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|  | DECEMBER 24, 2003
A Battle Zone in Safeway's Board The AFL-CIO and big pension funds want to boot William Tauscher, claiming conflicts of interest. The supermarket chain isn't budging In this age of corporate-governance reform, few things rankle institutional investors like a presumably independent director whom they perceive to be anything but. William Tauscher, an independent director at supermarket giant Safeway, is learning that the hard way. Officials from the largest, most influential labor unions and pension funds are calling on the Safeway (SWY ) board of directors not to renominate Tauscher for reelection at the company's annual meeting in May. Their objection to Tauscher: a record of business dealings with the $32 billion grocery chain collectively worth millions of dollars. The transactions "fatally compromised his objectivity as an independent director" in the words of Connecticut Treasurer Denise Nappier, who on Dec. 18 called for Tauscher's removal. The issue of Tauscher's objectivity is key because he sits on the board's audit and nominating committees and chairs its compensation committee. Under New York Stock Exchange listing standards approved by the Securities & Exchange Commission in November, all members of those committees must be independent from management. And according to the AFL-CIO, Tauscher's perceived conflicts mean the nine-member Safeway board has only one truly independent director: business consultant Rebecca Stirn. "NOTHING INAPPROPRIATE"? In addition to the three insiders on the panel -- Chairman and CEO Steven Burd, former Chairman Peter Magowan, and Hector Ley Lopez, who runs a Mexican company in which Safeway has a 49% stake -- four directors have ties to Kohlberg Kravis Roberts & Co., the leveraged-buyout firm that acquired Safeway in 1986. KKR sold its stake in the late 1990s, but its affiliates have several ongoing business ties to Safeway. Safeway considers the four KKR-affiliated directors independent, as it does Tauscher and Stirn. A Safeway spokesman told BusinessWeek Online that Tauscher was unavailable for comment and added that the company has no intention of removing him from the board in May or changing any of his committee assignments. "There's no basis for the claims challenging Mr. Tauscher's status as an independent director," says Safeway spokesman Brian Dowling. "There's nothing inappropriate in any of this." The AFL-CIO begs to differ. In a Dec. 9 letter to Burd, the labor union's director of the office of investment, William Patterson, laid out the bill of particulars. The first: Tauscher's separation agreement with Safeway vendor Inacom following Inacom's 1999 acquisition of Vanstar Corp., where Tauscher was CEO. The agreement, according to the AFL-CIO, guaranteed Tauscher a $1 million bonus if Safeway and other companies remained as customers for six months. That created "a significant undisclosed conflict of interest between Mr. Tauscher and Safeway," Patterson wrote. CHOICE CUTS. Following the Vanstar sale, Tauscher served as CEO of a marketing and technology e-commerce venture, MainStreet USA Corp. According to Safeway securities filings, Safeway loaned MainStreet $2 million in January, 2000. But when MainStreet went out of business six months later, Safeway forgave the loan and all the accrued interest. At about the same time, according to Safeway securities filings, the company granted Tauscher 100,000 stock options as payment for consulting work in connection with a new business venture. That, the AFL-CIO says, is a reference to Safeway's investment in a meat-processing company of which Tauscher was a director. When that company went bankrupt in March, 2002, Safeway took an aftertax charge of $30.5 million. Finally, Tauscher borrowed $133,070 to buy 4,467 shares of Safeway stock in 1998 and will remain indebted to the company until 2008. "IN THE WEB." Although Big Labor and various pension honchos are up in arms over Tauscher's transactions, under the NYSE listing standards and Sarbanes-Oxley, none of the four dealings would disqualify Tauscher as an independent director. Still, corporate-governance experts who aren't part of the campaign to unseat Tauscher say his history of involvement with Safeway raises serious questions about his independence. "It sounds to me like he ought to go," says B. Espen Eckbo, founding director of the Center for Corporate Governance at the Amos Tuck School of Business Administration at Dartmouth College. "He's too caught up in the web of the company to think independently." That Big Labor is drawing a bead on Tauscher at the same time it's involved in a separate, ongoing battle with Safeway is more than a coincidence to some observers. Unionized workers walked off the job on Oct. 11 at several Southern California grocery chains, including Safeway. LOTS OF ALLIES. "The union is attacking Tauscher at this time simply because of their long-running dispute with Safeway," says Jay Waks, who heads the employment law practice at Kaye Scholer LLP in New York City. The AFL-CIO could not be reached for comment. Whatever its motives, the AFL-CIO has plenty of company in its fight against Tauscher. In addition to Connecticut's Treasurer, others who have joined in include California Treasurer Phil Angelides; California Controller Steve Westly; Jack Ehnes, CEO of the California State Teachers' Retirement System; Rob Feckner, chairman of the investment committee of the California Public Employees' Retirement System; New York State Comptroller Alan Hevesi; New York City Comptroller William Thompson Jr.; and Edward Smith, chairman of the Illinois Board of Investment. Should Safeway renominate Tauscher next May, the union and pension funds could exercise their considerable clout by withholding their votes for the embattled director at the annual meeting. While doing so won't amount to much in 2004, it may down the road. The SEC is now considering a rule giving institutional investors limited power to run opposition candidates. Should such a rule be passed -- which is considered likely -- and should 35% of shareholders vote "no" on Tauscher in May, Safeway would be looking at a contested board election in 2005. It could be a long time coming, but Tauscher's opponents may have an opportunity to do by force what they apparently won't be able to accomplish by diplomacy.  By Louis Lavelle in New York Edited by Patricia O'Connell
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