CEO on the Spot

Can Computer Associates CEO Sanjay Kumar overcome jilted investors, angry customers, and an SEC probe--all at the same time?

Sanjay Kumar was on his best behavior. Through winter and spring of 2002, as corporate scandals erupted across America, the CEO of Computer Associates International Inc. (CA ) appeared determined to cast the embattled software powerhouse as a model of corporate virtue. It was no easy sell. After a decade of white-hot growth, CA had become legendary for its convoluted accounting, outsize executive handouts, and a take-no-prisoners approach to customers. Still, the 40-year-old Kumar toiled to turn over a new leaf. He coddled customers and worked to clear up accounting questions. He overhauled the board of directors, long considered a rubber stamp, even bringing aboard a former chief accountant of the Securities & Exchange Commission. Was this a new, spic-and-span CA for the post-Enron age?

Not quite yet. On July 24, Kumar stupefied investors and corporate-governance experts alike. After a week of negotiations that ended after midnight, he dished out $10 million to end a proxy challenge from Texas entrepreneur Sam Wyly. It seemed the bad old CA had reared its ugly head. "Technically, it's not greenmail, but they paid somebody to go away," says Ted White, director of corporate governance for the California Public Employees' Retirement System. CA justifies the deal as a legitimate means to end a management distraction--which drained precious time for Kumar's turnaround effort. But the company can't wash off the odor of scandal. These days, it's operating under the noxious cloud created by Enron, WorldCom, and Adelphia.

Does Computer Associates deserve a place among such scoundrels? While no one at CA has been indicted, the Long Island-based company is under investigation by the SEC and the U.S. Justice Dept. for alleged accounting irregularities. Investors, outraged by accounting shifts and a stock price that has fallen from a peak of $75 in 2000 to about $10 today, have filed nearly a dozen suits.

CA has a long road to fix a host of frayed relations. Its 50-plus acquisitions fed dizzying growth that sometimes topped 30% per quarter. But the resulting layoffs left hundreds of former employees seething from coast to coast. CA used the fact that its products were vital to customers to get them to agree to massive new contracts, critics say, and paid little attention to customer service. That left customers feeling roughed up and angry. "CA bullied and cajoled. They screwed the customers for every cent they could get out of them," says a former CA sales manager.

Now, Kumar's a CEO on the spot. He runs a widely distrusted company in an era where trust is suddenly worth more than growth. What's more, in a depressed tech market where companies count heavily on loyal customers, Kumar has to deal with disgruntled buyers who are all too happy to postpone software updates. The upshot: Kumar is now reaping a bitter harvest from the '90s.

The imposing job facing Kumar is to rebuild CA. He says he's out to change the very nature of the software giant, from the way it adds up numbers to the way it deals with people. The question is whether the pencil-thin Sri Lanka native, who was promoted to CEO two years ago, can remake a company so much a product of his own DNA. For 15 years, he stood shoulder to shoulder with founder and current Chairman Charles B. Wang as the two forged a hard-edged corporate culture focused on creating growth at all costs.

And for a time, Wang and Kumar succeeded beyond their wildest dreams. In the go-go market of the '90s, CA emerged as a global tech titan--the world's third-largest software company. Annual revenues hit nearly $7 billion by its fiscal 2000, net profits approached $700 million, and the company's 40% operating margins rivaled those of Microsoft Corp. In the business of managing mainframes and computer networks, CA was king.

Kumar wants to recapture CA's glory days. And, to do so, he has to improve the company's standing with customers, investors, and employees. "We have to change and consistently behave differently," he says. In his five-year drive to revamp CA for the new decade, Kumar is striving to create a gentler giant. The path to growth, Kumar says, is to cozy up with customers and develop products they want to buy. It used to be all about landing the big deal. Now, "it's about the customer," he says.

That's a common refrain these days, but Kumar's backing it up with resources. He has set up a 650-person customer-care organization and launched annual customer-satisfaction surveys, tying pay of 500 senior executives to the results. And he has visited dozens of customers to get back in their good graces. He's humbler now, offering apologies for past missteps and new flexibility in the way customers buy software.

