Eli Lilly 2006 Annual Report Download - page 106

PROXY STATEMENT
104104
impose, are closely related to fi nancial 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 fi nancial performance. Considering the
Company’s fi ve, 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, 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.
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 ac-
countable 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 classifi ed 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 compa-
nies with good corporate governance are more highly valued. We certainly agree that strong corporate governance
practices benefi t 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 University 11 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 adopt-
ing 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.
Item 9. Shareholder Proposal Regarding Adopting a Simple Majority Vote Standard
William Steiner, 112 Abbottsford Gate, Piermont, NY 10968, benefi cial owner of approximately 1,400 shares, has
submitted the following proposal.
9—Adopt Simple Majority Vote
Resolved: Shareholders recommend that our Board take each step necessary to adopt a simple majority vote to
apply to the greatest extent possible.
10 Institutional Investor, February 2006
11 “Corporate Governance and Firm Performance”, Georgia State University, December 7, 2004