Eli Lilly 2007 Annual Report Download - page 112

PROXY STATEMENT
110110
Item 7. Shareholder Proposal Regarding Allowing Shareholders to Amend the Company’s Bylaws
California Public Employees’ Retirement System (CalPERS), P.O. Box 942707, Sacramento, California 94229-2707,
benefi cial owner of approximately 4.7 million shares, has submitted the following proposal:
RESOLVED, that the shareowners of Eli Lilly & Company (“Company”) urge the Company to take all steps neces-
sary, 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 most important shareowner power is the power to vote. In most cases, in addition
to having the power to vote to elect directors, shareowners are able to vote to amend a company’s bylaws. Ap-
proximately 95% of companies in the S&P 500 and the Russell 1000 allow shareowners to amend the bylaws. The
Company is one of the very few companies in the S&P 500 that does not give shareowners this power.
Bylaws typically contain corporate governance provisions of the utmost importance to shareowners, e.g., the
ability to call a special meeting, the ability to remove directors, anti-takeover provisions, director election rules,
among other provisions. Without a formal mechanism to impact a company’s governance through bylaw amend-
ments, the shareowners of a company are disenfranchised. In fact, limiting shareowner ability to amend the by-
laws has been found to be one of six entrenching mechanisms that are negatively correlated with company perfor-
mance. See “What Matters in Corporate Governance?” Lucian Bebchuk, Alma Cohen & Allen Ferrell, Harvard Law
School, Discussion Paper No. 491 (09/2004, revised 03/2005).
This proposal asks for a majority vote standard to amend the bylaws of the Company since a supermajority
vote can be almost impossible to obtain in light of abstentions and broker nonvotes. For example, a proposal to de-
classify the board of directors fi led at Goodyear Tire & Rubber Company failed to pass by a majority of shares out-
standing 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 shareowners, 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. At the Sara Lee Corpora-
tion, approximately 81% of shareowners agreed when it passed a proposal identical to this proposal.
This is why CalPERS is sponsoring this proposal that, 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 4.7 million shares of the Company’s
common stock, CalPERS believes that corporate governance procedures and practices, and the level of account-
ability they impose, are closely related to fi nancial performance. CalPERS also believes that shareowners are
willing to pay a premium for shares of corporations that have excellent corporate governance. 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 fi nancial performance.
Please vote 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, includ-
ing rules for meetings of directors and shareholders, election and duties of directors and offi cers, 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 fi duciary obligations to the company and all its shareholders, including large insti-
tutions, 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 signifi -
cantly less than half of the outstanding shares could adopt bylaw amendments to further their own special inter-
ests. The board, on the other hand, has fi duciary 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.