For growth, Kumar is banking on those same customers. Once they're feeling friendlier, and a bit richer, he plans to sell them loads of new software. Monster acquisitions are out. Instead, Kumar is developing products in-house. In the next 12 to 18 months, he plans on delivering a new generation of software to handle wireless communications and Web services--which automate communications between Web sites.

To smooth out CA's see-saw earnings, Kumar rejiggered the company's accounting. In the past, CA recognized software-license revenues immediately after a deal was concluded. That left it vulnerable to end-of-quarter misses. The new, so-called ratable model recognizes software-license revenues over the life of a contract. There's less risk that the delay of one or two large deals will torpedo a quarterly-earnings report.

Kumar has also launched a major overhaul of the board of directors. He expanded the board from eight to 11, retiring several veteran members and adding seven new outsiders, including a former chief accountant of the SEC, Walter P. Scheutze, and a Harvard Business School corporate-governance expert, Jay W. Lorsch. The board this spring adopted term limits and appointed a lead outside director.

But all the while, dual federal probes hang over his head. As president for eight years and CEO for two, Kumar is responsible for the way the company kept its books. He went along with CA's long-standing revenue-accounting policies, including double-counting certain revenues when the company renegotiated long-term contracts. When CA changed its practice at the beginning of fiscal 2001, it retroactively reclassified revenues for the previous five years, slicing a hefty $2.5 billion off the total. And that's just one thing the feds are looking at. Kumar denies the company has done anything illegal. But if CA is proved to have violated rules or laws, he could be ousted.

While nobody's calling for Kumar's head, some management experts say that an outsider without his ties to the company's past could be in a position to do more, faster. As an insider, it's difficult for Kumar to repudiate the company's legacy--and make a clean break. Other troubled companies, such as United Airlines Inc., are seeking fresh starts under new leadership.

Still, with all his problems, Kumar holds a trump card. The company he runs is an immense thicket of software properties, offering up 1,200 products in half a dozen markets--much of it the result of CA's buying binge. Indeed, Kumar's supporters argue, it could take a very long time for an outsider to get up to speed.

That's one reason the board says it's sticking with him. Lewis S. Ranieri, CEO of Ranieri & Co. and CA's lead outside director, who has been on the board for two years, says Kumar is the man for the job because he's making progress in customer relations and corporate governance under difficult conditions. "I don't know who did what to whom before I came, but for the two years I've seen, he's the antithesis of the old CA," says Ranieri.

When confronted with some of what his critics have to say during breakfast recently in Manhattan's Grand Hyatt Hotel, Kumar defended himself fiercely. "I have nothing to hide. I'm not in the bunker," he said. He denies that he did anything illegal and stresses the progress he's making. "I have a five-year plan, and we're two years into it," he says.

Kumar acknowledges that CA behaved poorly in the past, but he blames the problems on underlings. "Our sales force was very successful, and it gave rise to some bad behavior," he says, adding: "Much of what went on, the top of the company had no idea."

At the same time, he's unapologetic about the controversial $1.1 billion stock grant made to the company's three top officers in 1998--with 30% going to him--even though investor outrage forced the trio to give back about half of the stock.

If Kumar escapes the federal dragnet, there's still the core business to fix. CA's revenues grew 7%, to $765 million, in its first fiscal quarter, ended June 30. That doesn't look half bad in an industry reeling from a vicious downturn. But CA's numbers may in fact be worse. The company is in the middle of an accounting change that makes its performance hard to measure by traditional metrics. By another of Kumar's measures, the company's average annualized revenues--new orders divided by the number of years of the contracts--dropped 7%. True, CA's losses are getting shallower. They were $65 million in the first quarter, vs. $342 million a year earlier. And it has reduced debt from $4.15 billion a year ago to $3.28 billion now. But debt payments still gobble most of CA's cash flow. Though the lousy economy has made times tough for most tech CEOs, "he should have made more progress by now," says analyst Sarah Mattson of RBC Capital Markets.

Kumar will be hard-pressed to reverse the numbers. CA's mainframe-software sales are stagnant. Sales of nonmainframe software for security and storage haven't provided the needed lift, and analysts doubt they will anytime soon. The cash crunch has prevented Kumar from boosting research and development--the seed corn of future growth. Then, too, competitors such as IBM (IBM ) and Veritas Software claim to be picking up customers at CA's expense. "We take advantage of the fact that they have dissatisfied customers," says Steve Mills, the general manager of IBM's software group. While CA has also won its share of contests, most analysts expect it to grow at only a single-digit rate for the next year or two.

