Season for CEO Reckoning
It's Easier Than Ever to Vote the Bums
Out of the Executive Suite
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
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
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
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
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
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.
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
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
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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