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Forum Report: Engagement of Glass Lewis for CA Research

(August 12, 2004)


Sent: Thursday, August 12, 2004 3:11 PM
Subject: Engagement of Glass Lewis for CA research

There has been no response to my August 4th suggestion (copied below) that CA management offer an alternative to the shareholder proposal, presented as "Proposal 3" in the company's proxy statement, for a policy regarding miscalculated compensation.  Shareholders will therefore need to consider how to vote on the proposal at the August 26th annual meeting.
To address this and other voting issues as well as broader investor concerns, I've engaged Glass Lewis & Co., a firm that provides corporate integrity analyses and proxy voting recommendations for institutional investors, to make its research reports on CA available to Forum participants for the next year.  This will include their “Proxy Paper” analyses and voting recommendations as well as any “Yellow Card” investigations of accounting or other corporate integrity conditions, and we may also explore additional services to address issues defined by Forum participants.
Please let me know immediately if there are any issues you want Glass Lewis to consider in their preparation of voting recommendations for CA's August 26th meeting.  So far, we are aware of Forum participants' interest in the following voting issues:
1.     Corporate integrity – the merits of the shareholder proposal to establish a policy for correcting miscalculated compensation.
2.     Director qualifications – the independence of director nominees, considering reported compensation for consulting and other relationships, and their association with actions now being investigated.
I know that some Forum participants are interested in addressing issues which are unrelated to current voting decisions.  Unless you believe that there is an urgent reason to address those issues now, we will put them on the Forum agenda for attention after the August 26 annual meeting.
Gary Lutin
Lutin & Company
575 Madison Avenue, 10th Floor
New York, New York 10022
Tel: 212-605-0335
Fax: 212-605-0325
----- Original Message -----
Sent: Wednesday, August 04, 2004 6:48 PM
Subject: Invitation to resolve details of policy for adjusting miscalculated compensation

Copied below is the text of a letter sent this afternoon to Lewis Ranieri, Chairman of Computer Associates' board of directors, inviting informal discussions to resolve details of a board resolution defining its policy for adjusting miscalculated executive compensation.
As indicated in the letter, management's "Opposing Statement" in the company's recently filed proxy material said that they agree with the purpose of a "Proposal 3 - Stockholder Proposal" on the subject but object to some of the Proposal's details.  I've therefore suggested that the issues be addressed now, so that the board can act on the matter before the August 26th shareholders meeting, assuming most shareholders would prefer this alternative to a vote on the Proposal and subsequent controversy about the board's response to it.
Copies of the proxy filing's presentations of the Stockholder Proposal and management's Opposing Statement appear below, after the letter.
Please let me know if you have any questions or comments about this issue.
Gary Lutin
Lutin & Company
575 Madison Avenue, 10th Floor
New York, New York 10022
Tel: 212-605-0335
Fax: 212-605-0325




575 Madison Avenue

New York, New York 10022

Telephone (212) 605-0335

Facsimile (212) 605-0325


                                                            August 4, 2004


By telecopier: 631/342-3300


Mr. Lewis S. Ranieri

Computer Associates International, Inc.

One Computer Associates Plaza

Islandia, New York 11749


Dear Mr. Ranieri:


            I would like to learn more about the board’s views regarding the subject of miscalculated compensation addressed in “Proposal 3” of CA’s July 29th proxy statement.


            Based on management’s “Opposing Statement,” I understand that you agree with the general idea of correcting miscalculated payments and that you object only to some specific provisions of the shareholder Proposal.  The first of your reasons, concerning details of selected accounting periods, suggests a need for further clarification of your reporting but is not really relevant to concerns which are based on the unquestionably substantial amount of aggregate adjustments over a five year period.  Your other reasons, though, raise practical issues about how a policy for compensation correction can be sensibly applied, and I believe these issues justify more attention.


            Since everyone agrees on the Proposal’s essential purpose, it should be easy to define an alternative form of resolution that would satisfy your practical concerns about application as well as shareholders’ reasonable concerns about corporate integrity.  The board’s adoption of a satisfactory policy prior the August 26th annual meeting would certainly be welcomed by most shareholders as an alternative to a vote on “Proposal 3” and months of subsequent attention to an unnecessary controversy.


            Please let me know how you or other board representatives wish to address this investor interest.  My own preference is for simple, informal discussions to resolve a relatively simple, immediate issue.  I will in any event look forward to hearing from you.


                                                            Sincerely yours,





                                                            Gary Lutin





      Amalgamated Bank Long View Collective Investment Fund, located at 11-15 Union Square, New York, NY 10003, a holder of approximately 245,530 shares of Common Stock of the Company, has submitted the following resolution:

      RESOLVED: The shareholders of Computer Associates International, Inc. (“Computer Associates” or the “Company”) request the board of directors to adopt a policy whereby, in the event of a restatement of financial results, the board will review all bonuses and any other awards that were made to senior executives on the basis of having met or exceeded specific performance targets during the period of the restatement and will recoup for the benefit of the Company all such bonuses or awards to the extent that the specified performance targets were not achieved.


