CalPERs' Interest on Safeway Inc.

Case-In-Point -Calpers Vs Safeway Inc
Name
University of Delaware
FINC 854: Seminar on World’s Wealthiest Shareholders
Date
1 Background of the Active Investor
Relevant experience
CalPERS the California Public Employees' Retirement System has undertaken various legal options and investor activism to influence changes in companies to protect their investment. Investor activism has affected companies such as Whirlpool Corp and Safeway. The board of Calpers is influential and the public pension fund with billions in assets has also focused on attributes that are part of the corporate governance (Dow Jones News Service, 2014 a). To influence changes Calpers has lists of companies that are underperforming in Calpers’ portfolio and there are calls for actions to improve investments, management and workplace practices. Pension funds such as Calpers have different investment criteria when choosing investments, but increasingly they focus on influencing management decisions to protect their investments.
Proxy targeting first involves target selection and Calpers identifies and targets that the fund’s analysts believe required change and are tasked to identify firms to be targeted. Considering the measurement of stock returns and other accounting measures indicates whether there is good or poor performance is common, but Calpers also focuses on corporate governance criteria is used. After selecting the target company, Calpers communicates with the target firms such as Safeway and Calpers informed Safeway about the need for change. Often, Calpers submits proposed shareholder proposals and depending on whether there are changes the next action is seeking resolution. In many cases, there is no resolution between Calpers and the targeted firms before the shareholders annual general meetings and Calpers also chooses nonproxy targeting where there are not shareholder proposals.
Tactics in active investment program
Placing underperforming companies on the Calpers focus list is associated with the Calpers effects, which affects wealth creation in companies that are targeted because their poorly governed. The Calpers management has focused on both the short-term and long-term decisions where the targeted firms were then forced to make changes to improve operations and competitiveness. The idea that there are performance improvements because of the CalPERS effect has influenced Calpers activism and there has been turn around in some of the targeted firms. Public pension fund exercise a huge economic clout because they are large institutional investors and Calpers is one of the institutions that have increasingly used public pension fund activism to influence the conduct of executives and corporations, which tends to improve profitability and wealth creations for the investors.
Calpers’ shareholder activism is linked to greater attention to transparency and accountability in companies where Calpers is a major investor. Pension fund activism is beneficial to influence management change and practices. However, funds such as Calpers may exercise too much power including political influence. Antitakeover measures and influencing the election of shareholders are some ways that Calpers has sought to make radical change in companies, with companies then forced to implement various defensive measures. Major shareholders often have powers such as calling special meetings and changing the number of directors, which in turn affects corporate control, management and affairs. Calpers has increasingly voted proxies for management to affect corporate matters and the activist chiefs at the fund have been vocal to emphasize the need for change (Dow Jones News Service, 2003a).
Activism among institutional investors became more common in the mid 1980s the year in which the training takes place where the Council of Institutional Investors (IIC) focused on the importance of promoting the interests of institutional investors. Thus, institutional activism expanded significantly with the big pension funds such as Calpers presenting proposals in the U.S., both individually and in collaboration with other shareholders where they support activist role in some of the companies in which they invested. As unions and pension funds gained strength in shareholder activism, researchers focused on pension fund activism analyzing fund activities and the influence organizations such as Teachers Insurance and Annuity Association of America-College Retirement Equities Fund (TIAA) and Calpers.
The proposals that institutional investors submit tend to garner more support that the proposal sponsored by other shareholder, and especially when the institutional shareholders have a large stake in the target company. Other institutional shareholders such as union funds are equally influential if not more influential in affecting support and votes for their proposals institutional shareholders are also likely to be more committed in their pursuit of change and Calpers showed their intention to influence change in Safeway. When institutional shareholders play a more active role in their submission of proposals and get the necessary support then they are more successful and effective investor activists. However, proposals to end poison pills may not be as effective even when large institutional investors are involved and the poison pills strategy is used to defend against a hostile takeover including through making the target firm shares undesirable or raising the costs of a takeover.
Decisions on Targets
To promote changes in the companies where there are major investments, Calpers has at times conducted as behind-the-scenes negotiations with the management of the companies, and make their intentions public in companies through the media or proposals to the Shareholder General Meetings shareholders. Additionally, they also seek to influence the decisions that the managers through take through the actual or implied threats of selling their share holdings in the companies and thus lead to the fall in the value of shares also known as Wall Street Walk. Like other large institutional shareholders Calpers has also carried out campaigns to encourage other shareholder activists to vote or deny their votes to make changes to express their dissatisfaction with the actions of the company's executives or the corporate governance structure (Dow Jones News Service, 2003 b).
2 Chronology of events related to the active investment program
Date

