RACE TO REFORM
CFO Bob Davis and his cohorts have nine months left to clean up CA.
By Alix Nyberg Stuart

Trapped for four hours in 2005 on a flight packed with irritable travelers waiting for takeoff in Washington, DC in the US, Bob Davis couldn’t help but wonder if the delay was an omen. He was on his way to a job interview. Even before the flight he’d had qualms, but as he sat on the runway as the hours ticked by, he really started to worry. Forty-five years old at the time, Davis had nimbly scaled the corporate ladder to win the job of chief accounting officer at Dell. Then came a call from a headhunter asking him if he would consider going to Computer Associates International, the New York-based software giant rocked by an accounting scandal. Part of the allure was a chance to work with Jeff Clarke, CFO of Computer Associates, whom he had met years earlier when Clarke was CFO of Compaq Computer. But taking the post would mean joining the cleanup crew at a very messy corporate crime scene.

As he fretted about the risks of the new job, things got worse. Bad weather forced the aircraft to divert to Syracuse, New York, for several hours before finally landing at New York’s LaGuardia Airport. At 3 am, Davis arrived at his hotel to find no room at the inn. Sent across town to a fleabag motel, he had time for only a half-hour nap before showering and shaving for a full day of interviews. But despite the rocky start, Davis was intrigued by the opportunities at CA, as the company is now officially known. Three months later, lured by a pay package that could be worth US$2.3m or more over the next two years, he joined the company.

As CFO, Davis is a key member of the team working to resurrect the US$3.5 bn company. Once one of the stars of the software industry, CA crashed in 2002 when federal regulators charged certain top executives with falsifying financial records in a US$3.3 bn fraud that began in 1998. Now operating under an innovative legal deal called a deferred-prosecution agreement, or DPA, CA’s executives are racing to complete reforms while bolstering the company’s core business in an increasingly competitive software market.

Davis joined a group of heavy hitters. CA’s CEO is John A Swainson, 51, a 26-year veteran of IBM, where he had held key product-development and sales jobs. CA’s chief operating officer is Clarke, 44, who became executive vice president of global operations for Hewlett-Packard after it acquired Compaq in 2002. Of CA’s top 35 executives, half were recruited within the past two years. “It’s definitely a new CA,” says Jean-Pierre Garbani, a vice president at Forrester Research, a technology- and market-research firm in the US. “But the company’s success depends on how well they execute, and it’s too soon to know that yet.”

The Watchful Overseer

The deadline looms. By September 30, CA will have had to fulfill a host of obligations or else face charges of fraud and obstruction of justice under the terms of the DPA. Some US$80m worth of financial-reporting software has to be installed and functioning adequately. CA’s finance department must be reorganized and strengthened. Although CA has met many of the terms of the DPA, such as hiring a chief compliance officer and controllers for each of its five business units, much work remains to be done.

Meanwhile, CA is laboring under the watchful eye of an overseer. The DPA specifies that CA’s rehabilitation is subject to the scrutiny of a court-appointed independent examiner, Lee S Richards. A partner in the law firm of Richards Spears Kibbe & Orbe in New York, Richards, who declined to be interviewed for this article, maintains an office at CA’s headquarters. His reports to the board, the court, and federal agencies are confidential. CA would not disclose what, if any, recommendations he has made to the new executive team.

CA also must mend its reputation with customers, shareholders, and Wall Street. One of its largest institutional investors is US-based Private Capital Management, a unit of Legg Mason, which holds 11.6% of CA and has been accumulating shares since 2000. The money manager made headlines recently by forcing Knight Ridder, the newspaper chain, to put itself up for sale. Through a spokesman, PCM declined to comment on CA. CA still faces the wrath of other angry shareholders who have filed lawsuits against the company, among them Texas billionaire Sam Wyly.

So the job is a risky bet for Davis. After all, the finance department was the scene of the crime – and the cover-up – at CA. Much of the work of rehabilitation rests squarely on his shoulders. If successful, the financial payoff could be big. CA lured Davis with a signing bonus of US$275,000. His base annual salary is US$525,000. If he meets certain targets, he will earn a bonus in his first year of US$525,000. CA also has promised him US$2.2m in long-term incentives such as stock options and restricted stock. But Davis says the move wasn’t just about the money. “It was frankly about the opportunity,” he says. “There was limited opportunity to move up at Dell.”

Still, colleagues were surprised when he took the job. James Schneider, CFO of Dell and his former boss, admits he was baffled when Davis announced he was leaving Dell for CA. Davis is “a good, solid guy,” says Schneider, “but I wouldn’t have thought of him as a risk-taker.” (Dell had been very generous with Davis. He made approximately US$3.1m by cashing in his stock options in 2003 and 2004.)

Building a Strong Team

Known for his technical accounting skills, Davis began his career at PricewaterhouseCoopers in 1980, working on audit and regulatory matters in Washington, DC. After getting his MBA at Columbia Business School, he joined MCI as senior manager in the corporate controller’s group in 1994. Schneider, who was also at MCI at the time, says that he would often pull Davis in to work on projects for him, although Davis did not report directly to him. Schneider left to join Dell in 1996. Several months later, Davis, in pursuit of fresh challenges, joined Dell as vice president of worldwide finance and planning for the enterprise systems group.

