Wednesday, McGuire said the board could vote to end such grants for "a small number of our most senior and longest tenured executives" -- including himself -- as early as next week.

In addition, UnitedHealth plans to declassify its board so that all directors face re-election at the same time. For now, however, the company has found itself fighting hard just to keep two directors seeking re-election right now.

Institutional Shareholder Services, the proxy advising firm known as ISS, has urged investors to withhold votes for compensation committee members James Johnson and Mary Mundinger at next week's annual meeting. But UnitedHealth has warned of serious consequences if that happens.

"While the withhold vote can be considered 'symbolic' or a way to 'send a message' where directors are elected by a plurality of votes cast at a meeting of shareholders, such votes have far greater significance for UnitedHealth Group's director nominees," McGuire stated. "This is because, as you may recall, UnitedHealth Group recently instituted a majority voting policy as part of its progressive efforts to bring governance practices in line with the requests of shareholder representative groups such as ISS."

As a result, McGuire explains, a director who receives more "withhold" votes than favorable votes has to promptly tender a letter of resignation. After that, he adds, board members must consider the resignation offer and then act on it within the next 90 days.

Stressing UnitedHealth's outstanding performance, McGuire urged shareholders to vote for the directors who will be standing for re-election along with himself instead.

"Their talents, experience and knowledge of our company are invaluable," he insisted. "They have intimate knowledge regarding our company's areas of focus, are experienced in public company matters and embody the highest standards of integrity."

Some worry more about the fate of McGuire himself. The powerful executive, who doubles as chairman of the board, has steered UnitedHealth to amazing levels of success.

Since 1991, McGuire himself pointed out, the company's stock has increased nearly 70-fold because of that strong performance.

"The appreciation of the company's stock ... is comparable to that of the dot-com companies at the height of the tech boom -- except that, in UnitedHealth's case, this performance was based on achievement, not promise, and has been sustained for over 15 years."

Still, McGuire has profited far more than most as a result of that impressive run. He has collected stock options priced at levels so cheap that, some feel, they had to be backdated. His company has fielded questions from the

Securities and Exchange Commission

as a result.

So far, UnitedHealth itself has yet to directly address whether any backdating occurred. The company has appointed a special committee to thoroughly investigate the matter instead.

Meanwhile, however, some seem to fear the worst.

"Although it is impossible to know with certainty what happened, we believe that there is a high likelihood that the alleged backdating occurred," Prudential analyst David Shove wrote last week. "The consequences of this activity would be focused in three areas -- accounting restatements, regulatory sanctions and possible management changes. The first two are manageable; the third is more distressing to us."

For now, Shove continues to recommend buying UnitedHealth's stock. But he has slashed his target price on the company from $72 to $60 a share.

The stock, which fetched nearly $65 before the compensation scandal erupted, fell $1.49 to $47.28 on Thursday.