Proxy Blog

Eli Lilly and Company 

April 5, 2020

The annual proxy for this pharmaceutical company had the following proposals: 

  1. Proforma votes on directors, appointment of auditors, and “say-on-pay” 
  2. Board proposals to declassify the board and eliminate supermajority requirements 
  3. Shareholder proposals on lobbying disclosure, effectiveness of forced swim test, independent chair, board diversity, drug prices impacting compensation, bonus deferral, and claw backs 

Magni voted as follows: 

  1. For and against proforma proposals.
    -For directors – The board has a majority of independent directors and some have CEO/CFO experience with other companies. The compensation of directors is disclosed with a meaningful portion in equity where the equity has restrictions to align director incentives with long-term value creation
    -For auditors – There appear to be no controversies with the financial statements of the company.
    -Against Say-on-pay” – The proxy materials disclosed a shareholder engagement program; however, the level of activity was not disclosed. The peer group was listed along with high-level criteria for the group, though there was no benchmarking of the company against the peer group. 
  2. For board proposals to declassify the board structure and eliminate supermajority requirements – On both proposals Eli Lilly has been attempting to make these changes for years, however the 80% supermajority requirement for passage has been too high a bar. The proposals are consistent with good shareholder relationships and good governance. 
  3. For and against shareholder proposals.
    -Against report on lobbying activities – The company already provides good disclosures of lobbying activities. This proposal seeks to lump industry group activities with political activities. There are good reasons for a company to participate in an industry group. Many of those reasons are unrelated to lobbying. Assuming all such industry activity as political is wrong.
    -For effectiveness of forced swim test – The company performs a test on mice to determine the performance of a product. Mice sometimes die in the test. The FDA requires the test. There is controversy on the effectiveness of the test. Despite the company’s assurances that it is humane to laboratory animals, Magni voted for a report on the effectiveness of the test.
    -For independent chairman – An independent board is an important part of good governance. An independent chairman is an element of an independent board, though there are situations where an independent chairman does not make sense (e.g., a visionary founder where a material portion of the company value is connected to the founder). This company does not have one of those situations.
    -Against board diversity – The proposal seeks to force political diversity as a criterion for board membership. However, the role of a board is to oversee the company for the benefit of shareholders. The board can make the decision as to whether the company is apolitical or political, and if political, what (if any) leaning it may have. The company has been very successful, so whatever political approach the company has used, the approach does not appear to have hurt the company, hence Magni defers to the board.
    -Against tying executive compensation to drug prices – The company’s behavior on executive compensation is consistent with best practices from Magni’s Corporate Governance Model. Drug pricing is not an executive compensation issue.
    -Against bonus deferral – The company already has an executive compensation program consistent with other large, public companies. The proposal did not make a compelling case on the deficiencies of the current compensation structure.
    -Against claw backs –The company already has claw back provisions in the executive compensation program. The proposal did not make a compelling case on the deficiencies of the current provisions.