At Dell, Davis rose through the ranks to become chief accounting officer in part by contributing to the company’s famously disciplined growth strategy. “When I look at who really helped us get to where we are, Bob is one of the core guys,” says Schneider. Among other things, Davis installed sophisticated software systems that provided top executives with detailed financial data so they could make better strategic decisions for Dell.

At CA, Davis is focusing on building a strong team and improving internal systems. One top priority: clearing up the three material weaknesses that stand in the way of a clean 404 opinion. With cash flow of about US$1 bn a year, Davis says, CA is in a strong financial position. But, he adds: “there’s plenty of opportunity to get the company growing and more profitable.”

Davis is working closely with Clarke, who had championed Davis at CA. Clarke joined CA as CFO in 2004 and is experienced in complex corporate-restructuring projects. He led the team overseeing one of the biggest mergers in the history of the computer industry: Hewlett-Packard’s US$19 bn acquisition of Compaq Computer. Like Davis, Clarke has a hefty pay package from CA that could be worth US$4.5m over the next two years.

Indeed, CA’s generosity to its new executive team is stirring controversy among shareholders and corporate watchdogs. CEO Swainson could earn as much as US$12.8m over the next five years. “CA’s board has not yet learned either restraint or resistance” when it comes to compensation, says Nell Minow, co-founder of The Corporate Library in the US, a research firm that rates companies based on corporate-governance practices. Christopher Lofgren, a CA board member and president and CEO of Schneider National, a transportation and logistics company in the US, defends the company’s pay packages. Seasoned executives with impeccable reputations command a high price in today’s market, he says.

In his one-year tenure as CA’s CFO, Clarke began cleaning up the finance department while working with the board to negotiate the deferred-prosecution agreement with the SEC and the Department of Justice. He restated financial results for fiscal years 2000 and 2001 and began to clamp down on sloppy internal financial procedures. He also helped craft a restructuring plan that involved cutting 5% of the workforce and oversaw the US$439m acquisition of Netegrity, a network security software company in the US. Clarke relinquished the title of CFO after Davis came on board in early 2005, and remains COO, a title he garnered in April 2004.

With the independent examiner looking over his shoulder these days, Davis says there’s a heightened “sense of urgency and momentum” on often-tedious compliance work. Richards and the team he has hired to review finances at CA “don’t pull any punches if they see issues,” says Davis. Most of their inquiries, he notes, involve matters that are now part of the routine at CA. “The DPA is basic blocking and tackling for finance,” he says. “If we can’t comply with the DPA, we’ve got bigger issues.”

Imperial Court of China

CA has formed a review group that circulates drafts of quarterly reports to 70 senior managers in its finance, legal, and sales departments before the documents are filed with the SEC. Controllers now oversee the finances of the company’s five business units. The executive roster includes a controller, a chief accounting officer, a new head of internal audit, and a new separate office for financial planning and analysis. Within the finance department, there are 100 subcertifiers for financial statements, which “drives down accountability,” says Davis.

Changing CA’s culture is another priority. Under Charles Wang, who founded the company in 1976, CA was run like the Imperial Court of China. Only a few top executives held decision-making power and there was no effective enterprise-wide data system. In fact, CA was a breeding ground for fraud in part because its management and technology couldn’t keep pace with its rapid growth in the 1990s.

Federal investigators say the fraud began in 1998 when company executives started backdating sales contracts to boost their bonuses. Wang resigned as chief executive in 2000 but remained as chairman until his resignation in 2002. He was not charged with any wrongdoing in connection with the scandal.

Davis and his colleagues are trying to push accountability deep down into the organization. “We want a team that’s empowered,” he says. Toward that end, Davis says he has hired close to 150 staffers. A new employee “ethics hotline” has received 22 calls since it was established in April. Meanwhile, Davis encourages staffers to e-mail him directly, and holds informal monthly breakfast meetings with small groups of them.

CA is also working to fortify its product line and integrate the companies it has acquired recently. In the past two years, CA has spent US$1.2 bn to snap up eight software businesses, including Netegrity; iLumin, a storage-management software company; Niku, an IT-management software company; and Concord Communications, which makes network-monitoring products.

In November, CA introduced a new version of Unicenter, its popular suite of integrated software modules, a move that the company hopes will help propel growth. For the six months ended September 30, 2005, CA’s revenues increased 8%, to US$1.8 bn, though US$73m was due to currency gains and its two most recent acquisitions. Net income was US$135m, compared with a US$51m loss in the six-month period last year.

Despite the strong results at CA, many industry analysts are reserving judgment. Some are concerned about a slowdown in the market for mainframe software, CA’s primary market. Others are concerned that the product line is dated and lacks true innovation. “It’s wait-and-see,” says Kim Caughey, an equity analyst covering software companies for US-based Fort Pitt Capital Group, which holds a stake worth US$11.5m in CA.

Davis, however, takes such skepticism as a spur to put the overhaul into overdrive. In fact, he says the most stressful part of the job for him is “making sure the urgent doesn’t drive out the important,” such as his long-term goal of creating a training, mentoring, and development program for his finance staff similar to the popular ones at Dell, Cargill, and GE. “When someone graduates from college, I want CA to be on their short list for employment,” says Davis. And so long as the candidates don’t have the travel nightmares Davis faced on his first trip to CA, he’s confident he can win them over. “We may be hitting on only three or four of six cylinders right now,” he says, “but we’re starting to move things in the right direction.”

Alix Nyberg Stuart is a senior writer at CFO in the us.