The phrase “corporate governance” is sleep-inducing. But a pair of governance proposals Eli Lilly and Co. shareholders will vote on this May could go a long way toward determining whether the 141-year Indianapolis-based pharmaceutical giant spends another century as an independent company or one day succumbs to a buyout bid.
It’s hard not to look at a sale scenario as catastrophic given the positive influence the company has had on the vitality of central Indiana and the state as a whole. Then-Mayor Stephen Goldsmith put it well a quarter-century ago when asked what would become of Indianapolis if Lilly were acquired: “God would not let that happen,” he quipped.
It’s been comforting to know that Lilly’s board more than three decades ago erected a mighty wall that discouraged unwanted takeover attempts: a requirement that buyout bids garner at least 80 percent shareholder approval.
That supermajority standard applies not only to outright takeover bids, but also to measures that could make a takeover easier to achieve, such as removing board members before their term ends or expanding the size of the board.
Now, though, Lilly management—led by CEO David Ricks, who became CEO in January 2017—is seeking to remove that barrier, according to a preliminary version of Lilly’s proxy statement filed with the Securities and Exchange Commission Feb. 23. The company’s board is asking shareholders to support management's proposal to require only a bare majority to approve such actions in the future. It’s also asking shareholders to approve a proposal to elect the entire board annually, rather than staggering elections for the 14 members over three years.
Both moves win praise from corporate governance experts, who say the supermajority-vote requirement and staggered board elections can serve to entrench directors and management who are failing to perform for shareholders.
“It’s very simple. The company is doing the right thing” by proposing the changes, said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.
Yet it’s worth noting that most of the members of the Lilly board recommending the changes live in other states and thus might not be evaluating the issue from the prism of central Indiana.
Shareholders are another matter. Eli Lilly’s largest shareholder remains the community-minded Lilly Endowment Inc., which holds an 11 percent stake.
A spokeswoman for the Indianapolis-based endowment wouldn’t say how it will vote on the proposals. But it’s easy to imagine opposition. While the endowment, founded in 1937 by Lilly family members, is separate from Eli Lilly and Co., its devotion to owning a huge chunk of the company, even at the expense of diversifying to reduce risk, would suggest it’s motivated by more than investment returns.
If the endowment is rock-solid in opposition, that would be a big reason past efforts to pass the proposals have fallen short. For six consecutive years starting in 2007, shareholders voted down electing all board members annually.
From 2010 through 2012, the board also voted down eliminating the supermajority voting requirement.
Votes on the proposals over the course of those years garnered 63 percent to 77 percent support. Lilly stopped asking in 2013, saying it concluded after conferring with shareholders that the proposals would be voted down.
In bringing the proposals back for shareholder approval this year, the company cited discussions it had in 2017 “with a number of our largest investors.” It didn’t name the investors.
In recommending elimination of the staggered board, the company’s proxy statement says, “The board believes it is important to maintain appropriate defenses to inadequate takeover bids, but also important to retain shareholder confidence by demonstrating that the board is accountable and responsive to shareholders.”
In addition, by recommending elimination of the supermajority requirement, “the board is demonstrating its accountability and willingness to take steps that address shareholder-expressed concerns.”
Fortunately, Lilly is on an encouraging course these days, with a stable of new drugs the company believes will help it achieve its goal of increasing revenue at a compound annual rate of 5 percent from 2015 to 2020. Strong performance, along with a robust stock price, is the best defense against unwanted suitors.
But pharmaceuticals are a tumultuous field, full of ups and downs, as some new drugs disappoint and others outperform. The high takeover barriers the company erected have served as a shield of sorts—protecting the company from unwanted suitors while also protecting the Indianapolis community itself.•