Through all the stress and controversy, Kumar remains unflappable. Perhaps it's a result of growing up under duress. A Tamil born and raised near the ethnic killing fields of Sri Lanka, he recalls one morning in 1974 when his family awoke in their home in the capital city of Colombo to discover that four men had been tied to nearby lamp posts and shot dead.

Kumar says his parents brought him up with Horatio Alger-type values. His mother, a teacher in a Montessori school, and his father, an animal-husbandry researcher, pushed Kumar and his two sisters to work hard and speak their minds. The family was middle class, but they lived in a five-room house that flooded during monsoons. When violence erupted between Tamils and Sinhalese, the family fled to the U.S. Kumar was 14. They arrived in Greenville, S.C., with just $80. "My parents moved here so my sisters and I would have opportunities. They gave up everything they had," he says.

In the faded textile town of Greenville, Kumar had to adapt to a new culture. He remembers that on his first day of high school, he went to the cafeteria at lunchtime and noticed that all of the blacks were in one line, the whites in another. Since he didn't belong to either group, he went without lunch. That night, his mother advised him to pick the shortest line each day. So that's how Kumar coped.

Software was the young Kumar's ticket out of the backwaters. In high school, he spent untold hours in the computer lab. He dropped out of Furman University in Greenville--and gave up his early dreams of being a doctor--to start a small software company of his own, which he gave up after his partner died in a car crash. He later landed a job as a product manager for UCCEL Corp., a Texas software company that CA bought in 1987.

When he met Charles Wang, Kumar found a teacher who could take him places. Within a year, Wang brought him from Texas to Long Island to be his assistant. "I saw he had a tremendous future," says Wang. "I tested his skills and leadership ability. The more he could take, the more I would give him." Wang put Kumar in charge of planning, then acquisitions, and made him president in 1994.

For years, Kumar and Wang were inseparable, sharing experiences that forged a tight bond. Once, in Chicago, they got stuck in an elevator that hung up between the 35th and 36th floors and started bouncing like a 3,000-pound yo-yo. Wang, no fan of heights, blanched and begged Kumar to make it stop. Every time Kumar flipped the stop switch, a deafening alarm went off. When he flipped it again, the horrifying bouncing resumed. The episode lasted only 15 minutes, but "it felt like we were stuck forever," Kumar says.

Although Wang had built CA from the ground up, even carpeting the first offices himself, it was the team of Wang and Kumar that fashioned CA's bare-knuckle culture in the '90s. They encouraged sharp disagreements. Favored employees were encouraged to come up with new ideas and run with them. "It's a thunderously great place to work if you like extreme challenges and opportunities," says Mark Stabler, who was CA's senior vice-president for global marketing until he left in 2000 to join a rival.

Deeper down, the organization wasn't a happy place. Every year, managers shook up the sales force, reassigning as much as 60% of them to new accounts. That meant starting from scratch with customers, year after year. Some employees lived in fear of being punished for making mistakes. "If you're not one of the 200 people in the organization who have the power to effect change, it can be a miserable place to work," says a former CA executive who was part of the company's in-crowd. "If you made a mistake, you'd be fired or demoted. We called it spending time in purgatory."

Kumar defends CA's Darwinian culture. "The company demanded performance," he says. Yet he is remodeling the old CA into a place where employees have more say and less turmoil. Last spring, during the annual reorientation of the sales force, only 2% to 3% of the staff switched customers. In April, Kumar reorganized the company into five business units, each with its own product-development and marketing teams--and with plenty of once-scarce autonomy. While Wang relied on a few trusted lieutenants to run the company, Kumar has assembled a team of 14 people who report to him.

These days, Kumar spends much of his time tending to customers. He patches up things personally with companies that were frustrated with CA, such as KeyCorp Ltd. (KEY ). "They were treating us like a captive customer," recalls K. Wade Tolman, executive vice-president for enterprise technology at the Cleveland-based bank. "The only time we saw the account team was when we had a contract to be renewed."

