Eli Lilly 2007 Annual Report Download - page 106

PROXY STATEMENT
104104
shareholders further assurance that the directors are accountable to shareholders while maintaining appropriate
defenses to respond to inadequate takeover bids.
Vote Required
The affi rmative 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 to provide for an-
nual election of directors.
Item 4. Proposal to Amend the Company’s Articles of Incorporation to Provide for Election of Directors by Major-
ity Vote
On the recommendation of the directors and corporate governance committee, the board has unanimously adopted
resolutions approving, and recommending to the shareholders for approval, amendments to the Amended Articles
of Incorporation to change the standard of election in uncontested elections of directors to a majority of votes cast.
Please see Appendix A to this proxy statement for the text of the proposed new Article 15.
Background of Proposal
Indiana law provides that, unless otherwise specifi ed by the Articles of Incorporation, directors are elected by a
plurality of votes cast. Lilly’s Amended Articles of Incorporation do not specify otherwise; therefore, directors are
elected by a plurality. Under this standard, director nominees with the most votes cast in their favor are elected
to the board, notwithstanding the number of votes withheld against a director nominee. Thus, a director can be
elected even though a majority of shares voted oppose his or her election.
The plurality standard has been the norm for U.S. corporations for many years. Recently, however, many
shareholders have called for changes in the director election standards to make director elections more meaning-
ful. In 2005, Lilly and several other leading companies addressed this concern by adopting a director resignation
policy, which calls for any director who fails to receive a majority of favorable votes to tender his or her resigna-
tion, subject to a determination by the board whether to accept the resignation. The board believes that now is the
right time to take the next step in assuring that shareholders have a clear voice in electing directors by moving to a
majority vote standard for uncontested elections.
Under Indiana law, directors are elected to serve for their respective terms and until their successors have
been elected and qualifi ed. Thus, under a majority vote standard, an incumbent director who fails to receive a
majority of votes cast would not be elected, but would continue to serve as a “holdover” director. However, under
amendments to the company’s Bylaws which the board has adopted subject to shareholder approval of this Item 4,
the unelected director would be required to offer to resign immediately. The board, with the advice of the directors
and corporate governance committee, would determine the appropriate responsive action and communicate its
decision, and its underlying rationale, to shareholders within 90 days of certifi cation of the election results. If the
resignation is accepted, the board may decide to fi ll any resulting vacancy or decrease the number of directors.
The amendments provide that in a contested election—an election in which the number of nominees exceeds
the number of directors to be elected—the plurality standard will continue to apply.
Effective Time
If approved, the Amended and Restated Articles of Incorporation will be effective upon fi ling with the State of Indi-
ana, which the company intends to do promptly after shareholder approval is obtained.
Vote Requirement
The amendments will be adopted if the votes cast for the amendment exceed the votes cast against the amendment.
The board recommends that you vote FOR amending the company’s articles of incorporation to provide for elec-
tion of directors by majority vote.
Item 5. Amendment of the 2002 Lilly Stock Plan
Stock incentive plans have been an integral part of the company’s compensation programs for more than 50 years.
These plans enable the company to attract and retain top talent and focus employees on creating and sustaining
shareholder value through increased employee stock ownership. In 2002, the board and the shareholders adopted