In disclosing that it's the subject of government inquiries , Computer Associates ( CA) isn't the only party in a sticky situation. Think for a moment of New York Stock Exchange chief Richard Grasso. Grasso has sat on the board of NYSE-listed Computer Associates since the mid-1990s. Many outside observers believe his directorship there presents a profound conflict of interest, but the Exchange maintains that it isn't a problem. The bickering about the Exchange allowing officials to serve on NYSE-listed company boards has until now been a side issue, but with allegations of impropriety swirling around Computer Associates, the tempest threatens to break out of the teapot. With legislators and shareholder advocates closely questioning the role of the Enron board in the demise of the energy trader, and Computer Associates' accounting and disclosure practices coming under intense scrutiny, the question of board independence has never loomed larger on Wall Street. "If they can't figure this one out at the Stock Exchange as being an utterly poor governance conflict and utterly obvious conflict of interest, I don't know what is," says Patrick McGurn, director of corporate programs for Institutional Shareholder Services. According to Computer Associates' last proxy statement, outside directors were to accrue $45,000 in Computer Associates stock as annual compensation on Aug. 28, 2001. Payment is deferred until retirement from the board, the proxy says. The NYSE says it has provisions that bar Exchange officials from taking part in decisions related to companies whose boards they serve on. "The appropriate controls are in place," says an Exchange spokesman. "End of story."
But for Computer Associates, the story appears to be far from over. Critics have long lambasted its use of pro forma accounting, which the company began using in October 2000 and which critics say has made it virtually impossible to understand. Cryptic financials, never a source of joy among investors, now serve to incite panic among Wall Street types trying to avoid "the next Enron." A Computer Associates spokesman said the company offers pro forma earnings only because investors and analysts demand it, and adds that the company would prefer to be judged by its results under generally accepted accounting principles, or GAAP. But critics say that because of a change in the way it books contracts, Computer Associates' GAAP results are meaningless. "We believe our accounting is among the most conservative in the software industry, and we have always adhered to applicable accounting principles," said Computer Associates CEO Sanjay Kumar on a conference call Friday morning.
Even if Computer Associates gets a clean bill of health, the whole affair could prove embarrassing for Grasso and the Exchange. Appropriate controls or not, investors' active imaginations will surely have them wondering what would have happened had Grasso served on the board of Enron or, say, Global Crossing. He'd quite possibly be down in Washington, D.C., getting sniped at by Congress, and all the praise that he quite justifiably garnered for his response following Sept. 11 would be laid to waste. So Grasso is in a bit of a fix. Were he to resign from the Computer Associates board now, he would only call attention to the criticism of his board service. And if he decides to sit it out until the smoke clears at Computer Associates, he runs the risk that the smoke won't clear. If the company is forced to restate results, Grasso could end up in a very hot seat indeed. It sure seems as if Grasso would have been better off if he had never joined the Computer Associates board in the first place.