Activist Shareholder Group Calls On Spartan to Elect New Board Members Annually

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Activist Shareholder Group Calls On Spartan to Elect New Board Members Annually

Alleging that classified boards of directors such as Spartan Stores “are an outdated…practice that serves to protect entrenched boards and prevent shareholders from holding [directors] accountable,” an investment group called on Spartan Stores, Inc. to adopt annual elections for its board of directors during its annual shareholders meeting Tuesday.

“The annual election of directors is a predicate for accountability to Spartan shareholders. Staggering director elections is a discredited corporate governance practice that needs to be quickly redressed by the Spartan board of directors,” said Bill Patterson, executive director of the Washington-based investment group CtW Investment Group.

CtW, which outlined its concerns over auditor independence and executive pay, urged the board to “declassify” in time for next year’s shareholders’ meeting. The group owns 116,000 of Spartan’s 22 million shares and represents union pension funds affiliated with Change to Win, a coalition of unions representing 6 million members. The predominately non-union Spartan Stores’ truck drivers are represented by the Teamsters.

Grand Rapids, Mich.-based Spartan Stores -- which supplies approximately 350 independent grocery stores in Michigan, Indiana and Ohio, and which also owns and operates 100 retail supermarkets in Michigan, including Family Fare Supermarkets, Glen’s Markets, D&W Fresh Markets, Felpausch Food Centers and VG’s Food and Pharmacy -- had not issued a statement at presstime.

The text of CtW's letter, which was addressed to James F. Wright, chair of Spartan Stores’ nominating and corporate governance committee, follows:

Dear Mr. Wright:

“We are writing to request that you and your colleagues on the board of directors move immediately to adopt annual elections for all members of the Spartan board of directors. Shareholders of Spartan would be well served by such an improvement in the company's governance practices, which in turn can have a positive effect on policies regarding auditor independence and CEO compensation. Declassification of the board is the best way to ensure director accountability to shareholders.

“The CtW Investment Group works with pension funds sponsored by unions affiliated with Change to Win, a coalition of unions representing 6 million members. These funds are substantial long-term Spartan shareholders.

“Classified boards such as Spartan’s are an outdated governance practice that serves to protect entrenched boards and prevent shareholders from holding accountable the directors charged with safeguarding their investments in the company. The Corporate Library lists the board structure of Spartan as an area of ‘high concern,’ stating that: ‘The company has an effective classified board, or a board that has a classified (staggered election) structure as mandated in the company’s charter or bylaws, in combination with other provisions that make it virtually impossible for shareholders to declassify the board. This combination greatly reduces the board’s accountability to shareholders and makes it hard to replace underperforming directors.’

“The first step to setting Spartan on the right path is to declassify the board of directors, as over half of the S&P 1,500 companies have already done.

“As we expressed in our July 31 letter to Spartan shareholders, the high percentage of non-audit fees paid to Deloitte & Touche over the past eight years, in combination with the firm’s 40-year tenure as Spartan’s auditor, give us great cause for concern. Auditor integrity is a responsibility of the board as a whole, but is the particular charge of the Audit Committee. Yet, only one of the directors on the committee, M. Shan Atkins, is on the ballot this year.

“When contacted by shareholders regarding the auditor independence issue, the chair of the audit committee replied that the auditor ‘has already been selected and engaged for the current fiscal year,’ but pledged to ‘carefully consider the independence of the company’s auditor’ for the fiscal year ending in March 2011. However, there is no disclosure regarding the methodology used by the audit committee for determining auditor independence.

“We also have strong reservations about executive compensation at Spartan Stores. It appears that CEO compensation has been above the median of Spartan’s peer group for the past three years, based on data from the proxy advisory service RiskMetrics Group. That this level of compensation would continue even after the appointment of a new CEO while the executive chairman receives significant compensation is disappointing. We note with particular concern that total compensation for the current CEO, Dennis Eidson, alone is nearly 1.5 times the peer-group median, without even taking into account the over $3 million in total compensation paid to former CEO and now executive chairman Craig Sturken. However, only two of the three directors on the compensation committee are up for re-election this year, and it would appear that none of the compensation committee members will stand for election next year.

“Board declassification is the most urgent reform for Spartan, as only annual director elections will permit shareholders to hold the board accountable for these issues. The directors who should logically bear the most responsibility for Spartan’s poor corporate governance practices -- the directors on the audit and compensation committees -- are not necessarily those who are on the proxy in 2009. Because the classified board deprives Spartan shareholders of the ability to hold accountable problem directors, we ask that the board move immediately to institute annual director elections.

“We look forward to further constructive engagement with you as we work to improve the governance of Spartan Stores. Please contact my colleague Per Olstad at 202-721-6027 or [email protected] with your response to our request.”