CA CEO says company determined to be 'gold standard` in corporate governance

Sanjay Kumar, President and Chief Executive Officer of Computer Associates International, Inc, told a group of institutional investors today that his "goal is to make Computer Associates the `gold standard` in corporate governance. That is a personal commitment and one that I intend to keep."

Speaking at the Council of Institutional Investors` Fall Conference in New York City, Kumar said: "Achieving the highest possible standards of good corporate governance begins with my commitment, and it is propelled by the time and energy invested by the extraordinary, independent directors who have come together to serve on our board today.

"The ultimate goal of good corporate governance is not simply to follow the most stringent rules," said Kumar. "It is instead to never stop improving - the continual improvement is critical at a time when the definition of good corporate governance is being redefined daily."

The recent corporate governance initiatives taken by Computer Associates include:

* Recruiting a top-tier board of new independent directors, among them Walter Schuetze, the former Chief Accountant at the Securities and Exchange Commission and Chief Accountant of the Commission`s Division of Enforcement, as well as Harvard University`s Jay Lorsch, one of the country`s foremost corporate governance experts.

* Electing Lewis Ranieri as the company`s first Lead Independent Director, a position that will come up for election annually by CA`s independent directors. In that role, Ranieri chairs discussions among the independent directors, facilitates their communication with one another and management, and serves as the spokesperson on behalf of the independent directors.

* Setting term limits for independent directors.

* Adopting rules strictly prohibiting the re-pricing of stock options, and taking the lead in the technology sector by deciding to expense stock options.

In addition, Kumar discussed a recent instance in which the company`s board of directors involved itself directly in the issues facing the company. The board, he said, commissioned an in-depth review by an independent auditing firm of CA`s accounting for the third and fourth quarters of fiscal 1998. Kumar said that even though the company`s accounting practices had been consistently applied for an 18-year period before and after those quarters, the board thought further review was appropriate because there had been press speculation that management might have sought to misstate the company`s financial results to boost the stock price in the periods just prior to the vesting of some major stock awards to management.

The review was led by members of the Audit Committee and the Lead Independent Director and was conducted by PricewaterhouseCoopers LLP (PwC). In its report to the Computer Associates Board, PwC, which has never done audit work for CA, found in the areas that PwC was directed to review by the board, no accounting irregularities, no violations of GAAP, and no other matters that needed to be reported to the board.

Earlier this year, CA said the US Securities and Exchange Commission and the Department of Justice had begun an inquiry into past accounting practices at the company. Kumar said that the company continues to cooperate fully with the government, and in that cooperative spirit presented PwC`s findings to the agencies to assist them in whatever way they find useful.

The full text of Kumar`s speech, as prepared for delivery, follows:

I`m glad to have an opportunity to report to such an important and influential group on the progress we are making - progress in setting and meeting the highest possible standards of good corporate governance.

I am here not because I think we don`t have some differences of opinion, but because I think we share some very important goals and objectives. I realise that I have some work to do if I am to convince everyone that Computer Associates is on its way to establishing the standard many other companies will be following a couple of years from now.

I won`t live up to that challenge by avoiding tough questions, so I am pleased to offer you a progress report on our "work in progress".

I believe that achieving the highest possible standards of good corporate governance begins with my commitment, and it is propelled by the time and energy invested by the extraordinary, independent directors who have come together to serve on our board today. The active participation of every one of our board members is fostering the overall success of CA.

By way of background, Computer Associates is a company with just over $3 billion in revenues; a company that produces enterprise software which helps more than 95% of the Fortune 500 companies manage their infrastructures.

Over the past 26 years, CA has grown rapidly, in part through acquisitions. I myself came to CA through such an acquisition in 1987. Since I joined, I have sought to build on CA`s commitment to quality in everything we do.

One of the areas I have focused on since becoming CEO in August 2000 is improving our relationships with our customers, the heart of our business, and an area where for too long we have suffered the slings and arrows of harsh criticism.

Two years ago, we took the lead among our competitors with the dramatic step of adopting an entirely new approach to doing business. We retooled and refitted everything in order to give our customers a simpler, more flexible and more cost-effective way to use and license our software. Letting them decide how much, for how long, and on what basis they would like to purchase our products.

We also went from a method of recording almost all of our licence revenue up-front, to a method that records all of our licence revenue over the term of the licence agreement. This was a bold step, but we knew we had to do it in order to ultimately better serve our customers and outpace our competitors.

