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The following report is copied with permission from Corporate Governance Highlights, a private weekly newsletter for clients of Investor Responsibility Research Center ("IRRC"), the leading source of impartial, non-advocacy research for institutional investor interests in corporate governance and proxy voting issues.


Corporate Governance Highlights



Vol. 15, No. 33

August 20, 2004




Meeting Watch . . .


CA SHAREHOLDERS DISAGREE OVER PROPOSAL TO RECOUP PERFORMANCE-BASED EXECUTIVE COMPENSATION. Private Capital Management, which controls about 10 percent of Computer Associates International’s voting power, said it will vote at the company’s August 25 annual meeting against a shareholder proposal that would require CA to recoup any performance-based executive compensation based on performance goals affected by a restatement of financial results. The company is under investigation by the SEC and the United States Attorney’s Office for the Eastern District of New York concerning certain accounting practices, including its revenue recognition procedures in periods before October 2000. The shareholder proposal was submitted by the Amalgamated Bank LongView Collective Investment Fund.  “We agree in spirit with Amalgamated’s concern. Since the company’s policies specifically endeavor to link corporate performance to executive compensation, it is reasonable and appropriate to expect the board to review remuneration achieved under false or misleading circumstances and take appropriate action. We, however, disagree with the concept of a mandatory recoupment policy and therefore plan to vote against the proposal,” Gregg J. Powers, president of Private Capital Management, wrote in an August 6 letter to CA management. 


            LongView says that, because of an overstatement of revenue in 2000 the company “overcompensated” its executives that year when it paid out executive bonuses that were based on company performance. The proponent claims that because the requisite performance goals were not met, the board should recoup those benefits that were “not earned or deserved.”


            Private Capital Management is particularly concerned about how the proposal might affect employee morale as well as its ability to attract and retain the best personnel. Powers maintains that the company’s board is fulfilling its fiduciary duties by reviewing the performance-based compensation paid to certain officers. “The board has faithfully served shareholder interests during the recent period of difficulties. Therefore, we believe Amalgamated’s mandatory recoupment proposal is unnecessary, unproductive and potentially damaging to shareholders’ long-term interests,” he says.


            The board says that the performance-based compensation paid for fiscal 2000 was substantially less than was called for by the performance metrics in question. The company says the proposal would "force" the board and compensation committee to seek to recoup compensation regardless of specific facts and circumstances. By putting a substantial portion of performance-based compensation at risk due to events over which a particular executive may have "no control," the proposal could affect the company's ability to attract and retain qualified management, the board argues.


            In January 2004, the SEC notified Computer Associates of its intentions to bring civil enforcement proceedings for possible violations of the federal securities laws arising from the company’s premature recognition of revenue from software license agreements, including revenue from contracts that were not fully executed or otherwise finalized until after the quarter in which the revenue associated with such contracts had been recognized. In response to this investigation, the audit committee conducted its own investigation and found that revenues were prematurely recognized in the fiscal year ended March 31, 2000, and that certain financial data should be restated for the fiscal years ending March 31, 2001 and March 31, 2000. Four executive officers who oversaw the relevant financial operations during the period in question resigned, and three of them pleaded guilty to charges in connection with the ongoing investigation.


            The company and certain of its executive officers and directors have been defendants in lawsuits, including class actions and derivative actions, some dating back to 1998. The Federal Court approved a settlement in December 2003 of all outstanding litigation related to claims about past accounting issues. In the settlement, which also was approved by the company’s independent directors, the company committed to maintain certain corporate governance practices.






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                                                                        Contributors: Jamie Carroll, Annick Dunning,
                                                                         Martin Personick and John Taylor




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