Universal Health Services a union target during proxy season

Alan B. Miller is chairman and chief executive of Universal Health Services Inc., which is subject of a union campaign for a shake-up of the board of directors.

Describing King of Prussia-based Universal Health Services Inc. as having a “uniquely entrenched governance structure,” a union-affiliated investment research group has urged the company’s shareholders to withhold their support for the reelection of Lawrence S. Gibbs to the board.

Gibbs, a board member since 2011, is the only director who public shareholders have a say on this year, given the division of the seven-member board into three classes. The other director up for re-election this year is UHS founder Alan B. Miller, but only company insiders, who own 7.5 percent of UHS shares, get to vote on his nomination.

UHS, whose annual meeting is set for May 17, owns 26 acute-care hospitals in the United States and is the nation’s largest operator of inpatient mental-health facilities, with 189 properties in 34 states, plus additional operations outside the country. In the Philadelphia area, Universal Health Services owns Brooke Glen Behavioral Hospital in Fort Washington; Fairmount Behavioral Health System and Friends Hospital, both in Philadelphia; the Horsham Clinic in Ambler; KeyStone Center in Chester; and Hampton Behavioral Health Center in Westampton, according to its annual report.

In a regulatory filing Tuesday with the Securities and Exchange Commission in  support of its opposition to the reelection of Gibbs,  the Washington-based CtW Investment Group cited a string of federal investigations — including a criminal investigation disclosed in 2015 of the company as a whole — and its own research into UHS’s admissions and billing practices.

“Our analysis has convinced us that the risk of regulator enforcement actions against UHS is considerable, but our efforts to convince the board to respond to these risks by reforming its outdated and entrenched structure have been unsuccessful,” CtW wrote.

CtW, which said it works with pension funds sponsored by unions representing six million members, noted that it has been pushing UHS to create a board committee to oversee regulatory compliance and quality of patient care, as some of its peers have done, but has gotten nowhere.

“Because UHS maintains a unique combination of a classified board and differential voting power for shares held by insiders, and because it dedicates five of seven board seats to be elected solely by company insiders, shareholders have few mechanisms to make their voices heard and to hold directors accountable,” wrote the group.

More than two-thirds of the companies on the Standard & Poor's 500 stock index put all their directors up for election annually, according to Equilar, which tracks corporate boards and executive compensation. Annual election of all directors is considered best practice by governance experts because it gives public shareholders more control. 

In a statement, UHS discounted the CtW filing as a “continuation of the campaign by some of its union membership whose true purpose is to increase unionization at our facilities. The filing by CtW primarily reincorporates allegations which Universal Health Services has previously refuted and which we continue to deny.”

Miller, the UHS chairman and chief executive, has 83.2 percent of the voting power in the company, though owning less than 15 percent of the shares outstanding. Miller and other insiders also get to elect five of the company’s seven directors.

Total compensation for Miller last year was $19.9 million, including stock options valued at $14 million. Miller also took in $46 million from cashing in stock options that were granted in the past, the company’s proxy statement said.

Separately, the California Public Employees’ Retirement System and the New York City Pension Funds have urged shareholders to vote for a nonbinding proposal that would allow certain long-term shareholders to nominate up to 25 percent of the directors.

“We believe providing access to a company’s proxy by giving shareowners the ability to nominate directors to the board is one of the most important rights for owners of a company,” the pension funds wrote. “Without effective proxy access, the director election process simply offers little more than a ratification of management’s slate of nominees.”

The pension funds, which manage $480 billion in assets and own more than $50 million worth of Universal Health Services stock, said that as of March 10 more than 400 companies, including Apple, Microsoft and Johnson & Johnson, have given shareholders the right to nominate directors.

UHS said that the pension funds’ proposal “advances a solution for a problem that does not exist,” and that its board “has strong support from our stockholders.”

Over the last five years, UHS shares have had a total return of 183 percent, significantly outpacing the 101 percent gain in the S&P 500 Health Care Index. The company reported net income of $747 million on revenue of $9.8 billion last year.