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This excerpt taken from the LLY DEF 14A filed Mar 5, 2007. Item 8. Shareholder Proposal Regarding Amending the Company’s Bylaws
California Public Employees’ Retirement System (CalPERS), P.O. Box 942707, Sacramento, California
94229-2707, beneficial owner of approximately 5.4 million shares, has submitted the following
proposal.
Resolved, that the shareowners of Eli Lilly & Company (“Company”) urge the Company to take all
steps necessary, in compliance with applicable law, to allow its shareowners to amend the Company’s
bylaws by a majority vote. Currently, the Company does not allow shareowners to amend the Company’s
bylaws.
Supporting
Statement: The Company is one of the very few companies in the S&P 500 that does not
allow shareowners to amend the Company’s bylaws. Approximately 96% of companies in the S&P 500 and
the Russell 1000 allow shareowners to amend the bylaws. Though the default under Indiana state law
is to only allow the board of directors to amend the bylaws, Indiana state law does allow Indiana
corporations to amend the articles of incorporation to allow for shareowners to amend the bylaws.
The company, however, has chosen not to allow shareowners to amend the bylaws even though
approximately 96 percent of corporations do so, as noted above.
The primary tool for directly impacting the Company’s governance practice is by amending the
Company’s bylaws. This is why we are sponsoring this proposal which, if passed and implemented,
would make the Company more accountable to shareowners by allowing shareowners to amend the bylaws by majority vote.
As a trust fund with more than 1.4 million participants, and as the owner of approximately 5.4
million shares of the Company’s common stock, the California Public Employees’ Retirement System
(CalPERS) thinks shareowners should have the ability to impact the corporate governance of any
company we own via a bylaw amendment.
This proposal asks for a majority vote standard to amend the bylaws since a supermajority vote
can be almost impossible to obtain because of abstentions and broker non-votes. For example, a
proposal to declassify the board of directors filed at Goodyear Tire & Rubber Company failed to
passes even though approximately 90 percent of votes cast were in favor of the proposal. While it
is often stated by corporations that the purpose of supermajority requirements is to provide
corporations the ability to protect minority shareholders, supermajority requirements are most
often used, in CalPERS’ opinion, to block initiatives opposed by management and the board of
directors but supported by most shareowners. The Goodyear Tire & Rubber Company vote is a perfect
illustration.
CalPERS believes that corporate governance procedures and practices, and the level of accountability they
48
impose, are closely related to financial performance. CalPERS also believes that shareholders
are willing to pay a premium for shares of corporations that have excellent corporate governance,
as illustrated by a recent study by McKinsey & Co. If the Company were to take steps to implement
this proposal, it would be a strong statement that this Company is committed to good corporate
governance and its long-term financial performance. Considering the Company’s five, three, and one
year stock performances were -16%, -13%, and 2%, respectively, action is warranted.
We urge your support FOR this proposal.
Statement in Opposition to the Proposal Regarding Amending the Company’s Bylaws
The board of directors believes that this proposal is not in the best long-term interests of
the shareholders and recommends that you vote against it.
The company’s bylaws establish a number of fundamental corporate governance operating
principles, including rules for meetings of directors and shareholders, election and duties of
directors and officers, authority to approve transactions, and procedures for stock issuance. Like
many other Indiana corporations, Lilly has adopted the default provision under Indiana law, which
states that unless the articles of incorporation provide otherwise, the bylaws may be amended only
by the directors.
The board of directors has fiduciary obligations to the company and all its shareholders,
including large institutions, small institutions, and individual investors. The board believes that
allowing the bylaws to be amended by a majority shareholder vote would expose the shareholders to
the risk that a few large shareholders who wish to advance their own
special interests – and who
have no duties to the other shareholders – could adopt changes in these operating principles that
could be detrimental to minority shareholders. Under the majority vote standard endorsed by the
proponent (requiring only a majority of shares voted at the meeting), shareholders holding
significantly less than half of the outstanding shares could adopt bylaw amendments to further
their own special interests. The board, on the other hand, has fiduciary duties to consider and
balance the interests of all shareholders when considering bylaw provisions, and is better
positioned to ensure that any bylaw amendments are prudent and are designed to protect and maximize
long-term value for all shareholders.
The proponent suggests this proposal is necessary to foster good governance principles at the
company and make the directors more accountable to the shareholders. On the contrary, the board has
been for many years, and intends to remain, a leader in corporate governance. The company has
adopted comprehensive corporate governance principles, consistent with best practices, that ensure
the company remains fully transparent and accountable to shareholders. Last year, our leadership in
this area was recognized when we were named the most “shareholder-friendly” company in our industry
in a survey of institutional investors.10 Further, in 2007, the board has taken two
major steps to demonstrate its continuing leadership in corporate governance and accountability to
shareholders: (1) seeking shareholder approval to eliminate the classified board (see Item 3), and
(2) agreeing to seek shareholder approval to adopt a majority voting standard for directors
beginning in 2008.
The proponent also suggests that adopting this proposal will enhance company performance
because companies with good corporate governance are more highly valued. We certainly agree that
strong corporate governance practices benefit shareholders, but we do not believe that this
particular proposal will improve the company’s corporate governance or lead to better performance.
In fact, a 2004 study by Lawrence D. Brown and Marcus L. Caylor of Georgia State
University11 found that companies that permit shareholders to amend the bylaws performed
no better or worse than those who reserve that power to the directors. This is consistent with our
view that adopting this proposal would not enhance our already strong corporate governance
practices and instead would expose minority shareholders to actions detrimental to their best
interests.
The Board of Directors recommends that you vote AGAINST this proposal.
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