Yes it's a known bug with upgrading armors of any sort. Basically, when you upgrade, the base def of the item will get rerolled using stats from new item type (upgraded armor doesn't retain max base def when upped).
Normal HoZ is Gilded Shield with base def 144-168 (actually max def is used here)
Upped HoZ is Zakarum Shield with base def 169-193 (yes, this defense range is used here!!)
So if you upgrade your HoZ, there's a possibility you won't get any improvement at all, only requirements will increase.
It's even worse with ethereal armor, because upgraded eth armor actually uses base def of non eth armor!!
And no, once upped, there's no way to degrade your HoZ .
Items with %def have perfect base defense +1, but upon upgrading, it gets a random base defense. Anyway, your HoZ can't become worse - see Cameron's posting. The main point of upgrading a HoZ is getting a far greater smite damage which isn't very useful for anybody but a smiter. For example, a zealot only uses smite because it always hits. That will result into a greater number of successful crushing blows versus monsters with lots of life, like Baal.