Imagine you buy a stock -- believing in the company's technology and leadership. Then you find that the CEO is out after a dispute with the board of directors over strategic direction. That's precisely what happened to ActivCard (NASDAQ:ACTI), which plunged more than 25% this morning to an all-time low for the reincorporated shares.

ActivCard is an extreme example of the risks associated with small operations with new leadership.

Involved in "digital identity and authentication," the company hired George Garrick as CEO last September. Garrick had been president and CEO of A.C. Nielsen in 1993 and had since successfully lead startups and fast-growing smaller companies. He was most recently president and CEO of Place Ware, which was subsequently bought out by Microsoft (NASDAQ:MSFT).

Could investors have seen this coming? Maybe. ActivCard started showing sales problems in the second quarter when it reported lower-than-expected orders. In the third quarter, after Garrick was hired, it reported a serious drop in sales from $12 million to $9 million. These signs were flashing before today's announcement that fourth-quarter sales would be a disappointing $6.5 million -- and that the board could not agree on a strategic direction with a highly regarded CEO who'd been on the job for less than four months!

With $229 million in cash and short-term investments, ActivCard has $5.45 cash per share. While that should serve as a comfortable cushion for years to come, the stock traded for less than cash earlier today. Indeed, there is competition to consider and the company is going to burn through a significant amount of cash before it turns the corner -- if it ever does.

For context, consider competitor RSA Security (NASDAQ:RSAS). RSA is profitable, has $207 million in cash, and less than $80 million in debt. It is also generating sufficient free cash flow to aggressively pursue options it finds attractive. ActivCard, frankly, is in a fast-growing business but is not growing itself.

Make no mistake, nobody is saying that investors have to stick to the tried-and-true Wal-Marts (NYSE:WMT) and IBMs (NYSE:IBM). But when turning off the beaten path, you had better look sharp. If nothing else, sound management and sound strategy is a must.

Until ActivCard offers a plan to ensure it can grow and compete, and do so at a profit, investors would be wise to make a strategic decision to step aside.

If you are looking for sound small-cap ideas, you might want to try a free trial of Tom Gardner's Motley Fool Hidden Gems newsletter service. Management and strategic direction are Page One with Tom.

You can e-mail W.D. Crotty.