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Proposal:
To elect
the following 12 nominees to the board for a one-year term: R. Bromark, A.
D'Amato, G. Fernandes, R. La Blanc, C. Lofgren, J.
Lorsch,
W. McCracken, L. Ranieri, W. Schuetze, J. Swainson, L. Unger, and R.
Zambonini.
Analysis:
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Board size: 12
§
New directors since last year: 1
§
Independent directors: 11
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Non-Independent directors: 1
Non-Independent directors: CEO/President J. Swainson
Withhold Vote:
At last
year's annual meeting, shareholders cast a relatively high percentage of
withhold votes for former N.Y. Senator A. D'Amato (25.9%). When directors
receive a high percentage of withhold votes in the preceding year, we
believe that the proxy statement should address that subject, since the
company presumably knows what issue or issues led to the withhold vote, and
should discuss what, if any, action was taken on that issue. D'Amato became
a director in 1999 (at this point, he is the only holdover director from
that era). He currently serves on the Corporate Governance Committee, and
has served on the Audit and Compliance Committee since 2000. Shareholders
appear to have been voicing displeasure after court filings disclosed that
D'Amato, while serving on the CA board in 2000, played an important role in
brokering a deal for former CEO Sanjay Kumar to buy the New York Islanders
hockey team. Such a deal was possible only because the CA board had, just a
few days earlier, eased restrictions on the sale or transfer of Kumar's
stock, which allowed him to use the stock as collateral for a $51 million
loan used to fund the acquisition. Only a few days after Kumar secured the
loan, the company announced that it would miss financial projections, which
resulted in a 43% decline in the company's stock and erased $13 billion of
the company's market value.
The
entire history surrounding the ensuing “35-day month” scandal is tawdry, and
it has led to derivative actions and shareholder litigation that have
continued to the present. The report of the company’s Special Litigation
Committee, issued in April 2007, effectively says that the then current
directors, which included D’Amato, were asleep at the switch (“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.”) We recognize that the company has taken pains to portray
D'Amato as having been part of the solution to its problems and not part of
the problem. However, notwithstanding that the Special Litigation Committee
was of the opinion that D'Amato should not be held legally liable to the
company, that does not mean, particularly in view of the understated but
still devastatingly critical language of the committee's report, that
shareholders should vote to continue his presence on the board. We believe
that the company, which has spent the last several years striving to put its
past behind it, would be better served if the sole remaining director from
that era departed from the board. We therefore recommend that shareholders
withhold votes for D'Amato.
Recent Developments:
In 2002,
the U.S. Attorney’s office and the SEC began an investigation into the
company’s past accounting practices that centered on the company’s
recognition of revenue for periods prior to October 2000, and resulting
misstatements of financial information in filings for that period and
afterward. The company restated its financial results for fiscal years 2000
and 2001. The investigation eventually led to the resignations of several
executives and the criminal convictions of former CEO Kumar, former CFO Ira
Zar, former head of Worldwide Sales Stephen Richards, former General Counsel
Steven Woghin and several others. Pursuant to an April 2007 settlement
agreement with the government, Kumar was ordered to pay restitution of
nearly $800 million.
The
Special Litigation Committee (noted above) determined in April 2007 to
pursue additional claims against former Chairman/CEO Charles Wang and
several other former executives, but not against any current executives or
directors of the company. While the report was critical of the board’s
unquestioning acceptance of management, it stated that directors had
satisfied their fiduciary duties to shareholders. However, dissident
shareholder Sam Wyly has criticized the report as a "whitewash," noting that
one member of the committee (L. Unger) formerly worked for director D'Amato
while he was in the U.S. Senate. It should be noted, however, that Ms. Unger
was only on the committee in its very early stages and for a very short
time.
As the
scandal had begun to subside, shareholders were hit with further revelations
in 2006 that the company would again restate earnings, this time for the
period from 2002 to 2006, primarily to account for additional stock
compensation expense of $342 million related to improper reporting of stock
option grant dates for the years 1996 to 2002. In addition, management
identified several material weaknesses in its internal control over
financial reporting, most significantly that monitoring of stock option
grants had not been effective to ensure that their valuations were correctly
reported. The company states that it has implemented procedures to ensure
that option grants are properly communicated to employees, recorded and
reported. We note that although almost no directors or executive management
remain from that era, the lone remaining director, D'Amato, served on the
Stock Option and Compensation Committee during fiscal years 2000 and 2001.
Performance:
According
to PROXY
Governance's
performance analysis, the company has
underperformed
peers
over the past five years; the company ranks at the 41st percentile relative
to the S&P 1500 compared to peers at the 51st percentile, and is
declining
relative
to peers at a rate of 2 percentile points per year. The company
significantly trails peers with regard to return on equity (at the 11th
percentile relative to the S&P 1500, compared to peers at the 41st
percentile) and revenue/expense ratio (at the 35th percentile compared to
peers at the 60th percentile).
On June
20, 2007 the company announced it had repurchased approximately 16.9 million
common shares, or 3% of its outstanding common shares, at a cost of
approximately $435 million. The repurchase was done under an accelerated
share repurchase agreement and was funded with existing cash. Most recently,
the company has reported sharply higher net profits. For the quarter ended
June 30, earnings of $129 million (on $1 billion in revenue) were more than
3.5x the previous year’s quarter.
Compensation:
The
average three-year compensation paid to CEO Swainson is 8% above the median
paid to CEOs at peer companies and the average three-year compensation paid
to the other named executives is 29% below the median paid to executives at
peer companies. We note that the company's average compensation numbers are
slightly inflated due to the company's double reporting of 2006 LTIP awards
in the form of restricted stock grants. The grants, which were valued at
approximately $1.0 million for CEO Swainson and from $300,000 to $590,000
for the other named executives, were disclosed in both the company's 2006
and 2007 proxy statements.
The
company's executive compensation appears
reasonable
given its
financial performance relative to peers.
Rationale/Conclusion:
PROXY
Governance
generally
believes that the current board is properly discharging its oversight role
and adequately policing itself. However, we recommend withholding votes from
D'Amato given his role in brokering a major business deal involving Kumar in
2000, which appears to be a clear conflict of interest, and the fact that he
is the sole remaining director that served on the board during the period
when the company's initial accounting scandal was occurring.
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