Eli Lilly 2005 Annual Report Download - page 93

PROX Y S TATEM ENT
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initiate the appropriate process to amend the Company’s articles of incorporation to provide that director nominees
shall be elected by the affirmative vote of the majority of votes cast at an annual meeting of shareholders.
Statement of Support: Our Company is incorporated in Indiana. Among other issues, Indiana corporate law ad-
dresses the issue of the level of voting support necessary for a specific action, such as the election of corporate
directors. Indiana law provides that unless a company’s articles of incorporation provide otherwise, a plurality of
all the votes cast at a meeting at which a quorum is present is sufficient to elect a director. (Indiana Code 23-1-30-9
Sec. 9. (a), Election of directors; cumulative voting.
Our Company presently uses the plurality vote standard to elect directors. This proposal requests that the
Board initiate a change in the Company’s director election vote standard to provide that nominees for the board of
directors must receive a majority of the vote cast in order to be elected or re-elected to the Board.
We believe that a majority vote standard in director elections would give shareholders a meaningful role in the
director election process. Under the Company’s current standard, a nominee in a director election can be elected
with as little as a single affirmative vote, even if a substantial majority of the votes cast are “withheld” from that
nominee. The majority vote standard would require that a director receive a majority of the vote cast in order to be
elected to the Board.
The majority vote proposal received high levels of support last year, winning majority support at Advanced
Micro Devices, Freeport McMoRan, Marathon Oil, Marsh and McClennan, Office Depot, Raytheon, and others.
Leading proxy advisory firms recommended voting in favor of the proposal.
Some companies have adopted board governance policies requiring director nominees that fail to receive
majority support from shareholders to tender their resignations to the board. We believe that these policies are
inadequate for they are based on continued use of the plurality standard and would allow director nominees to be
elected despite only minimal shareholder support. We contend that changing the legal standard to a majority vote
is a superior solution that merits shareholder support.
Our proposal is not intended to limit the judgment of the Board in crafting the requested governance change.
For instance, the Board should address the status of incumbent director nominees who fail to receive a majority
vote under a majority vote standard and whether a plurality vote standard may be appropriate in director elections
when the number of director nominees exceeds the available board seats.
We urge your support for this important director election reform.
Statement in Opposition to the Majority Vote Proposal
The board has reviewed this proposal and recommends a vote against it. The board agrees that shareholders
should have a meaningful role in the director election process. However, under current law, majority voting creates
legal and practical complications that make its adoption inadvisable at this time. As an alternative, in December
2005, the board adopted a progressive corporate governance policy on director voting that gives shareholders
influence in the director election process similar to majority voting while avoiding the legal problems inherent in
majority voting under current law.
The system of plurality voting, which the proponent seeks to replace, has long been the accepted system
among U.S. public companies and is the default system under Indiana corporate law. The rules governing plurality
voting are well understood. In addition, it is important to note that Lilly directors have consistently received broad
shareholder support—typically well over 90 percent of the votes cast. The proposal suggests that Lilly directors
are being elected by minimal affirmative votes. That clearly is not the case.
The majority vote system suggested by the proponent is simple in concept, but in practice it raises complica-
tions under current law. A “failed election”—an uncontested election where a director nominee does not achieve a
majority of the votes cast—could create a variety of outcomes that would frustrate the goal of providing sharehold-
ers a greater voice. Under Indiana law and the company’s articles of incorporation, a director whose term expires
continues to serve as a “holdover director” until his or her successor is elected and qualified. Thus, if the unsuc-
cessful candidate in a failed election is an incumbent, he or she would continue to serve as a director, until at least
the next annual meeting, and perhaps until the end of the next three-year term despite the failed election. If the
candidate is not an incumbent, the director position would become vacant and could be filled by the directors acting
alone—thus effectively bypassing the election process entirely for a three-year term. We do not believe such a re-
sult furthers shareholder democracy. On the other hand, if the “holdover” rule were to be abolished, a failed elec-
tion could create a large number of immediate board vacancies, resulting in unintended consequences such as:
• inadvertently triggering “change-in-control” provisions in various compensation plans and third-party
agreements;