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This excerpt taken from the LLY DEF 14A filed Mar 5, 2007. Item 2. Proposal to Ratify the Appointment of Principal Independent Auditors
The audit committee has appointed the firm of Ernst & Young LLP as principal independent auditors
for the company for the year 2007. In accordance with the bylaws, this appointment is being
submitted to the shareholders for ratification. Ernst & Young served as the principal independent
auditors for the company in 2006. Representatives of Ernst & Young are expected to be present at
the annual meeting and will be available to respond to appropriate questions. Those representatives
will have the opportunity to make a statement if they wish to do so.
The board recommends that you vote FOR ratifying the appointment of Ernst & Young LLP as principal independent auditors for 2007.
Item 3. Proposal to Amend the Company’s Articles of Incorporation to Provide for Annual Election of Directors
The company’s Amended Articles of Incorporation currently provide that the board of directors is
divided into three classes, with each class elected every three years. In December 2006, on the
recommendation of the directors and corporate governance committee, the board unanimously adopted
resolutions approving, and recommending to the shareholders for approval, amendments to provide for
the annual election of directors.
If approved, this proposal will become effective upon the filing of Amended Articles of
Incorporation containing these amendments with the Secretary of State of Indiana, which the company
intends to do promptly after shareholder approval is obtained. Directors elected prior to the
effectiveness of the amendments will stand for election for one-year terms once their then-current
terms expire. This means that directors whose terms expire at the 2008 and 2009 annual meetings of
shareholders would be elected for one-year terms, and beginning with the 2010 annual meeting, all
directors would be elected for one-year terms at each annual meeting. In addition, in the case of
any vacancy on the board occurring after the 2007 annual meeting, including a vacancy created by an
increase in the number of directors, the vacancy would be filled by interim election of the board,
with the new director to serve a term ending at the next annual meeting. At all times, directors
are elected to serve for their respective terms and until their successors have been elected and
qualified. This proposal would not change the present number of directors, and it would not change
the board’s authority to change that number and to fill any vacancies or newly created
directorships.
Article 9(b) of the company’s Amended Articles of Incorporation contains the provisions that
will be affected if this proposal is adopted. This article, set forth in Appendix A to this proxy
statement, shows the proposed changes with deletions indicated by strike-outs and additions
indicated by underlining. The board has also adopted conforming amendments to the company’s bylaws,
to be effective immediately upon the effectiveness of the amendments to the Amended Articles of
Incorporation.
41
Background of Proposal
The proposal is a result of ongoing review of corporate governance matters by the board. The board,
assisted by the directors and corporate governance committee, considered the advantages and
disadvantages of maintaining the classified board structure. The board considered the view of some
shareholders who believe that classified boards have the effect of reducing the accountability of
directors to shareholders because classified boards limit the ability of shareholders to evaluate
and elect all directors on an annual basis. The election of directors is the primary means for
shareholders to influence corporate governance policies. The board gave considerable weight to the
approval at the 2006 annual meeting of a shareholder proposal requesting that the board take all
necessary steps to elect the directors annually.
The board also considered benefits of retaining the classified board structure, which has a
long history in corporate law. Proponents of a classified structure believe it provides continuity
and stability in the management of the business and affairs of a company because a majority of
directors always have prior experience as directors of the company. Proponents also assert that
classified boards may enhance shareholder value by forcing an entity seeking control of a target
company to initiate arms-length discussions with the board of that company, because the entity
cannot replace the entire board in a single election. While the board generally concurred with that
view, it also took note that even without a classified board, the company has other means to compel
a takeover bidder to negotiate with the board, including a shareholder rights plan, certain
“supermajority” vote requirements in its Amended Articles of Incorporation (as described in the
company’s response to Item 9 at pages 50-51), and certain provisions of Indiana law.
The directors and corporate governance committee and the board heard advice from outside
governance and legal experts on the annual election of directors. On the recommendation of the
committee, the board approved the amendments, and determined to recommend that shareholders approve
the amendments, to the company’s Amended Articles of Incorporation to provide for the annual
election of directors. The board believes that by taking this action, it can provide shareholders
further assurance that the directors are accountable to shareholders while maintaining appropriate
defenses to respond to inadequate takeover bids.
Vote Required
The affirmative vote of at least 80 percent of the outstanding common shares is needed to pass this
proposal.
The board recommends that you vote FOR amending the company’s articles of incorporation.
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