Proxy Advisors Back Pension Funds' Safeway Opposition

The advisory firms – Institutional Shareholder Services (ISS) and Glass, Lewis & Co. – said they were recommending Safeway investors withhold their votes for Burd at Safeway’s May 20 annual meeting, according to news reports.

That news was music to the ears of dissident shareholders who have been railing against Burd and Safeway’s board since late March. Led by public pension funds in New York, Illinois and Connecticut, the naysayers argue that the current board has taken a hands-off approach while Burd mismanaged the company to the point where his missteps wiped out more than $20 billion in shareholder wealth since early 2001.

“This just adds credibility to what we have been saying all along,” John Chartier, a spokesman for New York state Comptroller Alan Hevesi, told the Associated Press.

The influential California Public Employees’ Retirement System (CalPERS)  promised  to withhold votes for Burd, as well as Tauscher and MacDonnell.

“We applaud ISS and Glass Lewis for adding their voices to the debate and agreeing with us that it’s time for new leadership,” CalPERS spokesman Brad Pacheco, told reporters. The giant pension fund has a connection with Safeway in that president Sean Harrigan used to work for Safeway in various capacities before becoming assistant to the director of organizing at the Food and Commercial Workers International Union in Washington, DC. in 1993 (See   CalPERS  Board Backs Labor Official Harrigan for President ).  

For its part, the Pleasanton, California-based Safeway has consistently depicted the dissident shareholders as actually speaking on behalf of labor unions that vilified Burd during a 3 1/2-month Southern California grocery strike that was settled in February.

Safeway said in a    statement posted to its Web site   that it was surprised and disappointed by ISS’s recommendation.

“Under (Burd’s) leadership, Safeway shares have grown in value from less than $3 to more than $20 on a split-adjusted basis,” the company said in the statement. “Mr. Burd has articulated a clear vision for repositioning Safeway as a differentiated and successful player within the supermarket sector.” Burd has been president of Safeway since 1992 and became chief executive officer in 1993.

Neither of the proxy advisory firms indicated their opinion on whether Burd should lose his CEO job altogether – arguing that that decision was best left up to a reconstituted independent group of directors.

ISS described shareholder complaints about Safeway’s poor performance as “modestly compelling,” but said it was most upset about the current board’s level of oversight of management. “If this ‘vote no’ campaign were solely a referendum on performance, it would likely not have gained the traction and momentum that we have seen in recent weeks.” ISS said.

The report highlighted Safeway's purchase of Randall's in 1999. That deal, valued at $1.8 billion, took place just a year after Kohlberg Kravis Roberts & Co. (KKR) bought 62% of Randall's, and ISS said Safeway's purchase was at a "significant" premium to KKR's purchase price. ISS criticized the deal because KKR bought Safeway in 1986, took it public in 1990 and still holds a number of board seats. In late 2002, Safeway announced it was taking a $700 million charge to reflect the reduced value of Randall's on its books.

ISS advises nearly 1,000 major investors and companies worldwide, and its recommendations were considered influential in the outcomes of recent management battles at Hewlett-Packard Co. and the Walt Disney Co.

Meanwhile, Glass Lewis was also focusing on the Safeway board's independence. "We fear the board does not have enough authority to, or isn't in a position to, hold management's feet to the fire," said Greg Taxin, CEO of Glass Lewis. "We believe that setting up an independent chairman would change the mind-set of both the CEO and board in a way that would be beneficial for shareholders."

However, the two firms split over whether two other Safeway directors, William Tauscher and Robert MacDonnell, should be reelected to their board seats. Glass, Lewis recommended withholding shareholder votes from both those directors, too, citing various conflicts of interest. In contrast, ISS advised shareholders to re-elect the men.

Hoping to quell the shareholder rebellion, Safeway earlier this week announced it would jettison three directors  - George  Roberts, James Greene and Hector Ley Lopez - and appoint replacements with fewer ties to the company. Safeway also named longtime board member Paul Hazen as its lead independent director — a position meant to create more autonomy from Burd.

The firms applauded the changes as positive steps, but said Safeway needed to go even further. In their analyses, the advisers said Hazen's independence is compromised by his long-standing KKR ties.

Walt Disney Co. divided the duties in March after dissident shareholders, including some involved in the anti-Burd campaign, withheld 45% of the votes cast in a re-election of the entertainment giant's chairman, Michael Eisner (See  Eisner Protest Vote Reaches 43%  ).