Announcement

03/25/2004

Pension Funds Want Safeway CEO, 2 Directors out ( Source: Dow Jones News Service)

04/07/2004

CalPERS announces plan to withhold proxy votes on Safeway CEO (Los Angeles Times)

05/03/ 2004

Safeway reports intention to replace three directors with independent directors (Source: Wall Street Journal)

12/01/2004

Gadfly Activism at Calpers Leads To Possible Ouster of President
(Source: Wall Street Journal)

Prior to Calpers activists targeting Safeway, there was focus on changing the board of Safeway as there as a need to pick New Board president in 2003. William Brown the mayor of San Francisco showed intention to contend for the position of president at Calpers in 2003, and two other board members were being considered including the acting board president Robert Carlson and Sean Harrigan an official of the Food and Commercial Workers International Union (Dow Jones News Service, 2003). There had already been shuffling of the top-tier management after Calpers experienced losses in 2002 and the board was divided in the 2002 fiscal year (Dow Jones News Service, 2003 a). Both private and public funds had been losing money over time and there was pressure to improve fund performance as the stock market asset value had fallen, and the low interest rates had forced the funds to increase obligation to avoid a shortfall in future benefits (Dow Jones News Service, 2003 a).
In 2003, Safeway Inc was unable to sell the Dominick’s grocery store chain, a subsidiary of Safeway Inc based in Chicago and Dominick's had experienced declining sales (Dow Jones News Service, 2003 b). This was further complicated by the failure to reach an agreement with 8,000 workers working at the chain store. Just like in California unionized employees in the Midwest were calling for better wages and health-care benefits (Dow Jones News Service, 2003 b). The unions were also bolder to call for changes in the retail stores a s there were more strikes where they were was focus on improving workers benefits working in the retail stores. When the unions broke negotiations with the store chains was often followed by labor strikes.
Safeway earnings fell because of a 4½ month strike up to February 2004 and resulted in fall in profitability. Consequently, there was pressure on Safeway’s CEO from various public pension funds, and the troubles affecting Safeway extended beyond California. Despite the labor despite Mr. Burd did not change the Safeway's per-share earnings, but combined with the closure of some stores outside California, the net income fell compared to the same period of the previous year. Recovery from the strike was slow as customers then moved to shopping in other stores, which experienced higher sales especially those in Southern California.
On 25th March 2004, officials the Calpers fund supported the removal of Steven Burd, the CEO of Safeway and two other directors, where Safeway the parent company of Vons and Pavilions in Southern California was in a labor dispute with the workers. As one of the activist shareholders in Safeway, Calpers officials advocated for improved accountability among big businesses such as Safeway. The dissident shareholder pushed the agenda to oust Mr. Burd and Safeway to pick someone with no previous connection to the supermarket chain and one advancing union interests. Pressure against Safeway’s CEO was also interpreted as an attempt to support organized labor since Hurd had ties to eh labor unions.
In February 2014, there were growing concerns that the pension fund officials and pension trustees had already shared their concerns and supported union campaign before the activist decision as there was organized labor linked to a supermarket strike in California. Some of the executive members had ties with Kohlberg Kravis Roberts & Company (KKR) in the 1980s, and the buyout firm was partly responsible for job cuts. The labor strife promoted Calpers and other pension funds to call for change in management and improved oversight a Safeway. In 2004, there was a lawsuit against Safeway’s directors highlighting that the members failed to disclose information that some of Safeway’s divisions performed poorly and facilitated KKR and some of the directors to sell shares at inflated prices (Safeway, 2004). In February 2014, Safeway reported that more than $ 100 million loss was attributed to the strike and the shoppers staying away from the retailer.
By March 2004, the California Public Employees' Retirement System and other our pension funds owning Safeway Inc. shares sought to oust the chairman and chief executive Steven A. Burd and two directors Robert I. MacDonnell and William Y. Tauscher highlighting that there were pervasive conflicts on the board and a sharp decrease in the share price.
Pension funds in different states had already raised concerns that Safeway’s management was worsening operations and their activities affected the ability of the directors to serve effectively.
Conflicts of interest that the board faced affected shareholder interests including two who had ties to Kohlberg Kravis Roberts & Company. While there were concerns about conflicts with other executives, the two nonexecutive directors were singled out since they sought reelection in 2004.
