In ninth try, Eli Lilly asks shareholders to end staggered terms for board members

Eli Lilly and Co. corporate headquarters. (IBJ file photo)

If at first you don’t succeed, the old saying goes, try, try again.

But Eli Lilly and Co. is apparently taking that to the next level—trying for the ninth time since 2010 to overhaul the company’s board structure to force all directors to stand for election every year.

The Indianapolis-based drugmaker is asking shareholders to approve a measure that would eliminate the company’s traditional system of dividing its 13-member board into three classes.

Currently, roughly one-third of the board stands for election every three years, with overlapping  or “staggered” terms, giving the board a degree of stability and continuity, and making it harder for shareholders to throw out the entire board at once.

The proposal would scrap that method and have all directors stand for election every spring.

Although the phrases “corporate governance” and “staggered terms” might cause drowsiness for many, the issue is anything but sleepy for Indianapolis and its relationship with one of its oldest companies, 146-year-old Lilly, with about 10,000 workers here.

Staggered boards are considered useful in preventing hostile takeovers, since the entire board cannot be kicked out at once and replaced with a different board at the hand of activist shareholders. Hostile takeovers can also result in companies being broken up or moved to other cities.

That’s one of the main arguments for a staggered board, along with the fact that it might promote shareholder value by providing continuing and stability in the management of the company.

Still, some investors and business experts consider staggered boards a bad form of governance, since they have the effect of reducing the accountability of the directors to shareholders.

The Weinberg Center for Corporate Governance at the University of Delaware, a leading voice for responsible corporate leadership, has generally supported the elimination of staggered terms, saying they could lead to entrenched boards and management that fails to perform.

The other side of the argument, of course, is that an all-new board would be less beholden to old ways, including Lilly’s longstanding presence in its hometown.

The Lilly board says it has considered both sides of the argument. “After balancing these interests, the board has decided to resubmit this proposal to eliminate the classified board structure,” the company said in its preliminary proxy statement filed with the Securities and Exchange Commission on Feb. 24.

The measure would need approval from 80% of shareholders. Shareholders have rejected a similar proposal eight times between 2010 and 2022.

The company is also asking shareholders to support another measure to require only a majority to approve such actions in the future. Lilly’s board established the 80% rule more than three decades ago to discourage unwanted takeover attempts.

If shareholders approve the measures at Lilly’s May 1 virtual shareholder meeting, the declassification would becoming effective immediately. Directors elected prior to the vote would serve the remainder of their three-years terms and each director elected after the May 1 meeting would serve a one-year term. The classified board structure would be fully eliminated in 2026.

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