Health Care and Environment

Lilly faction seeks split of exec roles: Shareholder group wants to separate chair, CEO jobs

March 21, 2005

The shareholders think Lilly should separate its chairman and CEO roles. Sidney Taurel currently holds both jobs and the title of president. The group wants an independent chairman. It's one of six shareholder proposals on the agenda for Lilly's April 18 annual meeting at its headquarters. The move would address "a leadership crisis at our company" created by the lack of access to affordable medicines, according to the proposal listed in Lilly's recently filed proxy statement. Lilly's board disagrees and recommends that shareholders vote against it.

This, like many shareholder proposals, probably won't survive beyond its brief life in the proxy statement. However, the separation of CEO and chairman is a split more companies are starting to make, according to experts.

The Adrian Dominican Sisters kept long-term growth in mind when they joined other shareholders in submitting the proposal, according to Margaret Weber, coordinator of corporate responsibility for the Michigan-based sisters.

Other names attached to it include Denverbased Catholic Health Initiatives and Sister Lillian Ann Healy of the Congregation of the Sisters of Charity of the Incarnate Word in Houston.

Separating the executive roles allows the CEO to concentrate on day-to-day operations and the chairman to lead the board in long-term thinking, Weber said. That strategic thinking will lead to lower drug prices in a roundabout way, the shareholders argue.

It could include finding alternatives to the dependency on developing blockbuster drugs, the sisters note. That could lead to a broader, more steady product line. That, in turn, could lead to a broader customer base, more money flowing in and lower drug prices.

That means a better return in the long run, according to Weber.

"If there's a clear distinction between those roles, we think the company will be better positioned to do that," she said.

Lilly agrees that the U.S. health care system should change to improve pharmaceutical access.

However, the company favors a comprehensive solution that improves access,

removes inefficiency and preserves the competitive environment that spurs "innovative new health care solutions for patients," according to the proxy.

The company also notes that it runs several charitable programs like LillyAnswers, which provides the elderly with access to company medicines. Lilly provided more than $166 million in free products to the needy through its Lilly Cares program last year.

"In summary, we share the proponents' goal of improved access to health care, but not their approach," the proxy states.

Lilly spokeswoman Terra Fox declined to elaborate beyond the proxy.

The shareholders advocating this proposal, all members of the New Yorkbased Interfaith Center on Corporate Responsibility, carry little weight behind their request. The 173,040 shares they own amounts to far less than 1 percent of the Lilly total.

Shareholder proposals tend to be ignored when they receive less than the majority of support from fellow shareholders, according to Paul Hodgson, a senior research associate with The Corporate Library, a Maine-based firm that provides corporate governance data.

The other questions before Lilly's shareholders, all of which the board recommends be defeated, are:

Adopt a policy not to limit importation of prescription drugs.

Re-evaluate the company's position limiting the availability of Lilly drugs in Canada.

Produce a semiannual report of the company's political contributions.

Tie stock options to company performance.

Eliminate testing on animals whenever possible.

Company boards sometimes ignore the proposals even if they do receive majority support, he added.

"They're not binding; [boards] don't have to do anything about it," he said.

Weber understands this. She said the goal behind the proposal is to spark thinking in the boardroom. The group submitted the same proposal to Pfizer Inc. and Abbott Laboratories.

"We know from experience that not 'winning' still achieves some progress on the concerns we raise," she said.

More companies have started thinking about splitting chairman and CEO duties over the past few years, according to Hodgson.

For instance, 377 CEOs of Standard & Poor's 500 index companies chaired their own boards last year, down 4 percent from the 394 recorded in 2003, according to a Corporate Library survey.

"It's not a very steep trend line, but it is a trend line, nevertheless," Hodgson said.

David Denis sees the same thing.

"There's no question that far more companies now have a separation than they used to," said the Burton D. Morgan chair of private enterprise at Purdue University's Krannert School of Management.

Hodgson sees no consensus reason for the increasingly split duty. Some companies might be motivated by the rolling conflict between Walt Disney Co.'s former chairman and current CEO, Michael Eisner, and some shareholders and former directors.

Hodgson said the split can lead to some benefits.

"It creates more of a balance of power in the boardroom so that the CEO can't call all the shots," he said, adding that the separation is a widespread practice in Great Britain.

A separation can mean that directors feel more comfortable about criticizing management strategy in the boardroom "without thinking, 'He's going to kick me off the board the next time we go to the stockholders for re-election,'" Hodgson added.

On the flip side, Lilly believes combining the two roles "generally provides the most efficient and effective leadership model for the company," according to the proxy.

Board policy also helps maintain its independence by requiring at least 75 percent of the directors be non-employees.

Denis thinks shareholder proposals advocating the split are becoming more common, too. In some cases, the weight of large pension funds like the California Public Employees Retirement System backs them.

Denis said he sees the logic behind the separation. But he's held back from fully endorsing it by one simple fact.

"I'm not aware of any evidence that says the companies that do separate these two roles perform any better than companies that do not," he said.
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