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Wall Street Journal, March 18, 2010 column


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Season for CEO Reckoning

It's Easier Than Ever to Vote the Bums Out of the Executive Suite


Columnist's name

Homebuilder Ara Hovnanian has been preaching the good news about the housing industry of late. The glut of unsold homes is shrinking. Competitors have scaled back or gone out of business. His company, Hovnanian Enterprises Inc., eked out a profit in the most recent quarter, ending a 13-quarter string of losses.

You would think Mr. Hovnanian is breathing a sigh of relief because he's shared some of the pain his shareholders have endured, but when it comes to pay you'd be wrong. He's been getting healthy bonuses through the darkest period Hovnanian has endured: options valued at $1.38 million in 2009, $1.26 million in 2008 and $3.92 million in 2007.

The perks have been nice, too. Mr. Hovnanian also charged his company $57,975 for personal use of the company plane and $149,716 for the company car last year, according to the company's annual filing.

He could have easily been awarded more, said J. Larry Sorsby, Hovanian's chief financial officer. Mr. Hovanian limited his own bonus in 2008 to 50% of the previous year. He also froze his salary driving down his total compensation. Mr. Sorsby said Mr. Hovanian was "herculean" helping the company repay debt and keep cash flowing.

"We started the year (2009) with analysts saying we wouldn't survive, now we're being upgraded," Mr. Sorsby said, defending the compensation. "Ara did a yeoman's job navigating a difficult storm."

It's been a different kind of reward for Hovnanian investors. Not only have they had to deal with more than three years of losses, the stock has been on a long decline that began well before the housing bust -- falling from a high of $72.30 in 2005 to about $4.60 in trading this year. The stock hasn't been above $20 in two-and-a-half years, it hasn't broken above $10 since the summer of 2008.

This isn't to single out Mr. Hovnanian. Any shareholder, of course, can vote with their feet, the old saying goes, and sell their stock. But dumping a stock isn't truly a viable choice for many of us locked into investment retirement plans that offer a few mega funds owning a big share of the S&P 500.

What can make a difference is coordinated shareholder activism. Of course, that demands shareholders actually vote right now, the majority don't. Proxy season is just around the corner. Board seats are on the line. Critics are doing battle with companies such as Denny's Corp., Cascade Financial Corp. and Genzyme Corp. which is being targeted by Carl Icahn.

This year could be a watershed for the dissidents looking to shake up companies. Technology has made it easier for shareholders to come together and vote. Proposed financial reform includes a say-on-pay provision, something more than 50 companies have adopted voluntarily. Even big fund companies known for being passive when it comes to management are rethinking their approach. Populist angst is looking for an outlet.

Historically, "shareholders have had the sense of feebleness and frustration," said Nell Minow, co-founder of The Corporate Library a corporate governance research and analysis firm. "Corporate governance was predicated on the gap that shareholders could provide some kind of market response and the physical inability of doing so because of the inability to find each other."

Ms. Minow said that gap is closing. On the retail front it's shrinking through new Internet-based sites such as Moxy Vote, an independent proxy voting service and Folio Client, a service of the online brokerage Foliofn. These sites provide online voting and research. An investor can vote with management, a dissident platform or slate; or with socially responsible funds such as Calvert Investments.

Already these sites are holding sway. Activists voting through Moxy Vote blocked the acquisition on On2 Technologies by Google Inc. last year, resulting in a higher offer that was accepted.

Also, Ms. Minow said big fund companies are slowly turning activist. They want more research on individual board members, signaling that they may be reconsidering their usual blanket endorsements. Big fund companies such as Fidelity Investments and American Funds aren't turning into Calpers by any stretch, but they're clearly feeling some pressure.

Last year, Ken Lewis, then chairman and chief executive of Bank of America Corp., was stripped of his chairman role by shareholders by a narrow margin of institutions and retail investors. A few months later, he resigned as CEO. Ousting Mr. Lewis was a big victory for shareholders, but there's a lot more wreckage to clean up.

"The fact is a number of directors that served on the bailed-out companies and failed companies continue to serve and that's a concern to shareholders," Ms. Minow said. "That really is the issue."

Take, for instance, Christopher Gent. The former director of Lehman Brothers is chairman of GlaxoSmithKline PLC, and serves on the board of Ferrari SpA and Vodafone Plc. Or Erskine Bowles? He served on the boards of General Motors and Wachovia Corp. and still serves on the boards of Cousins Properties Inc. and Morgan Stanley.

"We've seen abuses of pay stepping up, rather than down in the bailout era," Ms. Minow added.

The failure of corporate governance in the financial crisis seems to have taken a backseat to more structural issues such as mortgage origination, risk-taking by banks and accounting standards. They're important. But the work of the compensation committees and company boards are just as, if not more, vital when it comes to companies holding themselves accountable.

It's also probably misplaced to think that Washington should solve the issues of pay and conflict that afflict so many companies. Shareholders need to become more active, an admittedly tall order. Only 3.4% of retail shares were voted in 2007 and broker shares voted with management 90% of the time.

But Moxy Vote's success in the On2-Google deal shows that it's not impossible. CEOs such as Mr. Hovnanian hold a great advantage, but they're not immune if a compensation committee chair is bounced from the board or it, in the case of Mr. Lewis, shareholders can send a strong message.

As proxy season draws near, shareholders have an opportunity to turn the tables on that losing reward proposition. Will they bother to seize it?

Write to David Weidner at


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