Risk & Governance Weekly

In Brief

More Than 20% Opposition at Two Homebuilders

Board members at homebuilders Hovnanian Enterprises and KB Home received more than 20 percent opposition from shareholders, according to regulatory filings.   

Like other U.S. homebuilders, the firms are receiving greater scrutiny after reporting significant losses. Redbank, New Jersey-based Hovnanian posted a 63.1 percent share decline in the past year, while shares of Los Angeles-based KB Home fell 58.3 percent. 

At Hovnanian’s March 31 meeting, Chairman Kevork Hovnanian, CEO Ara Hovnanian, and Chief Financial Officer J. Larry Sorsby all received more than 23 percent opposition from the company’s Class A common shareholders. The percentage of Class A investors who withheld support would have been even higher if not for the insider shareholdings. The Hovnanian family owns 23.76 percent of Class A shares and 91.6 percent of the super-voting Class B shares. If the family’s shares had been excluded, the three inside directors would have had at least 32 percent opposition.

The reasons for the high withhold votes are not entirely clear. There was no organized “vote no” campaign, but the company does lack a nominating committee, and its pay practices may have led to greater dissent. A majority of Class A investors did vote against a management proposal to establish a new stock incentive plan that would permit the board to reprice options; the plan had an estimated 45 percent shareholder value transfer. A majority of those shareholders also voted against an amendment to a 1983 stock option plan to permit repricing.

At KB Home’s April 3 meeting, investors withheld more than 28 percent of their shares from two pay panel members. There was no “vote no” campaign, but investors appear to have lingering concerns over the homebuilder’s compensation practices. The company’s former CEO, Bruce Karatz, left the firm in November 2006 after the firm disclosed that stock options had been backdated since 1998.

In 2007, investors gave more than 85 percent support to a management-opposed proposal that asked the board to seek shareholder approval of future severance agreements that provide for more than three times an executive’s base salary, plus bonus.  In response, the board adopted a new severance policy in October 2007, but the policy did not address change-in-control situations or require shareholder approval of severance packages that exceed three times an executive’s base salary and bonus. The Trowel & Trades S&P 500 Index Fund filed a similar proposal for this year’s meeting; that measure received 58.4 percent support.

In March, the CEO and two board members at Toll Brothers received more than 31 percent opposition amid investor complaints over the chief executive’s compensation. The Laborers’ International Union of North America claims that a new CEO bonus plan failed to receive majority support among non-insider shareholders and has asked the Horsham, Pa.-based homebuilder to scrap the plan.

In addition, there may have been significant opposition at Ryland Group’s April 23 meeting, where the CtW Investment Group opposed three pay panel members, but the company has not yet released official vote results. --Ted Allen