INVESTORS SET TO VOICE GRIEVANCES AT SAFEWAY

ELLIOT ZWIEBACH

PLEASANTON, Calif. -- The long-term direction of Safeway here could be on the line Thursday when the company's shareholders convene for the company's annual meeting.

At issue is whether a coalition of institutional investors can deliver enough clout to force major changes in the company's governance and the direction of top management.

The coalition, composed of public pension funds from several states and municipalities, is urging shareholders to withhold their votes from the three directors up for reelection, which includes Steve Burd, chairman and chief executive officer. While the coalition has no pretensions of tossing Burd out, it hopes to influence the board to become more independent and determine objectively whether Burd should remain in his position and whether his two roles of chairman and CEO should be split.

Safeway has said in public statements the coalition is nothing more than "a union-backed effort to discredit Steve Burd and Safeway's board, shrouded in the language of corporate governance."

Coalition members told SN last week they are uncertain how many votes will ultimately be withheld. "But this effort is the last arrow in our quiver," William Atwood, a representative of the Illinois Board of Investment, one of the pension funds, told SN last week.

At the time the coalition disclosed plans to withhold votes in early February, it represented five pension funds controlling approximately 7 million Safeway shares, or about 2% of the 445 million shares outstanding. Atwood said last week the group has not kept track of how many shareholder groups have expressed support for its effort.

"If only 2% of the shares outstanding withhold their votes, then it will be meaningless," he said. "But our worst-case scenario would be for the vote to withhold to be larger than anyone is expecting -- maybe something like 35% -- and the company still refuses to make changes or converse with shareholders.

"What we're hoping for is that, after the vote, Burd will pick up the phone and call one of the institutional investors and schedule time for an honest conversation so we can work toward some meaningful solutions for the betterment of the company."

According to Bernard L. Kaveler, a spokesman for the Connecticut treasurer's office, another pension fund owner, the number of shares that will be withheld got harder to gauge last week after two shareholder advisory firms, which serve as proxy voting services -- Institutional Shareholder Services and Glass, Lewis & Co. -- urged shareholders to withhold votes. "Many of the pension funds using those services tend to vote the way those services suggest they vote, and that will probably grow the vote against management, though it would be hard to pinpoint the amount in advance," he told SN.

Industry analysts told SN last week they aren't sure what the impact on the company would be if a significant percentage of shareholders opt to withhold their votes.

"This is uncharted territory," Gary Giblen, senior vice president and director of research for C L King, New York, said. "Institutional investors voting as a block on issues of corporate governance is a new approach in business, and there are no established guidelines here."

But Safeway has already been somewhat responsive to shareholder concerns over governance issues, Giblen pointed out, having announced plans to replace three inside directors -- James H. Green, George Roberts and Hector Ley Lopez -- with independent directors in the next few months and offering to declassify the board beginning with next year's annual meeting, "so while it's likely to be a colorful meeting, the reality is, shareholders have already put Burd on a shorter lease, though he should have at least a year longer to show improved results before any serious challenge to his leadership can be mounted."

Jonathan Ziegler, principal in PUPS Investment Management, Santa Barbara, Calif., also said he believes Burd's leadership is secure -- for the moment. "Burd's got legs," he told SN, "and he should be OK for a year or maybe two, if not longer."

His chances for survival became more likely, Ziegler pointed out, after Safeway opted to make some of the corporate governance changes institutional investors have been asking for. "There's an old joke about a visitor to a farm who wonders why the farmer has a pig with a wooden leg and the farmer tells the visitor, 'With a pig like that, you don't eat it all at once,' and I think that applies to Safeway.

"Dissident shareholders are not going to get everything they want on the first try, but they've already accomplished quite a lot, and they shouldn't try to 'eat a pig like that all at once' but should take comfort in what they've accomplished so far."

Ziegler said he believes part of the investors' enmity stems from the prolonged strike-lockout in Southern California. "I believe Burd did what he had to do there because health care costs are a nationwide concern. He may have been a little heavy-handed in the way he went about it, but his objectives were good for shareholders."

Giblen also said the coalition's efforts to embarrass Burd by withholding votes stem from the labor situation. "I'd say only about 25% of the investors' actions are motivated by genuine concerns with corporate governance, while the other 75% is grandstanding by labor unions and the pension funds that get money from them," he indicated.

The three directors up for reelection are Burd, 54, a board member since 1993 who has served as president since 1992, CEO since 1993 and chairman since 1998; Robert I. MacDonnell, 66, a board member since 1986, who retired in 2002 as a partner in Kohlberg Kravis Roberts & Co., the New York-based investment firm that acquired majority control of Safeway in 1986; and William Y. Tauscher, 54, a director since 1998 who is the management member of The Tauscher Group, which invests in and assists in the management of companies involved with home products, transportation, security and real estate.