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Safeway released a statement yesterday in response to reports that a campaign to oust Safeway CEO Steve Burd has been initiated by dissident shareholders of the company. The company charged that it is a union-driven campaign to put pressure on a company that has "moved to restructure its labor costs."

The campaign is led by two public employee pension funds, which together hold about seven million of Safeway's 444.8 million outstanding shares,

In addition to Burd, who has been identified as being militantly anti-union and the most confrontational CEO during the recent four-month strike/lockout in Southern California, two outside directors - William Tauscher and Robert I. MacDonnell - also are being targeted by the funds as being too cozy with Burd. The funds said that they hope to unseat the men at Safeway's May 20 annual meeting.

The Safeway statement was attributed to Brian Dowling, vice president of Safeway Inc.:

    "Let's be clear on what this is. This is an attempt -- at the behest of union leadership -- to pressure a company that has taken decisive action in labor issues and moved to restructure its labor costs. Union leadership has threatened to attack Safeway CEO, Steve Burd, and individual members of Safeway's board as a pressure tactic to get better results during labor negotiations, and these union backed pension funds are carrying through on that threat.

    "The fact that the attack is shrouded in the language of corporate governance issues may help garner press coverage, but it can't create legitimacy where there is none. When questioned by reporters, representatives of the effort claimed Safeway should declassify its board. We announced more than two months ago that we were doing exactly that. They suggested that the company should invest in its store system. Safeway spent nearly $1 billion dollars on new store and remodel construction in 2003 and plans to spend more than $1.2 billion to $1.4 billion in 2004 on capital projects. They challenged two Safeway board members independence, asserting conflicts of interest. In fact, they fully meet our director independence. Safeway has been and continues to be committed to the highest corporate governance standards. We have enacted director independence guidelines more restrictive than the NYSE/SEC rules, and have properly applied them to our board members.

    "Safeway has produced excellent results for shareholders including an eight fold increase in the share price since Steve Burd joined the company as CEO. The company has acted decisively in times of challenge, aggressively reinvests in its stores, and has a sound vision for the future which is fully supported by Safeway's Board of Directors."
KC's View:
Safeway should be a little careful about resting on its laurels; just ask Disney's Michael Eisner about how effective these pension funds can be in affecting corporate management structures.

We also think that there seems to be a tendency among Burd supporters to point to how well the company has done in terms of stock price since he became CEO…without acknowledging the company missteps that led to its Dominick's division losing more than a billion dollars in value during his stewardship, and the loss of customer support experienced by the company in its Philadelphia, Dallas, and Chicago operations.

The issue, for us, seems to come down to the fact that from all appearances, Safeway has been managed for its Wall Street customers rather than its supermarket customers. We know that this may be a reality of life for a public company in 2004, but we find it hard to believe in companies that seem to be run by accountants rather than marketers and merchandisers.