Hovnanian combines titles, raises watchdog hackles
NEW YORK, Nov 6 (Reuters) - Governance watchdogs have Hovnanian Enterprises Inc (HOV.N) in their sights again, after the homebuilder announced this week that it was adding chairman to its chief executive's collection of titles.
At last year's annual meeting, activist investors criticized the builder for paying Ara Hovnanian, then chief executive and president and now chairman, too, more than his peers.
This year's meeting may well feature a similar shareholder resolution scolding the company for combining the titles, said Patrick McGurn of investor advisory firm RiskMetrics.
The board of the Red Bank, New Jersey-based company voted unanimously to make Ara Hovnanian chairman after the recent death of his father, Kevork Hovnanian, who founded it in 1959.
"It wouldn't shock me if this ended up on their proxy this season," McGurn said.
Hovnanian declined to comment.
A separate CEO and chairman creates a system of checks and balances for shareholders, protecting them from abuses such as excessive compensation, said Chris Cernich, a director with Proxy Governance, which provides proxy voting recommendations.
"It looks like Hovnanian shareholders need more of an advocate," Cernich said.
Last spring, Proxy Governance urged investors to withhold votes from directors to protest Ara Hovnanian's compensation, which averaged over three years was 290 percent higher than the median paid to CEOs at the company's peers, according to Proxy Governance.
Hovnanian trades at about $4 per share today compared with a lifetime high of $73.40 in July 2005, before the onset of the worst housing slump in decades.
Still, a combined CEO and chairman is not uncommon in the industry, pointed out Stephen Kim, an analyst with Alpine Mutual Funds, which owns 180,500 Hovnanian shares, according to Reuters data.
Bob Toll, for example, is chairman and CEO of luxury builder Toll Brothers Inc (TOL.N). Pulte Homes Inc (PHM.N) Chief Executive Richard Dugas is also chairman of the board, as is MDC Holding Inc's (MDC.N) Larry Mizel.
Some investors may consider more power for Ara Hovnanian a positive, said analyst David Urani of Wall Street Strategies. "He is the heir," Urani said. "He's grown up with the company his whole life. He's obviously going to know everything about homebuilding. He's been taught it from the cradle."
Like Hovnanian and Toll, many of the industry's big players started life as the creation of an entrepreneurial founder, Kim said. Some of the others, such as Pulte, have ceded control to non-family members. Founder Bill Pulte recently resigned as chairman to become a director.
But Hovnanian is still very much a family firm with public shareholders, said Proxy Governance's Cernich, adding that not every family firm has a combined CEO-chairman or Hovnanian's "egregious" compensation practices.
Kevork and Ara Hovnanian had voting control through personal holdings and family-owned entities of 72.3 percent of the company's stock, according to its most recent annual report.
The real source of Ara Hovnanian's control over the company lies in his ownership stake more than his titles, said UBS analyst David Goldberg.
But Kim sees advantages to shareholders in Hovnanian's structure, because investors and management will reap the same benefits from any successful strategy: "This is a management team that's fully vested in what's going on. We may not have full control, but we have their full attention." (Editing by Gerald E. McCormick)