It got so bad that a year and a half ago, KeyCorp decided to dump CA. Kumar jetted to Cleveland to save the contract. At the bank's headquarters, Kumar offered KeyCorp more flexibility in using and paying for CA software. Since then, says Tolman, "they have behaved extremely well."

While Kumar blames much of CA's customer woes on an overaggressive sales force, interviews with former employees show that Kumar himself was sometimes in the thick of things. He attended a meeting of CA executives at the company's Kirkland (Wash.) offices in December, 1999, when they decided to get tough with the Albertson's Inc. (ABS ) grocery chain. For nearly a year, Boise (Idaho)-based Albertson's had resisted inking a multiyear contract that included a heavy dose of new software. It simply wanted to renew licenses for mainframe software it already owned, according to three former CA sales people. But CA had plenty of leverage to push for the bigger deal. Most of Albertson's licenses had expired. That meant CA could ask the grocer to turn off computers, the lifeline of its business. With that powerful threat in hand, the executives decided to put the squeeze on the grocer.

Kumar says he doesn't remember the discussion and calls the accusation that he intended to bully Albertson's "bullshit." He says he has fired CA sales people for suggesting such threats. Albertson's declines to comment on suppliers.

Now, the customer surveys show CA has started to turn its reputation around. This year, 41% of participants rated it as a good or excellent partner--up from 37% last year. But overcoming a decade of bad feelings is proving to be a slog. At an April tech conference in San Diego hosted by Gartner Inc., about 70% of an audience of several hundred corporate tech managers turned thumbs down when asked if they saw CA positively or negatively. Kumar, on stage, looked stricken. The attitude of many customers is still: Show me. "CA had a lot of issues for years," says Ralph J. Szygenda, chief information officer of General Motors Corp. "People tend to not trust you after a while."

To win over customers and investors, Kumar has to prove to them that he has fully taken control from Wang--who was seen as CA's tough guy. Board members say Wang has adapted to his new role, gradually giving up operational duties and now mostly advising Kumar. But former employees question whether Kumar has truly taken charge. "I'm not Charles's puppet. I'm my own man," says Kumar, sounding exasperated at the suggestion.

Still, Wang, as chairman, looms over him, which adds a level of complexity to his job. During the proxy battle in 2001, investors pressed Kumar to add independent voices to the board--the board that Wang had built. The task called for delicate diplomacy. Out of deference to Wang, Kumar talked with board members behind the scenes and urged them to press governance issues at meetings so he didn't have to confront the founder directly, according to a board member and another source close to the board. Kumar acknowledges that he talked to board members individually about governance but denies he was trying to avoid confronting Wang.

Kumar's diplomatic finesse wins him high marks from the board. They also credit him for passing on one of the perks that many CEOs seem to take for granted: the company loan. Kumar has never asked for one. In fact, when UBS (UBS ) in February called a $46 million loan he had taken out to cover the taxes on his 30% share of the $1.1 billion executive stock grant, he didn't ask the board for a bailout--even though the value of his stock had been whittled down to $27 million. "He took a shot in the head and smiled," says Richard A. Grasso, chairman of the New York Stock Exchange and a member of CA's board until he resigned in August.

Amid all the flack Kumar gets from investors and former employees, he is eager to be seen as a good guy. Asked how he explains the government investigations and proxy fights to his two daughters, he tells this story: "My older daughter (age 12) read one of the ads that Wyly put out. She said, `Why are they saying these bad things?' I explained what a proxy fight is about. She said, `Are you going to say bad things about him?' I said, `No.' She said, `Good. That's very Quakerly of you.' She goes to a Quaker school. Then she pats me on the back and walks off."

Clearly, Kumar has made an earnest stab at changing how his company operates. But in this unforgiving climate, CA's poor reputation with customers and investors is going to be difficult to overcome.

The outcome of the federal probes is the wild card for Kumar. Horatio Alger virtues taught by his immigrant parents have played a key role in his successes. But the investigations will reveal if financial misdeeds also played a part in his rise to wealth and prominence. If so, all of Kumar's toil will be for naught, and his story will have a dark ending so familiar in this era of capitalism.

By Steve Hamm

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