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Letter to Chairman Suggesting Resolution of Demonstration Issue

(August 27, 2004)

Copied below is the text of letter transmitted on August 27, 2004 to Lewis S. Ranieri, Chairman of the Computer Associates board of directors, following the company's August 25, 2004 annual meeting.

Observing continuing confusion about issues concerning investors and the significant discount of the company's stock price, the Forum manager suggests in the letter that the board resolve a demonstration issue to win the confidence of investors.   The issue, previously raised in an August 19, 2004 Forum report to which Mr. Ranieri had been referred in an August 23, 2004 letter, involves questions of functional as well as regulatory compliance under the NYSE's new Corporate Governance Listing Standards (Section 303A Final Rules) and SEC's new Rule 10A-3(b)(1)(ii) of the Exchange Act of 1934.  As noted in the letter below, there is a specific SEC provision allowing a company to seek review of particular relationships and possible exemption from the independence requirements.

Mr. Ranieri and the company's chief legal officer responded in letters dated September 8, 2004.




575 Madison Avenue

New York, New York 10022

Telephone (212) 605-0335

Facsimile (212) 605-0325


                                                            August 27, 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:


            Many shareholders appreciated Wednesday’s annual meeting statements assuring them that you are “taking aggressive steps” to prevent future management misconduct.  But many others, as you observed, were disappointed that you were not more specific about your past or planned actions.  And asking them to be patient only increased their frustration.


            It is apparent that the confusion has not been resolved.  Investors continue to wonder why CA’s board has not yet done what every other company has done when it needed to correct management misconduct and restore corporate integrity.  This naturally leads to concerns about board leadership.  And in that context of intensified scrutiny, more questions have been raised about both the functional and regulatory independence of the board’s members.


            Under these circumstances I encourage you to address a single issue that can be resolved quickly and cleanly, as an example to win investor confidence.  The Forum recently noted that CA’s public reports have not presented sufficient information about the “extraordinary services” provided by Mr. Schuetze to determine whether his $125,000 additional payment was for work performed in his capacity as a member of the audit committee, or whether the payment would disqualify him as an independent director under applicable NYSE and SEC rules.  This is not a question about the value or competence of his services.  It is simply a question about Mr. Schuetze’s ability to serve as an independent member of the board after he performed the work and got paid extra for it.


            There are two ways you can resolve this demonstration issue.  One is to publicly report sufficient information for investors to know exactly what Mr. Schuetze did.  The other, if the information cannot be made public, is to ask the SEC staff to review the facts confidentially.  The new SEC regulations have a provision, in Rule 10A-3(b)(iv)(f), which appears to anticipate exactly this need for reviewing relationships, and also for allowing exemptions from the independence requirements when appropriate.


            It is of course important to resolve the issue of Mr. Schuetze’s independence, and to do so promptly, independently of its demonstration value.  I assume you will appreciate the concern of investors who know only what you have told them so far: that directors who are being sued, personally, decided to give one of their colleagues a $125,000 bonus for heading up an investigation of the evidence against them, and that they decided to call their colleague independent.  This is not a foundation for confidence.


            As an investment professional, you must be aware of the effect confusion has on shareholder value.  It is certainly a major factor in the pricing discount of CA stock, trading today at 33% below the average premium to book value of invested equity capital for other companies in the Reuters software industry index, and 52% below their average multiple of free cash flow.  To eliminate these pricing discounts, you must eliminate the confusion.


            Please let me know how the shareholder Forum program may support your efforts.  Its primary purpose, as you know, is to eliminate confusion.


                                                            Sincerely yours,





                                                            Gary Lutin



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