SAFEWAY INVESTORS LAUNCH 'NO CONFIDENCE' CAMPAIGN

ELLIOT ZWIEBACH

WASHINGTON -- Safeway management found itself on the hot seat last week as a coalition of institutional investors launched a campaign here calling on other investors to withhold their votes at the chain's May 20 annual meeting.

The coalition's goal is not to remove Steve Burd as chairman, president and chief executive officer of Safeway, but to amass a symbolic "no confidence" vote in Burd and two other directors up for reelection this year to convince the company to be more responsive to requests from shareholder groups to make corporate governance reforms and improve financial performance, William Atwood, a spokesman for the coalition, told a press conference here Thursday.

The coalition, comprised of five public pension funds, said it will hold a briefing next Monday in New York City for Wall Street institutional investors and other money managers hosted by Alan G. Hevesi, comptroller for New York state.

The five funds collectively control approximately 7 million Safeway shares, or about 2% of the 445 million shares outstanding.

Brian Dowling, a spokesman for the Pleasanton, Calif.-based chain, told SN, "The pension funds should tell it like it is and acknowledge that this is a union-backed effort to discredit Steve Burd and Safeway's board, shrouded in the language of corporate governance. This has nothing to do with corporate governance and everything to do with ongoing efforts by the union, based on what has gone on and what will continue to go on, at the bargaining table.

"Under Burd's leadership, Safeway has produced excellent results for shareholders, including an eightfold increase in share price over the 11 years since he became president. He has a sound vision for the future of Safeway that is fully supported by the board of directors."

The investors maintain, however, that the share price has dropped precipitously in recent years.

Speaking at the press conference, William C. Thompson Jr., New York City comptroller, denied any connection between the investor groups and organized labor. Many of the same groups had expressed public opposition to Safeway's position in the 20-week strike-lockout in Southern California that ended earlier this month.

According to Thompson, "That [alleged link with organized labor] is a diversionary tactic that tries to detract attention from the main issues. This is solely about our concerns with Safeway's performance and corporate governance that will lead to better financial performance."

Members of the coalition are the New York State Common Retirement Fund; the New York City Employees' Retirement System; the Illinois Board of Investment; the Connecticut Retirement Plans and Trust Funds, whose representatives spoke at the press conference; and the California Public Employees' Retirement System, which also intends to withhold its votes, a CalPERS spokesman told SN.

Industry analysts contacted by SN differed in their opinions on the institutional investors' efforts.

Chuck Cerankosky, an analyst with McDonald Investments, Cleveland, told SN he expects their efforts to have "zero impact. They are pro-union people who are wasting the time of a CEO like Steve Burd, who's playing hardball with the union, which is his job. As an investor, I want him to run the company, not spend his time talking to people who represent a group that causes the company problems on a daily basis."

Two other analysts, however, told SN they believe the investors have legitimate concerns in pursuing their goals.

"Of the Big Three chains, Safeway is the laggard in terms of performance, with the stock down almost 43% since 2000 -- compared with a 29% decline by Albertsons and a 12% decline by Kroger over the same period -- and that's the most legitimate complaint a shareholder can have," Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., said.

"If enough people withhold their votes, it will get Safeway's attention and could result in some changes."

Jonathan Ziegler, principal in PUPS Investment Management, Santa Barbara, Calif., said efforts by institutional investors to seek corporate governance reforms at companies like Walt Disney and now Safeway "may be the beginning of a major movement, and it's likely that kind of pressure will intensify among underperforming companies.

"It's hard to dismiss the idea of improving corporate governance, so the pension funds are probably on the right page because there have been some relationships among Safeway board members that could raise some suspicions. Furthermore, these institutional funds are not a bunch of flakes, and what they're doing seems well-considered."

Atwood told the press conference the coalition's efforts were prompted in part by a 60% decline in Safeway's stock price over the last five years -- from $61 in 1999 to $20.02 at mid-week last week -- and in part by Safeway's failure over the last few months to allow the investment groups to talk with Rebecca Stirn, the chain's sole independent director, about issues of concern, including possible conflicts of interest among board members with the company.

Edward M. Smith, chairman of the Illinois Board of Investment, said the decision by the pension funds to withhold their votes "is based on a wide range of concerns, including the failed leadership under Steve Burd, the company's failed governance, the conflicted board, and the steep losses for investors.

"We see our effort as the first step in restoring accountability and integrity to the Safeway board and value to Safeway shareholders."

Hevesi said the coalition's effort is designed "to start a process where we can begin negotiating substantial corporate reforms and improvements in performance. We want to send a message to Safeway and other underperforming companies that we're very serious about entering this process to improve performance on a sustained basis."

Thompson complained about alleged conflicts of interest among Safeway's directors, noting that eight of the nine members "are doing business with the company and with each other -- and benefitting from it."

Meredith Miller, assistant treasurer for Connecticut, outlined some of the alleged conflicts, noting that William Y. Tauscher, chairman of the board's compensation committee, "has personally engaged in a series of related-party transactions with Safeway," while Robert I. MacDonnell was awarded "excessive audit fees" in his position as chairman of the chain's audit committee.

In addition, MacDonnell is one of four former executives of Kohlberg Kravis Roberts & Co., the New York-based buyout group that used to own Safeway, "and that has resulted in a variety of conflicts embedded into a complex tapestry," Miller said, including the sale to Safeway of Houston-based Randall's Food Markets, whose majority owner was an entity related to KKR.