INVESTORS VOW TO PRESSURE SAFEWAY FOR BOARD CHANGES

Elliot Zwiebach

PLEASANTON, Calif. -- The reelection of Steve Burd and two other Safeway directors will not end the concerted effort by institutional investors to influence the company's future direction, members of a coalition of public pension funds told SN last week.

They said they intend to carry on the fight to make Safeway's board more independent, with the ultimate goal of splitting the positions of chairman and chief executive officer held by Burd.

According to Bill Atwood, a representative of the Illinois Board of Investment, the coalition's effort to affect corporate governance by asking shareholders to withhold their votes from Burd and the two directors "was a means to an end that we've not yet achieved -- to have an independent board of directors and an independent chairman."

Industry analysts said the success or failure of any future efforts will probably be tied to the performance of the company's stock.

The coalition includes public pension funds in Connecticut, New York (including New York City), California and Illinois that collectively represent about 2% of Safeway's outstanding shares, who were able to muster a "withhold" vote from 17% of all shareholders in opposing the reelection of Burd and 15% opposing the reelection of William Tauscher and Robert McDonnell.

A proposal to split the chairman and CEO positions lost by a vote of 66.8% to 33.2%.

According to Atwood, Safeway's announcement in early May that three of the company's nine directors will resign later this year to make room for independent directors is a step in the right direction, "but we need at least five directors who are independent, with no current or previous relationship with Safeway or with KKR [Kohlberg Kravis & Roberts, the New York-based investment firm that once owned the majority share of Safeway]."

He said the coalition does not expect to dictate to Safeway who the three new directors should be, "but we would like to have some input, and we think we should be heard. We also would like to know who the company is considering."

Atwood said he has concerns about some of the corporate strategies outlined by Burd during the meeting "that don't square with my view of how a business should operate, such as trying to outperform competition on service while reducing labor costs and replacing a diversity of branded grocery items with Safeway-label products.

"For me, the bottom line is, we cannot rely on the board as it's now constituted to evaluate the company's strategies to determine what's in the best interests of shareholders, and we need a board that will posit some of those concerns."

Bernard L. Kavaler, a spokesman for Connecticut State Treasurer Denise Nappier, also told SN the coalition will continue to pressure Safeway. "We remain long-term shareholders interested in assuring shareholder value at Safeway, and we hope to continue to be responsible shareholders," he said.

He said Nappier is continuing to seek a meeting with Rebecca Stirn, the Safeway director who heads the board's nominating committee -- a meeting he said the treasurer has been seeking since last December. Despite the failure to get that meeting, "clearly, we've gotten their attention," Kavaler said.

Scott Taffet, a spokesman for New York City Comptroller Alan Hevesi, said he believes Safeway management "understands better now than it did before that shareholders care about corporate governance. Even though we didn't achieve the Disney threshold of success [a 43% vote to split the chairman and CEO positions], we can only hope the company will continue to listen to shareholders and make improvements in corporate governance."

Industry analysts told SN they believe the anti-Burd movement will gain or lose strength depending on the direction of Safeway's stock price.

"If the stock price recovers, the coalition will be less influential, but if it continues to trend downward, the coalition will gain in power," Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., explained.

He said the 17% "withhold" vote "was impressive proportionate to the 2% represented by the coalition, but not anywhere close to an overwhelming rebuke of Burd. However, with a 17% vote to fire Burd and a 33% vote to split his positions, it's clear shareholders don't want to fire him, but just to rein in his power with stronger board oversight."

Gary Giblen, senior vice president and director of research for C L King Associates, New York, said the decision by 17% of shareholders to withhold their votes "is just an indicator of sentiment that doesn't mean anything -- like voting for an independent presidential candidate when you know he can't win.

"If the company's financial results improve, it will all go by the wayside, and if they don't, Steve Burd will probably lose his CEO position anyway."

As for splitting the positions of chairman and CEO, Giblen said that's unlikely to happen "unless the board wants it to happen. However, it is conceivable that it could happen in the next year or two if the company's financial performance doesn't change, based on the Disney precedent."

The only direct reference by a shareholder to the effort to withhold votes came during the informal part of the meeting, when Atwood, speaking from the audience, said the pension funds had decided to withhold their votes only after the company failed to respond to a series of letters asking to meet with Stirn. "Withholding votes was our only option to have some assurance shareholders would have some input in the nominating process," he explained.

During the meeting, several shareholders sought to ask questions directly of McDonell and Tauscher, the two directors up for reelection. However, Robert Gordon, the chain's general counsel, fielded all questions, leading one shareholder to ask, "How can we evaluate the directors if management answers the questions on their behalf?"

In response to a shareholder question, Burd defended his salary. "I make a lot of money," he said. "In fact, I'm the sixth highest-paid CEO among my peers. But it's a market wage for what I do, and I'm not ashamed of that.

"While the company's results have not been as good as they once were, I make a lot less than I did four years ago -- 40% less. I believe that, when the company doesn't hit the numbers, management should pay the price and I should pay the biggest price."