Eli Lilly 2006 Annual Report Download - page 105

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• serves as a liaison between the chairman and the independent directors
• generally approves information sent to the board and meeting agendas and schedules, and
• has authority to call meetings of the independent directors.
A recent Wharton School of Business article entitled “Splitting Up the Roles of CEO and Chairman: Reform or Red
Herring?,” 9 points out that there is a lack of hard evidence to show that separating the roles boosts returns for share-
holders. A majority (315) of the top 500 Standard & Poor’s 500 index maintain a CEO/Chairman role. As the article points
out, most companies that separate these roles do so because they are troubled or facing a major executive succession
challenge. Lilly neither expects, nor is facing, either of these problems. Additionally, the article points out that by divid-
ing roles a company may weaken its ability to develop and implement strategy. We agree, and believe that combining the
roles of board chair and CEO generally provides the most effi cient and effective leadership model for the company.
We agree that the current business model of the pharmaceutical sector is undergoing signifi cant challenges.
The company has adopted a strategy, approved by the board, to transform the cost structure through a variety of
productivity initiatives and to provide customers with a signifi cantly enhanced value proposition that improves pa-
tient outcomes through tailoring drug, dose, timing of treatment, and relevant information.
We also agree that access to medicine continues to be a serious concern; however, the board’s corporate gov-
ernance principles ensure effective independent oversight of the company’s responses to this problem. The public
policy and compliance committee of the board, composed solely of independent directors, provides independent
oversight of public policy issues for the board, including access to medicines.
Guided by the active oversight of our independent directors, our company will continue to be a strong advocate for
reforms that improve access to needed medicines and reduce the cost structure for health care while protecting the in-
dustry’s ability to invest in innovation for the next generation of breakthrough medicines. At the same time, we will help
to address the immediate needs of those without access to health care through patient assistance programs. In 2006
alone, we distributed products with a retail value of more than $300 million free of charge through these programs.
The board recommends that you vote AGAINST this proposal.
Item 8. Shareholder Proposal Regarding Amending the Company’s Bylaws
California Public Employees’ Retirement System (CalPERS), P.O. Box 942707, Sacramento, California 94229-2707,
benefi cial 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. Cur-
rently, 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 shareown-
ers 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 fi led 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
9 “Splitting up the Roles of CEO and Chairman: Reform or Red Herring?”, June 2, 2004, Knowledge @Wharton, http://knowledge.wharton.upenn.edu