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In sum, and to state the obvious, for most of its history
CA was not a model of
corporate governance. The scope of the SLC’s investigation
– of claims against twenty-two
(22) individuals and entities – revealed flaws in how the
business was managed. In addition,
while the directors fulfilled their fiduciary obligations,
the SLC found that they did not always
grasp the opportunities that should be the aspirational
goal of every board.
As such, although
not part of the SLC’s mandate, the SLC nonetheless believes
that it is appropriate, for the
benefit of the current and future members of CA’s Board
(and others), to comment on the
Board’s response to these events. In offering this
commentary, the SLC recognizes that it is
easy, with the clarity of hindsight, to criticize the
Board’s reactions to these events given what
is now known about the scope and magnitude of the fraud.
The SLC also offers this
commentary while acknowledging that the Company’s most
senior managers, who directly
controlled the information flow to the Board, engaged in
active efforts to conceal information
from the Board (and some have pled guilty to serious
federal crimes).
The SLC believes that the non-management Oversight
Directors were presented
with opportunities, at several points in time, where they
could have engaged in a searching
analysis. The Board could have taken incremental steps to
seek verification of the Company’s
financials when the vesting of the KESOP was imminent; it
could have actively probed the
accountants once the KESOP vested; it could have probed
management’s explanation as to the
timing of when it learned of the effects of the events in
Asia; it could have connected the news
of slowing growth in Asia to the billion dollar stock award
that vested eight (8) weeks earlier; it
could have treated the allegations made in the shareholder
litigation following the vesting of the
KESOP in a less cursory fashion; it could have probed
management, specifically Mr. Zar, and
its outside accountants, more thoroughly when the New York
Times article was published; it
could have sought independent legal or accounting advice
and taken more time to consider the
issue. The events discussed above, alone or in concert, may
have put a skeptical director on
alert that something was amiss, but no director at CA drew
that conclusion.
Likewise, the SLC believes that, although the directors
satisfied their duties
during the government investigation, there are still things
that the CA Board could have done
better (and thus provide lessons for this and other
boards). First, the SLC found that the CA
Board could have taken steps to more fully understand the
role played, and actions taken (and
not taken), by WLRK in its representation of the Company
during the investigation. The SLC
found that the directors believed that WLRK was conducting
a full scale investigation “to get to
the bottom of things,” when instead WLRK was hired to
defend the Company and not to
uncover wrongdoing. Second, in 2003, when the government
expressed dissatisfaction with
CA’s document collection and production efforts, the CA
Board could have probed to
understand what had occurred and, if a problem existed,
taken action to remedy that problem,
such as insisting that outside counsel actively assist the
Company with the collection efforts
rather than relying exclusively on inside legal staff to do
this critical job. The SLC recognizes,
however, that WLRK never suggested to the Board that any
additional action be taken at any
time, and the Board was continually assured by inside and
outside counsel that the Company
was fully cooperating with the government. Third, overall,
the CA Board could have viewed
the assurances it received from management – especially
those made after January 2003 when it
learned that CA and its customers had received grand jury
subpoenas – with a greater
skepticism and insisted that outside counsel independently
assess and verify those assertions.
This is a theme that the SLC will return to throughout this
report – that the CA
Board, at various points in time, too often accepted the
explanations and assurances of CA
management and its advisors without applying a high degree
of skepticism or fully
understanding the details of what was being done. Such
skepticism and careful probing of
management and advisors might have led the directors to
take further action in situations where,
although action was not required to satisfy their fiduciary
duties under Delaware law, it
nonetheless might have benefited the Company and saved it
from further harm.
This leads to several additional conclusions that the SLC
takes away from its
investigation concerning a board’s use of outside,
professional advisors, whether those
professionals are legal, financial, accounting, or
otherwise. While these conclusions may seem
intuitive, in hindsight, the SLC, in both this
investigation and in drawing on its own Board
experiences, has found this not always to be so. The SLC
believes that it is imperative that
Boards clearly define, and understand, the scope of the
engagement of those professionals. It is
clear that those professionals hired by a Board will
understand, and adhere to the scope of that
engagement, and a Board must ensure that it has the same
understanding of that scope. As a
corollary, a Board must ensure that it remains updated and
aware of what those professionals
are doing during the course of the engagement, so in the
event that circumstances change, a
Board can likewise change the scope of the professionals’
engagement, if necessary. Moreover,
especially in situations as critical as the one that CA
confronted, the professionals have a
responsibility to take all necessary steps to make sure
that the Board – and not just Company
management – understands precisely what the professionals
are, and are not, doing. But in the
end, at all times, the onus is on the Board to actively and
appropriately manage and supervise
its professionals, and without having these understandings,
a Board will not have the
wherewithal to do so.
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