The adoption of this new business model also helped eliminate the wrenching end-of-quarter purchase and discounting decisions that characterise much of the software business. This new approach resulted in near-term sacrifice for the long-term benefit of the company and its shareholders. And, in so doing, it improved the predictability of our revenue stream.

Since introducing the new business model in October 2000, we have accumulated over $3.2 billion of deferred subscription revenue - which will be amortised into revenue over a period of time. Going into our last quarter, almost 40% of our revenue was derived from the predictable amortisation of deferred revenue and this will continue to increase.

And, to help ensure constant improvement of customer service, we have continuously built up our Customer Relations Organisation. We now have 650 people, who don`t have sales quotas, but are dedicated to offering a range of resources to support our customers from implementations to technical support to ongoing customer education. We`re proud of the progress we`ve made in customer service, and continue to focus on even better service in the years ahead.

We also focused substantial attention during the past two years on being a leader in another area critical to the operation of the company, and where we recognised we could be stronger: corporate governance. Much of this effort became visible in May of this year when CA`s board adopted state-of-the art corporate governance principles designed to ensure the strongest possible board oversight and alignment with shareholder interests. In conjunction with the adoption of these principles, we have taken such key steps as:

* Recruiting a top-tier board of new independent directors including Walter Schuetze, the former Chief Accountant at the Securities and Exchange Commission and Chief Accountant of the Commission`s Division of Enforcement, and Harvard`s Jay Lorsch, one of the country`s foremost corporate governance experts. In fact, the corporate governance principles adopted by the company in May mainly reflect recommendations from Professor Lorsch.

* Electing Lewis Ranieri as the company`s first Lead Independent Director, a position that will come up for election annually by CA`s independent directors. In that role, Lewis chairs discussions among the independent directors, facilitates their communication with one another and management, and serves as the spokesperson on behalf of the independent directors. We also:

* Assigned specific responsibilities for the board`s four committees.

* Set term limits for independent directors. In fact, Dick Grasso, one of your speakers, was one of our long-time, independent directors until he stepped down a few months ago due to our new term limits provision.

* And even though we have never in our history re-priced stock options, we took the additional step of adopting rules strictly prohibiting this practice in the future. Finally:

* We took the lead - and I might say, the heat - in the tech sector by deciding to expense stock options. We heard criticism from some other technology companies because we broke ranks on this point, but we believe that for us it was the right step to take in our ongoing efforts to restore investor confidence.

I have complete confidence in the integrity of our financial reporting and the way we do business. We have an excellent internal audit staff that scrutinises every aspect of our business.

And we have a strong, independent board with an active and financially astute audit committee that should help build that same confidence among all our stakeholders.

Our CFO, Ira Zar, and I of course personally certified our past financial statements, and did so ahead of the government`s deadline in August.

In addition to soliciting Professor Lorsch`s views as we put in place our new corporate governance principles, over the past year we engaged a blue ribbon panel to look at our financial reporting and disclosures to make sure that our financial statements were as complete and accurate as they could be. As a result of that effort, we publish close to 20 pages of supplemental financial information each and every quarter.

We also recently took the lead in adopting a best practice goal of filing our 10-K and 10-Q at approximately the same time as we release our earning results. This gives investors more complete financial information as soon as we practically can.

I am not aware of any other public company doing this. And, just to put things in perspective, we filed our last 10-Q in 22 days, and our last 10-K in about 45 days.

I am proud that our efforts to date have already received recognition. The ISS Corporate Governance Quotient, for example, has recently ranked CA in the top 5% of the companies in the S&P 500.

But in my mind, the ultimate goal of good corporate governance is not to simply follow the most stringent rules. It is instead to never stop improving - and continual improvement is critical at a time when the definition of good corporate governance is being redefined daily.

With our board`s leadership, we are working with the NYSE and other groups to ensure CA is always at the forefront of accountability and transparency.

I have said in the past that Computer Associates will be considered the "gold standard" on corporate governance matters. That is a personal commitment and one that I intend to keep.

The highest standards of corporate governance are our goal and we`re proud of the progress. But that journey has not been without its challenges and distractions. For example, in 2001, and again earlier this summer, CA faced a proxy challenge by Sam Wyly, a shareholder who had sold his company to CA in 2000. In late July this year, Wyly approached us and shortly thereafter we reached an agreement to end the proxy battle. This agreement included a standstill provision with Wyly and his organisation - Ranger Governance - whereby they will not engage in a proxy contest or other similar activity for five years. The amount paid to extend his existing non-compete agreement and to reach the standstill with Wyly was $10 million.

