PLEASANTON, Calif. -- The decision by Safeway to declassify its board of directors at its annual meeting later this year is based on circumstances unique to Safeway and is unlikely to prompt other chains with classified boards to change their approach to corporate governance, industry analysts told SN.
Safeway's nine-member board is divided into three classes, with one-third of the directors elected annually for three-year terms. Safeway said earlier this month it plans to declassify its board by proposing a charter amendment to shareholders at the company's 2004 annual meeting.
If the amendment is approved, Safeway said all directors would stand for election or reelection annually beginning at its 2005 annual meeting. A proposal by an institutional investor at the 2003 annual meeting to declassify the board attracted a non-binding yes vote of 62%.
Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., said Safeway's investors "have more issues with the board than other companies -- questions about whether the independent board members are truly independent."
For example, he noted the concern of some investors that four of the chain's independent directors have ties to Kohlberg Kravis Roberts & Co., the New York-based investment firm that once owned majority control of Safeway. "While the directors are technically independent, it seems to some like a very closed board, with the chairman -- Steve Burd -- having once been a consultant to KKR," Wolf said.
Gary Giblen, senior vice president and director of research for C L King Associates, New York, said the change in governance policy will make Safeway's board more answerable to shareholders.
Giblen said he also attributed the proposed change to pressure from Safeway's institutional investors, "who could drive the stock price down and discourage other institutions from investing if they were to dump their stock because of questions over Safeway's governance policies. So in making this change, Safeway runs the risk of a serious meltdown because the change gives shareholders the ability to exercise control of the board if operating results falter and someone decides to run a slate against the incumbent directors in 2005."
According to Jonathan Ziegler, principal in PUPS Investment Management, Santa Barbara, Calif., "Safeway has been involved in controversy for a while, and it's clear there's been some pressure from a variety of institutional investors -- particularly an effort to get rid of one of Safeway's directors [William Y. Tauscher for alleged business dealings with the chain that could compromise his independence]. So maybe the chain's inner circle sees this change in governance as a way to rectify that situation."
Asked whether Safeway's move to declassify its board will set a precedent for other chains, Wolf said it's unlikely "because most other companies have not done anything with so many repercussions for institutional investors."
Giblen said Safeway's move "increases the chances -- but only slightly -- that Kroger and Albertsons will follow suit because Safeway often leads the industry. But there's been more emphasis for Safeway to make the change because it has not done well financially, which has raised investor concerns."
According to Ziegler, Safeway's action could be followed by other operators. "But Kroger employees own about 35% of the stock of their company, so it would be evident if shareholders there were unhappy with the nature of their board," he pointed out.
In making the change, Safeway said it was reflecting shareholder sentiment following the non-binding majority vote at the chain's last annual meeting. "This action shows the board's commitment to enhanced director accountability, as well as responsiveness to the views of our shareholders," Burd said.
Over the past year, Safeway said its board has adopted a comprehensive set of corporate governance initiatives to enhance existing policies and procedures, including the following:
Adopting standards that call for two-thirds of the board to qualify as independent directors.
Expanding the duties of the board's nominating and corporate governance committee to implement and oversee corporate governance matters.
Establishing a code of business conduct and ethics for senior executives to supplement the existing code covering all employees and directors.
Instituting a pre-approval policy for audit and non-audit fees.
Formalizing the existing practice of regularly scheduled meetings for non-employee directors.
Safeway's corporate governance policies were challenged at the end of 2003 when financial officials in four states and representatives of two retirement funds asked Safeway not to renominate Tauscher as an independent director because of alleged business dealings with the chain they said might compromise his objectivity.
At the time, Safeway said Tauscher had done nothing that would disqualify him from being renominated to the board.
The proposal to declassify the board was made at Safeway's annual meeting last May by the New York-based Amalgamated Bank Long View Collective Investment Fund, which owned 150,603 shares of common stock, according to the company's proxy statement.
In explaining in the proxy why it wanted to declassify the board, the fund said annual election of all directors is "the primary avenue for shareholders ... to hold management accountable for its implementation of [corporate governance] policies.
"The evidence indicates that shareholders are fed up with classified boards. In 2002 the shareholders at more than 30 other companies voted in favor of resolutions recommending that all directors run for election each year. The average level of support for these declassification proposals was 62%..."
In its response in the proxy, Safeway said electing one-third of the directors every three years "provides continuity and facilitates long-term planning by the board; enhances the independence of non-employee directors, and encourages potential acquirers to negotiate transactions with the board that are fair to all stockholders. The election of directors by classes is designed to prevent sudden disruptive changes to the composition of the board. ... Three-year staggered terms allow experienced directors to evaluate projects and policies that will affect the growth and vitality of the company well into the future."
In the proxy statement, the fund dismissed such concerns "that the annual election of all directors could leave companies without experienced directors in the event that all incumbents are voted out by stockholders. In the unlikely event that stockholders do vote to replace all directors, such a decision would express a dissatisfaction with the incumbent directors and would reflect the need for change."