      In recent years shareholders have increasingly taken the view that compensation for senior executives should be closely tied to company performance. We believe that executive compensation should provide incentives for superior performance and that Computer Associates should be a leader in this regard.

      Recent evidence suggests that this has not been the case at Computer Associates, however. In October 2003 the Company announced that it had inflated revenues in the fiscal year ending March 31, 2000 because of an accounting practice whereby the Company reported revenues from contracts before they had been signed.

      Bonuses for senior executives that year had been based on the extent to which income exceeded goals. Sanjay Kumar, then the president and chief operating officer, received a bonus of 80,000 shares and $3.2 million, based on the Company’s supposedly superior performance in 2000.

      It thus appears that Computer Associates awarded generous bonus compensation even though the Company had failed to meet the requisite performance goals. It also appears that Mr. Kumar has not offered to return the shares and cash that were awarded based on the Company’s supposed superior performance that year, even though he reportedly declined a bonus in a subsequent year.

      In our view, there is no excuse for such over-compensation. To the extent that Computer Associates has a policy of incentive-based compensation for senior executives, the Company should follow that policy. If it appears that the Company reported erroneous results that have to be restated, the board of directors should undertake to recoup money that was not earned or deserved and that, in our view, belongs to the Company.

      The board of directors has made no public statement about whether it has sought to recoup funds that were paid to senior executives under the erroneous assumption that performance targets for 2000 had been exceeded. The board’s failure to take any such action would, in our view, be a serious omission. Under the circumstances, we believe that it is important to adopt the recommended policy whereby incentive pay for


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senior executives is paid — and retained — only if the Company legitimately achieves performance benchmarks that are set in advance.

      We urge you to vote FOR this resolution.


      The Board agrees that performance-based compensation awards, granted with respect to a specific period, should be reviewed when a restatement of financial results for that period might affect the factors determining such award. The Company has stated that the Board is reviewing compensation paid to certain officers in prior years for which results have been restated and will take appropriate action following such review. Moreover, in the event that any future restatement calls prior compensation awards into question, the Board would expect to follow the same procedures.

      However, the Board disagrees with the proposal for several reasons.

      First, the proposal appears to be based on a number of erroneous assumptions. As a result, it contains many incorrect and misleading statements, such as the following:






The proposal states that “the Company . . . inflated revenues in the fiscal year ending March 31, 2000” due to improper revenue recognition practices. In fact, the Company’s restatement, published in April 2004, resulted in a decrease in revenues for fiscal 2000 compared with those previously reported — from $6.094 billion to $6.092 billion, a decrease of 0.03%. Fiscal 2000 net income and earnings per share were not affected at all by the restatement.






The proposal states “[it] . . . appears that Computer Associates awarded generous bonus compensation even though the Company . . . failed to meet the requisite performance goals,” resulting in “over-compensation.” In fact, the performance-based compensation awarded for fiscal 2000 was substantially less than was called for by the performance metrics in question, as determined under both the initially reported results and the restated results.






The proposal states that the “[B]oard . . . has made no public statement” about recouping amounts paid to executives under the “erroneous assumption that performance targets for 2000 had been exceeded.” In fact, as noted above, the Company has stated that the Board is reviewing compensation paid to certain officers in prior years for which results have been restated, and the Board would expect to do so in the event that any future restatement calls prior compensation awards into question.

      Further, the proposal goes far beyond requiring a review of previously paid performance-based compensation. Rather, it would force the Board and its Compensation and Human Resource Committee to seek to recoup compensation regardless of the specific facts and circumstances present in a particular case — including whether an executive was in any way responsible for the events requiring the restatement. This would deprive the Committee and the Board of the discretion and flexibility necessary to carry out their obligations to the Company and its stockholders.

      Also, because the proposal could put a substantial portion of performance-based compensation at risk due to events over which an executive had no control — and would prevent the Board from considering relevant facts and circumstances — the Board believes that the proposal would impair the Company’s ability to attract and retain qualified executives and other managers. The Board believes that this is contrary to the best interests of the Company and its stockholders.

      Last, the policy called for by the proposal could contravene existing agreements covering stock options, restricted stock awards and other forms of compensation, as well as any employment agreements between the Company and its executives.

      In summary, although the Committee and the Board agree that a review of performance-based compensation is appropriate when results are restated, it believes that the proposal would require further actions that could be inadvisable or harmful to the Company and its stockholders.





The Forum is open to all Computer Associates ("CA") shareholders, whether institutional or individual, and to any fiduciaries or professionals concerned with their investment decisions.  Its purpose is to provide shareholders with access to information and a free exchange of views on issues relating to their evaluations of alternatives, as described in the Forum Summary.

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The material presented on this web site is published by Gary Lutin, as chairman of the Shareholder Forum.