As we noted at that time, we made this decision in order to avoid a distracting and costly proxy challenge that the board believed would not have been in the best interests of the company or its shareholders.

This was a difficult, even distasteful decision to make - especially because we had absolutely no doubt that our shareholders would again dismiss Ranger`s challenge handily. It was also difficult because we knew the settlement would be second-guessed and make CA a target for criticism.

Some viewed it as pure and simple "greenmail," contending that Sam Wyly received some advantage that other shareholders did not. With all due respect, this is simply not so. Any way you look at it, Ranger got no advantage. They lost money on this encounter.

In fact, they clearly spent more in the first year alone than they received in payment. And, they had already invested a considerable amount this year. What`s more, there was absolutely no assurance that they would not engage in the same expensive and distracting battle - however hopeless - again next year.

The decision to settle rather than fight - particularly for a company like Computer Associates - was not popular in all quarters. Indeed some of you undoubtedly voiced your criticism. And I understand that.

But, all things considered, it was the right decision - for Computer Associates and for our shareholders. It was in our shareholders` best interest to enable the company to maintain its momentum. And, it freed us immediately from an expensive, costly, distracting and damaging fight.

And it also paid for itself. Last year`s proxy contest cost CA more than $12 million, not including the lost opportunity to have CA management singularly focused on the business. And this year`s battle was on its way to being every bit as costly.

I said before that I intended for Computer Associates to be regarded as the "gold standard" in corporate governance. And some of you may find that inconsistent with how we settled this proxy battle. With all due respect, I do not. And faced with the same set of circumstances, I would make exactly the same decision again.

To me the litmus test on any set of governance standards is not that everyone finds them agreeable but instead that a company`s shareholders are always the beneficiaries.

But I will say that if there is one good thing we can all agree came out of the proxy battle it was that corporate governance moved very rapidly to the top of our agenda. And, I think everyone has derived some benefit from that.

Our independent - and tough - board continues to take very seriously its role of overseeing management`s success in establishing and executing strategy. They act as advisors, ask questions, solve problems and are active participants and decision-makers in fostering the overall success of CA. Let me give you one recent example of their important work.

From the beginning, we have been cooperating fully with the investigations of the company`s historical accounting practices by the SEC and US Attorney`s Office.

As part of CA`s ongoing effort to deal with this matter constructively, our outside directors - led by members of our Audit Committee and our Lead Independent Director - thought it would be appropriate to commission an in-depth review by an independent firm of CA`s accounting for the third and fourth quarters of fiscal 1998. This step was taken at their own initiative. In my view, the action demonstrated a clear sense of ownership on the part of the board in addressing all of the issues facing the company.

Even though our accounting practices had been consistently applied for an 18-year period - both before and after those fiscal quarters - the board focused on those periods. They did this because of press speculation to the effect that CA management might have sought to misstate CA`s financial results to boost CA`s stock price in the periods just prior to the vesting of the KESOP stock awards.

The board asked PricewaterhouseCoopers, which has never done audit work for us, to conduct this review under Schuetze`s supervision. It`s important to note that the 1998 financial results had, of course, already been audited by Ernst & Young, and they gave us an opinion that our financial statements complied with Generally Accepted Accounting Principles.

Nonetheless, our board decided that further scrutiny was prudent so they commissioned PwC to do the work. PwC has completed its study and has just recently reported to the board that they had found no accounting irregularities and no violations of GAAP.

We are very pleased by this result, because it confirms the view we`ve had all along that our accounting was appropriate. The findings have been presented to the government to assist them in whatever way they find useful.

Let me just conclude by saying that the pursuit of best practices is contagious. And it is spreading throughout Computer Associates. I believe our recent actions demonstrate CA`s resolve to be the very definition of best practices in everything we do: from customer service to innovation ... from product development to accounting ... and from financial practices to corporate citizenship.

While there is always room for improvement in each of these areas, I firmly believe we have in place the right management team, the right business model, and the right technology to see us through this difficult operating environment.

Perhaps most importantly, I believe a strong board and the highest standards of corporate governance are not a safety net to catch us if we fall. They are critical components in the fuel that drives our success and ensures prosperity for CA and its shareholders in the years to come.

Again, I thank the council for this opportunity to speak today and I will be glad to take your questions.