April 21, 2004 9:29 AM PDT
Kumar out as chief executive at CA
The company on Wednesday said Kumar will step aside and resign from CA's board, becoming chief software architect, a newly created position. Lewis Ranieri, the company's lead independent director of CA's board, will become chairman of its board of directors.
CA said that it will begin searching for an interim-CEO.
"The changes in Sanjay's role are not based on the conclusion that he engaged in any wrongdoing. Nonetheless, the conduct in question occurred during his tenure, and the board felt this action was appropriate," Ranieri said.
Ranieri, a money manager who worked for Solomon Brothers, joined Computer Associates' board of directors in 2001 and became lead independent director in 2002. CA, like Tyco and Enron and other companies, brought in outside directors to improve oversight of corporate governance.
Computer Associates, which makes management software for businesses, has been accused by the Securities and Exchange Commission of a "widespread" practice of improperly recognizing revenue during 2000, which helped boost the price of the company's stock and meet analysts' revenue expectations. Compensation of top executives, including Kumar, was tied to stock performance.
Kumar himself has not faced any indictments regarding the inquiry. Other high-level executives, including the former chief financial officer, have pleaded guilty to criminal charges.
The board's decision to take Kumar out of his leadership position demonstrates the company's commitment to resolving the ongoing inquiries into past financial practices but still does not completely put the matter behind them, observers said. On top of the ongoing SEC investigation, the company faces the difficult task of introducing a new CEO with the former CEO staying on.
"This is messy way to deal with the situation," said Jeff Embersits, a financial analyst with Shareholder Value Management. "It just develops different camps in the company and more opportunities for infighting, which is the last thing the company needs now."
Filling the hole
Analysts said CA may look to the outside for a new CEO to demonstrate a clean break with the management team that ran the company in 2000. Also, Kumar, who started the process of establishing a more well-rounded management team with outside executives, has still not designated a successor.
A representative for Computer Associates said the company "has a strong management team and that the day-to-day management of CA is in good hands."
"The good news is that this removes some of the cloud around CA," said Rick Sturm, an analyst at Enterprise Management Associates. "But the big question mark is: Who will they put in there?"
Computer Associates will need at least 100 days to find a new chief executive, given that there are few people with experience in running a company with the size and breadth of CA, said Umesh Ramakrishnan, a managing partner at search firm Christian & Timbers. The firm earned $3 billion last year and has a very broad portfolio of products in management, security, storage and mainframe tools.
"I think it's going to be tough to fill Sanjay's job," Sturm said. "It's not a small challenge, and there aren't going to be a lot of people interested."
"I think it's going to be tough to fill Sanjay's job. It's not a small challenge, and there aren't going to be a lot of people interested."
--analyst Rick Sturm
of Enterprise Management Associates
Although an outside CEO would have the benefit of having Kumar around to ramp up to speed, that also had disadvantages.
"Sanjay's role as chief software architect is not an empty-suit position. There is precedence for this--look at Bill Gates," Ramakrishnan said. "But any prospective CEO will be asking what Sanjay's duties will be and what authority he has. If there is a sign that Sanjay can make decisions and the final word doesn't rest with the CEO, then it can create problems for the CEO search."
In the transition to a new CEO, Computer Associates faces a balancing act: the company wants to rely on Kumar's experience but also bring in a manager with strong leadership skills, observers said.
"Clearly the organization and the board hold (Kumar) in high regard. They're trying really hard not to lose him but make a dramatic enough response to satisfy public concerns and private concerns that the SEC may have expressed," said Frank Gillett, an analyst at Forrester Research.
Despite the management turmoil, the company's technology and product strategy remain sound, analysts noted.
Investors appeared to react positively to the shift in Kumar's position. The company's stock was up 2.5 percent in afternoon trading, at 26.21, shortly after the board decision was announced.
The fall of Kumar, once the protege of founder Charles Wang, represents the most dramatic fallout from the company's disputed financial practices, which brought on the SEC investigation.
Earlier this week, the company fired nine employees who worked in the financial and legal departments during 2000, and said it was "nearing completion" of the investigation by its audit committee.
The audit committee found that Computer Associates prematurely booked revenue in fiscal 2000 based on software license agreements that were actually recognized after the end of the quarter in which they were said to have been signed.
Earlier in April, the company's former chief financial officer, Ira Zar, pleaded guilty to charges of conspiracy, securities fraud and obstruction. Two executive vice presidents of finance also have pleaded guilty to conspiracy to commit fraud and obstruction.
Changing the changing face
Gregg Moskowitz, an analyst at Susquehanna Financial Group, expects Computer Associates to navigate the internal shake-up well. The Islandia, N.Y.-based software maker has been effective in handling the transition from an interim finance chief to current CFO Jeff Clarke, a former Hewlett-Packard executive who came on board this month, he noted.
Kumar led the introduction of new corporate governance processes after 2000, when he became CEO, and a different system for recognizing revenue. He also instituted several customer and partner outreach efforts to improve sometimes-antagonistic relationships Computer Associates had with its customers.
But even with Kumar's track record over the past four years, the board decision could augur Kumar's eventual departure and perhaps that of other executives, said James Governor, an analyst at RedMonk.
"Kumar talked about a kinder, gentler, friendlier CA, but he was associated with the old, brutal, money-driven, aggressive CA," Governmor said. "Kumar's still in a tough spot."
Because the investigations into improper financial activities continue, some uncertainty hangs over Computer Associates as company partners and customers wait for the outcome of the ongoing inquiries, analysts said. The company itself and other officers could face further criminal charges, the company said on Wednesday.
"This will cause a rough couple of months for CA," said Richard Ptak, an analyst at Ptak, Noel and Associates. "The quicker they can fill the (CEO) slot, the better it will be."
CNET News.com's Dawn Kawamoto contributed to this report.
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