McNealy steps down as Sun CEO

Sun Microsystems co-founder Scott McNealy has stepped down as chief executive, and has been replaced by president Jonathan Schwartz, the company said on Monday.

McNealy who will stay on as chairman, was one of four co-founders of Sun 24 years ago and has been CEO for the last 22 of those. Since then, he has been a strong and often contrarian voice for change in the computing industry but in recent years his vision hasn't translated into financial success.

McNealy, 51, said in a conference call: "Jonathan has risen to the top of the class, and he is ready." The move was planned, he added: "It's part of our ongoing succession process we've been working on since my days at the [General Electric] board."

Schwartz, 40, speaking on the conference call, said the main difference under his leadership will be a greater emphasis on "growth and financial performance, now that the technological performance and customer performance is back at a level we think is reasonable".

He said: "My team is going to be more focused on growing the business, finding new customers, seeking the new adoptions, finding the new opportunities around the world."

He added: "We're not planning on changing the strategy."

The change makes sense, said Illuminata analyst Jonathan Eunice, who likened Sun's move to a sports team's offensive co-ordinator becoming head coach. "Jonathan's been the one calling the plays for some quarters now," he said.

McNealy will continue his active role at Sun. Schwartz said: "In the next phase, he will be more actively involved with the customer base than he previously was."

Schwartz is now CEO and president, and the chief operating officer role has been phased out. Schwartz said in an interview: "I have no intention of having a COO."

Rumours have swirled in recent weeks that McNealy would step down, with flames fanned by the return of chief financial officer Mike Lehman and his declaration that he would "take a fresh look at everything".

More changes are coming as Lehman, Schwartz and McNealy evaluate Sun's options for the next fiscal year, which begins in July. But investors clamouring for major cost cuts through extensive layoffs are likely to be disappointed, Schwartz said.

Toni Sacconaghi, an analyst at Sanford C Bernstein, said on the conference call: "The sentiment is that there needs to be, or will be, a significant 20 per cent or plus work-force reduction."

Schwartz's response was: "There's no plan whatever... of the cut you referenced."

McNealy said he'll be actively engaged in Sun, including in his new role as chairman of its Sun Federal subsidiary, a role previously held by Clark Masters. And he looks fondly at his role in the industry.

McNealy said in a statement: "Sun has been a labour of love for me for since 1982, and it has been an honour and privilege to serve as its CEO for the past 22 years. We've helped shape the industry as it is today, and the opportunities before us are immense. I look forward to a smooth transition and to working with Jonathan on company strategy in my continued role as chairman."

Pointing to streamlining and major acquisitions, McNealy said: "Since joining Sun in 1996, Jonathan has been a driving force within the company."

But McNealy's departure is tied to Sun's recent rocky years, Pund-IT analyst Charles King suggested. "Given the continuing lacklustre performance of the company over the last few years, unless he'd really been able to pull a rabbit... out of a hat, it was a foregone conclusion," he said. "When you manage a company in a public way like McNealy did, you become more of a target."

When Ed Zander left his joint role as Sun's president and chief operating officer in 2002, some called for a more buttoned-down replacement. But Schwartz has followed the same maverick path as McNealy. McNealy said in the conference call: "Jonathan and I are highly aligned."

McNealy led the server and software company through the dot-com bubble but it hasn't returned to consistent growth or profitability.

In recent months, there has been an outflow of top executives at Sun. Last month saw Masters, the company's government sales chief, announce plans to retire in June. Also in March, Sun's top software executive, John Loiacono, resigned to take a position at Adobe Systems. The month was also marked with the retirement of Bob MacRitchie, head of Sun's global sales.

Last year, Sun's then-chief financial officer, Stephen McGowan, announced plans to retire in October 2005. However, he has since agreed to stay on as an executive vice president of finance.

Shareholders apparently favoured the news, pushing Sun's stock up 39 cents, or eight per cent, to $5.37 in after-hours trading.

Last year, for example, investors waged a proxy battle with the company, seeking to realign compensation for Sun executives. Some investors, complaining about an underperforming stock, sought an executive compensation plan that would rely on a stock option plan more closely tied to the company's performance, according to Sun's proxy filing last year.

For the past few years, Sun's stock has traded in the range of $3 to $4 per share and has underperformed competitors such as Dell and key indexes such as the S&P 500.

Investors were particularly angered when Sun's board awarded McNealy a special bonus of $1.1m, even though he had failed to qualify for a bonus under the regular compensation plan.

The company on Monday reported a third-quarter loss of $217m amid a climb in revenue.

CNET News.com's Dawn Kawamoto and Tom Krazit contributed to this report

Stephen Shankland writes for CNET News.com