On Apr 07 2004, Calpers stated that it would withhold votes for Steven Burd Safeway’s Chairman and Chief Executive as there had been a $ 20 billion fall in the market value since 2001 equivalent to a 60% fall in the value (Lifsher/ Losn Angeles Times, 2004). The fund officials further stated that there were conflicts of interests and the managers were not responsive to the shareholder concerns. Rob Feckner the CalPERS Investment Committee Chairman further stated that having Mr. Burd, Robert MacDonnell and William Tauscher on the grocery chain board jeopardized the shareholders interests. Withholding the votes would derail Burd’s reelection bid and the other two board members. Public pension funds in other states showed intention to also withhold proxy votes from Mr. Burd.
On May 3, 2004, Safeway reported that the retailer would replace three directors and improve the corporate governance enhancements (Adamy, 2004). George R. Roberts and James H. Greene, Jr who were board members and affiliated with KKR would leave the board and Hector Ley Lopez would be replaced by an independent direcor. The changes were partly linked to pressure from Calpers, but the there was no removal of the chairman, president and CEO as Calpers had demanded (Adamy, 2004).
There was a need for Safeway to disclose information about the performance of all the retailer’s division and conflict of interests for KKR members who were part of Safeway Board. Complaints about the actions and decisions of Safeway board of members who had privy information that affected the company’s stock, but failed to disclose the information benefited the members and KKR as they traded shares at a profit; this resulted in abuse of control, breach of fiduciary duty, abuse of control, violations of the California Corporations Code (Safeway, 2004). Despite Safeway’s annual report highlighting the importance of implementing corporate governance enhancements, there were three directors at Safeway who were affiliated with KKR, and this resulted in conflict of interests.
Sean Harrigan the former president of Calpers was ousted before December 1st 2004, with the Calpers board voting 3-2 to replace him on the board (Weil, & Lublin, 2004). The officials who removed Harrigan from the board highlighted that there were more interested in improving the long-term value for Calpers while considering the interests of various (Weil, & Lublin, 2004). At Harrigan ‘s direction, Rob Feckner a member of Calpers Board of Administration wrote to Mr. Burd the CEO of Safeway on Dec 17, 2003 when there was a union strike among California chain stores because of reduction of the employees' health-care benefits (Weil, & Lublin, 2004). At the time, Calpers owned Safeway’s shares worth $ 77 million and requested Mr. Burd to focus on the fair treatment of employees during the negotiations (Weil, & Lublin, 2004).
In 2003 and 2004 Calpers Mr. Harrigan sought to “intercede on behalf of striking Safeway Inc. employees, members of a food-worker's union where he is a top executive” (Weil & Lublin, 2004). At the same time, Calpers engaged in conduct that violated mutual interests through caring proxy votes among some of the company directors, and other activities supported by Calpers included joining efforts to remove the head of New York Stock Exchange, Richard Grasso (Weil, & Lublin, 2004.) However, there were concerns that Calpers was being used for political leverage and the pension fund may have been harming the corporate-governance movement (Weil, & Lublin, 2004).
The loss value of Calpers assets and the increased benefits receipts to the retired workers were increasingly overburdening the public fund. In the 2003/2004 strike the Pavilions and Vons stores were most affected in Southern California. The strike deterred shoppers who chose alternative that were not affected by the strike, and the management of the supermarkets and stores had targeted reducing labor costs through cutting different benefits mostly heathcare to be competitive when compared to Walmart stores. The related-party transactions among some of Safeway’s board of directors were a concern because of the conflict of interests, but the labor strike resulted in a drastic fall in profitability.
3 Changes in stock price performance
On 25th March 2004 the S & P 500 value was 1,109.19 and increased to 1,191.37 on December 01 2004 and the index increased by 7.41% during this period. The change in stock performance compares the stock price of Safeway (SWY) and the S & P index on 25th March 2004 the stock price was $ 20.16 and ha d fallen to $ 19.81 on the first of December 2004. The period 1st November to 1st December 2004, the lowest share price was $ 18.35 on 1st November, while the highest value was $ 20.20 on Nov 05 2004. for the one month to 1st December 2004 the second largest positive change in stock value was December 01 2004 at $ 19.81 compared to $19.28 on 30th November 2004 for an increase of 0.53 cents The changes in stock price performance between 3/25/2004 and 1/12/2004 was -1.74% as the stock value declined. Generally, the stock price decreased two weeks after December then there was a slight increase in the stock value up to the end of the year.
Date

Stock Price of Safeway

Value of S & P Index

3/25/2004

20.47

1,109.19

04/07/2004

21.06

1140.53

12/01/2004

19.81

1,191.37

% Change

-3.22%

7.41%

Comparing the performance of Safeway’s stock with the S&P index is an indicator of whether the individual stock differs from trends in the market. While the activist action was less than one year, there were changes in both the stock value and the S&P 500 index and the index is a useful benchmark when evaluating portfolios The S&P 500 is a weig...