Eli Lilly 2008 Annual Report Download - page 120

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Item 6. Shareholder Proposal on 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 3,488,440 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 simple
majority vote.
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. Approxi-
mately 95% of companies in the S&P 500 and the Russell 1000 allow shareowners to amend the bylaws. The Com-
pany 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
bylaws has been found to be one of six entrenching mechanisms that are negatively correlated with company per-
formance. 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 simple majority vote standard to amend the bylaws of the Company since a super-
majority vote can be almost impossible to obtain in light 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 pass by a majority
of shares outstanding 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
Corporation, 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 1.5 million participants, and as the owner of approximately 3.4 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 on Allowing Shareholders to Amend 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 current rules prevent the bylaws from being abused by special interest shareholder groups.
The company’s bylaws establish a number of fundamental corporate governance operating principles, including
rules for meetings of directors and shareholders, election and duties of directors and offi cers, authority to approve
transactions, and procedures for stock issuance. Under Indiana law, the bylaws can contain any provision regulat-
ing the operation of the business not prohibited by law or the articles of incorporation. 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 shareholders to the risk that a relatively small number of large share-
holders 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 would be detrimental to minority shareholders. Under the major-
ity vote standard endorsed by the proponent (requiring only a majority of shares voted at the meeting), sharehold-
ers holding signifi cantly less than half of the outstanding shares could adopt bylaw amendments to further their