Safeway's

(SWY)

efforts to inject independence into its board amid a swirl of criticism over its stock performance and corporate governance are striking several independent observers as too little, too late.

The dissatisfaction was accented last week when two proxy advisers, Glass Lewis and Institutional Shareholder Services, both came out against the re-election of Safeway Chairman Steve Burd. Glass Lewis urged investors to go further, encouraging them to withhold votes from two other directors who are also up for re-election at the company's annual meeting on May 20.

In its report, Glass Lewis focused on Safeway's poor financial and stock performance in recent years, as well as its disastrous acquisitions of the Randall's and Dominick's grocery chains.

"We think this is a company that could use a different chairman who could oversee management with vigor," said Greg Taxin, CEO of Glass Lewis.

The proxy advisers' opposition to Burd comes amid charges by pension fund managers such as New York State Comptroller Alan Hevesi that Burd and his management team have destroyed some $20 billion in shareholder value in the last five years.

Safeway's stock price has plunged 54% over the last five years vs. a 36% decline for supermarket leader

Kroger's

(KR) - Get Report

and a 17% drop by the

S&P 500

.

Fund managers have also raised questions about why, until recently, four out of nine Safeway directors were affiliated with the investment firm Kohlberg Kravis Roberts, which sold much of its stake in Safeway in 2000. Meanwhile, the company's business dealings with KKR-affiliated firms have also raised eyebrows.

The company responded to the charges by accusing the fund managers -- who run money for thousands of unionized workers -- of playing politics after the company took a hard line in a recent labor strike in Southern California. Meanwhile, Safeway has made a show in recent months of revamping its board, including the nomination of an non-management board member as lead director, changing three board members and enacting several proposals that were previously pushed by shareholders.

In a statement, Safeway called the opposition to Burd "disappointing." The company noted that since Burd became CEO in 1993, the company's stock has jumped from less than $3 to more than $20.

"Safeway's board and management remain equally focused on executing its strategic plan to improve financial performance, and we urge shareholders to support the team that is working to build a better Safeway," the company said in its statement.

A company representative did not return a call seeking additional comment.

Safeway has had a rough time in recent months. In February, the company, Kroger and

Albertsons

(ABS)

settled a strike by workers in Southern California. The dispute, which had been going on since October, was one of the longest ever in the grocery industry, and it helped

sink Safeway's fiscal year, adding to a string of disappointing years.

After earning $1.25 billion, or $2.44 a share, in fiscal 2001, the company lost $828 million, or $1.77 a share, in fiscal 2002 and $169.8 million, or 38 cents a share, last year. If not for an accounting change in 2002, the company's loss would have been even greater last year than it was the year before.

Soon after the strike was settled, public pension fund managers made clear that Safeway was becoming the latest target of their governance reform agenda. The company has charged that pension funds such as those run by the states of New York, Connecticut and Illinois -- which manage retirement accounts on behalf of millions of unionized workers -- are reacting to the tough line the company and its partners took in the labor strike.

Fund managers have denied the company's charges. The strike might have brought Safeway to the attention of public pension fund managers, but the company's performance is what is driving their campaign, said John Chartier, a spokesman for Hevesi. Meanwhile, the critical reports by ISS and Glass Lewis represent a blow to the company's argument that the governance issues raised by the funds are simply a red herring.

Much of the company's loss last year was related to the strike. But the company has also been hurt by its acquisition of Randall's and Dominick's. Over the last two years, Safeway has written off more than $2 billion in goodwill related to the chains and another $513 million in tangible assets. That wipes out more than half of the $3.7 billion the company paid for the two chains, Glass Lewis noted in its report.

"Impairment charges are almost always an indication of either excessive purchase prices for acquisitions or possible mismanagement causing an erosion of asset value," the report said.

Glass Lewis further noted investment firm Kohlberg Kravis Roberts owned 62% of Randall's at the time of Safeway's acquisition; meanwhile, four of Safeway's directors at the time were affiliated with KKR. (KKR had a bigger Safeway stake at the time, too.)

"We believe

the acquisitions illustrate the poor and, in the case of Randall's, potentially conflicted decisions of the bulk of the current Safeway board," Glass Lewis said.

The potential conflicts extend to Robert MacDonnell and William Tauscher, the two non-management directors who are up for re-election.

MacDonnell is a former partner of KKR and the brother-in-law of fellow director and KKR founding partner George Roberts. Through KKR and a realty company he owns, MacDonnell has been involved in a number of business deals with Safeway in recent years, even though the company considers him an independent director.

Likewise, Tauscher received a fee of 100,000 options from Safeway for helping it with an acquisition in 2000, Glass Lewis noted.

"We believe that directors should not provide professional services to the companies on whose boards they sit, as doing so creates multiple conflicts of interest," Glass Lewis said, explaining its opposition to Tauscher and MacDonnell.

Safeway has attempted to address criticism of its board. Earlier this week, the company removed MacDonnell from its audit committee and said that it would replace Tauscher on its compensation committee. Meanwhile, the company plans to replace Roberts and two other directors with three new independent directors by the end of the year.

Despite the shakeup, Tauscher still remains on the company's audit committee, and MacDonnell has kept his seat on the company's compensation committee, Taxin noted. Under

New York Stock Exchange

rules, both seats have to be held by independent directors.

The company's move to remove the two directors from the committees is an acknowledgement that their position on those committees is problematic, Taxin said. But "it's half an answer to a whole problem," he said.