Computer Associates offers a case study worth remembering about CEO pay abuse, ineffectual boards and press cheerleading.
A chapter has closed in the history of giant computer software company Computer Associates (now called CA), and in the life of its one-time high flying CEO, Sanjay Kumar, who was sentenced recently to 12 years in federal prison for securities fraud and obstruction of justice. The story is rather symptomatic of the ills that brought business to its Enron era state of disgrace and somewhat illustrative of the shortsightedness of the press, for that matter.
In 2000, Computer Associates was awarding huge stock options and bonuses to its top executives. With the assistance of his hand-picked board, which charitably could be called governance-challenged, company founder Charles Wang’s compensation approached a billion dollars in one year. Giant paycheques were also handed out to other CA executives.
As I wrote in The Globe and Mail in early 2001 and prior to the series of scandals that afflicted so many companies where CEO pay soared into the stratosphere:
Observable throughout North America is the Midas touch of CEOs and boards that works in reverse for shareholders. Last fall, JDS Uniphase CEO Jozef Straus took home more than $187 million from stock options. The stock recently slumped to a 52-week low. The day Computer Associates’ Charles Wang cashed in board-approved options for a profit of $995 million, the company’s shares tumbled 31 per cent.
Well, like many companies, Computer Associates was playing fast and loose with the numbers. Wang’s s self-annointed successor, Sanjay Kumar, who received a bonus of more than $300 million in a single year, boasted about the strong commitment he had to improving the company’s corporate governance. In fact, however, he was engaged in a scheme to inflate the company’s numbers and then destroyed the evidence when regulators came calling. In 2004, CA admitted that it had improperly padded its revenues over the course of several years. The company just barely skirted criminal indictment when it agreed to make restitution to investors and cooperate with the criminal investigation of high level officers. Four top executives have admitted to committing boardroom crimes at CA.
What we have in the Computer Associates story is the same pathology that exists in virtually every corporate scandal in recent memory: excessive CEO pay and a compensation system that tempts those at the top to play games with the numbers. A version of that is going on now with the ballooning options scandal in the US, which I have written about recently in Finlay ON Governance. I have long taken the position that stock options frequently have a corrosive effect upon business judgment and boardroom ethics and every few years there is a new set of scandals that bares out that opinion. For some reason, however, those one might expect to have some sensitivity to the subject often turn out to have blinders on instead. Again, the lesson of Computer Associates is instructive.
Rather than seeing the insanely excessive level of compensation at Computer Associates, and the admission by CEO Kumar that corporate governance had just recently become important, as a giant red flag which was likely symptomatic of deeper corporate ills, BusinessWeek elevated the company to its list of most improved boards in 2002. It did this even while the company was being investigated for accounting irregularities that occurred while Mr. Kumar was a top executive –accounting irregularities that would later prove costly to the company and see Mr. Kumar fall from CEO to felon. My reaction, after a suitable period of recovery from such a breathtaking lack of judgment, was to write the following letter to the magazine’s editor.
It will come as little consolation to an investing public reeling from the most serious crisis in capitalism since the Great Depression that BusinessWeek was able to find some successful contenders in its periodic boardroom beauty contest (The Best & Worst Boards, Special Report, Oct. 7). Perhaps most illustrative of the true state of corporate governance is the fact that many of the so-called best boards have only just awakened to the need for stronger corporate governance practices long recommended by governance experts and shareholder advocates. Even when Computer Associates CEO Sanjay Kumar proclaims: “In the post-Enron days, governance has become critical,” –as if it had not been before– his company makes it onto the magazine’s list of most improved boards.
The letter was not published, even though the magazine had interviewed me on the subject of CEO compensation and corporate governance on several occasions previously.
There is, in the post Sarbanes-Oxley era, a great tendency to exaggerate the level of progress that has been made in the boardroom and to raise to celebrity status CEOs and directors who suddenly discover that boards stand for something. Business celebrities who utter the most basic observations, as Mr. Kumar did with BusinessWeek and which if any mere mortal voiced them would be greeted as a “dah” moment, are too often heralded as a new boardroom Moses leading the masses of shareholders to the corporate governance promised land. As Myles L. Mace, who was a genuine pioneering figure in boardroom reform in the 1970s, often commented, it is fairly easy for those at the top to engage in self-serving, nice-sounding pronouncements. It is another to actually change the culture of self-interest that so often dominates the North American boardroom.