Commentary: Computer Associates...Well, It's A Start

But it will take more than dropping CEO Kumar to dispel the clouds

The board of directors of software maker Computer Associates International Inc. (CA ) has been patient -- many would say to a fault. Even as a two-year federal investigation of alleged accounting misdeeds at the Islandia (N.Y.) company edged closer and closer to Chairman and CEO Sanjay Kumar, the board held off on replacing him. Despite a guilty plea by former CFO Ira Zar on securities-fraud charges on Apr. 8 in which he implicated "high-level" executives in the alleged scheme to misallocate revenues, the board said its internal investigation had not turned up evidence that Kumar broke the law.

Kumar denies wrongdoing. But on Apr. 20, during an all-day meeting at Manhattan law firm Sullivan & Cromwell LLP, the board asked Kumar to step down. At the same time, it decided to begin settlement talks with the government in an effort to avoid prosecution for securities fraud.

It's high time they made that move -- but the board still needs to do more to dispel the dark cloud over the company. And early indications aren't promising. A source close to the board says it will consider internal as well as outside candidates for a new CEO. That would be a mistake. The ongoing federal investigation -- which has already led to guilty pleas on securities fraud and obstruction of justice charges by three top executives and the firing of nine middle managers -- has made it clear that problems were widespread. Computer Associates would be far better off hiring an outsider who is untainted by the scandal. Another misguided move: keeping Kumar on as chief software architect. That could complicate life for the next CEO. "Why not make a clean break of it?" says Jeffrey A. Sonnenfeld, a professor at Yale School of Management.

The answer is that Kumar is widely credited with turning the troubled company around since becoming CEO in 2000. CA's board has been reluctant to part with him without proof that he was involved in the alleged scheme. While the board said the change in his role was not "based in any conclusion that he had engaged in any wrongdoing," it moved nevertheless because the problems occurred during his tenure. "It was clear from the allegations from ex-colleagues that he's likely to be accused of something" by the Justice Dept., says one director. "We can't have that hanging over the company."

So will CA stumble again with Kumar's removal? Probably not. He patched up frayed relationships with customers and Wall Street analysts. He replaced half the board and improved corporate governance. And he totally changed the company's business model -- counting revenues gradually over the term of a contract rather than all at once. Those changes assure steady, predictable revenues and earnings. "Even if Sanjay leaves, the wheels don't fall off," says Bear Stearns & Co. (BSC ) analyst John DiFucci. He expects revenues to grow 12.8%, to $3.7 billion for the year ended in March; profits should hit $277 million, up from a loss of $162 million a year earlier.

For now, the company is in capable hands. Veteran Wall Street exec Lewis Ranieri, the lead independent director, has been named chairman, and an interim CEO will be selected. The front-runner is board member Kenneth Cron, former CEO of Vivendi Universal Games (V ), according to a source close to the board. The possibility that additional executives may be tainted with wrongdoing makes it imperative to shop outside for a new CEO. "You don't want to anoint somebody and find out they're going to be indicted," says a source at an executive search firm.

There are plenty of people in the tech industry who could do the job. Names mentioned by management experts include Ann Livermore, executive vice-president of HP's consulting arm, HP Services, and Steven A. Mills, senior vice-president and group executive of IBM's (IBM ) software group. Kumar clearly doesn't want to go, but it's time for him to move on. CA needs to make a fresh start.

By Steve Hamm

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