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CALPERS gains allies in Lilly bylaw fight

Norm Heikens
April 17, 2008
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The California Public Employees' Retirement System, the nation's largest public pension fund, said yesterday it has backing from four major proxy advisory services for a resolution that would require only a simple majority vote of Lilly shareholders to amend the company's bylaws.

Endorsing the giant pension fund's shareholder resolution are Egan-Jones, Glass Lewis, RiskMetrics Group (formerly ISS), and Proxy Governance.

The new support ratchets up pressure on Lilly directors and particularly John Lechleiter, whose promotion from president and chief operating officer to CEO took effect just days ago, on April 1.

CALPERS said in March it would withhold votes for Lechleiter as well as existing directors Dr. Alfred Gilman and Karen Horn at Lilly's annual meeting on Monday to protest the company's lackluster stock performance.

Indiana University corporate governance specialist Dan Dalton said it is the first time he has seen shareholders try to nip a CEO's entry to a board so early in the CEO's tenure.

"This is big," Dalton said. "It is extremely aggressive."

CALPERS reiterated yesterday that it is withholding its vote for Lechleiter, Gilman and Horn because they "provided oversight" while the stock languished and the company retained its "poor governance practices."

CALPERS owns about 4.8 million Lilly shares valued at more than $265 million.

Lilly stock has trended sideways since 2005 largely because few potential blockbuster drugs are in its development pipeline. The shares are trading near $53.

In the past five years, Lilly shares have lagged peers by 22.4 percent and the S&P 500 by 67.7 percent, CALPERS charged.

Lilly has said allowing a majority vote would expose the company to the risk of a few shareholders wanting to make changes that wouldn't benefit the company in the long term.

CALPERS contends the rule retards the stock price.

Dalton noted that Lilly directors are not obligated to follow through on what in affect would be a no-confidence vote in Lechleiter.

Still, if CALPERS were able to garner enough shareholder support for a strong showing at the shareholder meeting, Lilly and Lechleiter would be subjected to an unusual level of humiliation.

On the outside chance Lechleiter's ascent to the board were thwarted, Dalton said it would be a first in his memory.

"I have never heard of a CEO of a company who was not a director of the company," Dalton said. "One wonders what it means for a board of directors not to be represented by its CEO."

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