Eli Lilly 2007 Annual Report Download - page 105

PROXY STATEMENT
103103
The board recommends that you vote FOR ratifying the appointment of Ernst & Young LLP as principal indepen-
dent auditors for 2008.
Item 3. Proposal to Amend the Company’s Articles of Incorporation to Provide for Annual Election of Directors
The company’s Amended Articles of Incorporation currently provide that the board of directors is divided into three
classes, with each class elected every three years. In December 2006, on the recommendation of the directors and
corporate governance committee, the board unanimously adopted resolutions approving, and recommending to the
shareholders for approval, amendments to provide for the annual election of directors. This proposal was brought
before shareholders at the company’s annual meeting of shareholders in April 2007, and received the vote of over
75 percent of the outstanding shares; however, the proposal required the vote of 80 percent of the outstanding
shares to pass. In December 2007, the board again unanimously adopted resolutions recommending these amend-
ments to shareholders for approval.
If approved, this proposal will become effective upon the fi ling of Amended and Restated Articles of Incor-
poration containing these amendments with the Secretary of State of Indiana, which the company intends to do
promptly after shareholder approval is obtained. Directors elected prior to the effectiveness of the amendments
will stand for election for one-year terms once their then-current terms expire. This means that directors whose
terms expire at the 2009 and 2010 annual meetings of shareholders would be elected for one-year terms, and
beginning with the 2011 annual meeting, all directors would be elected for one-year terms at each annual meeting.
In addition, in the case of any vacancy on the board occurring after the 2008 annual meeting, including a vacancy
created by an increase in the number of directors, the vacancy would be fi lled by interim election of the board, with
the new director to serve a term ending at the next annual meeting. At all times, directors are elected to serve for
their respective terms and until their successors have been elected and qualifi ed. This proposal would not change
the present number of directors, and it would not change the board’s authority to change that number and to fi ll
any vacancies or newly created directorships.
Article 9(b) of the company’s Amended Articles of Incorporation contains the provisions that will be affected if
this proposal is adopted. This article, set forth in Appendix A to this proxy statement, shows the proposed changes
with deletions indicated by strike-outs and additions indicated by underlining. The board has also adopted con-
forming amendments to the company’s bylaws, to be effective immediately upon the effectiveness of the amend-
ments to the Amended Articles of Incorporation.
Background of Proposal
The proposal is a result of ongoing review of corporate governance matters by the board. The board, assisted by
the directors and corporate governance committee, considered the advantages and disadvantages of maintaining
the classifi ed board structure. The board considered the view of some shareholders who believe that classifi ed
boards have the effect of reducing the accountability of directors to shareholders because classifi ed boards limit
the ability of shareholders to evaluate and elect all directors on an annual basis. The election of directors is the
primary means for shareholders to infl uence corporate governance policies. The board gave considerable weight
to the approval at the 2006 annual meeting of a shareholder proposal requesting that the board take all necessary
steps to elect the directors annually, and to the 75 percent favorable vote for management’s proposal in 2007.
The board also considered benefi ts of retaining the classifi ed board structure, which has a long history in
corporate law. Proponents of a classifi ed structure believe it provides continuity and stability in the management
of the business and affairs of a company because a majority of directors always have prior experience as directors
of the company. Proponents also assert that classifi ed boards may enhance shareholder value by forcing an entity
seeking control of a target company to initiate arms-length discussions with the board of that company, because
the entity cannot replace the entire board in a single election. While the board recognizes those potential benefi ts,
it also notes that even without a classifi ed board, the company has other means to compel a takeover bidder to
negotiate with the board, including certain “supermajority” vote requirements in its Amended Articles of Incor-
poration (as described in the company’s response to Item 8 on pages 112–113), other provisions of its articles and
bylaws, and certain provisions of Indiana law. In addition, the company has a shareholder rights plan. However, the
plan will expire in July 2008, and the board does not intend to renew it.
The directors and corporate governance committee and the board heard advice from outside governance and
legal experts on the annual election of directors. On the recommendation of the committee, the board approved
the amendments, and determined to recommend that shareholders approve the amendments to the company’s
Amended Articles of Incorporation to provide for the annual election of directors. Although this proposal did not
pass in 2007, the board continues to support this change and believes that by taking this action, it can provide