Jonathan G. Katz
Re: File No. S7-19-03
Dear Mr. Katz:
I am writing on behalf of Eli Lilly and Company, an Indiana corporation with over $11 bil-lion in annual revenues and more than 40,000 employees worldwide. I appreciate this opportunity to provide comments on the Securities and Exchange Commission ("SEC") proposal to require companies to include shareholder nominees for director in company proxy materials under certain circumstances (the "Proposed Election Contest Rules"). In addition to the comments included in this letter, we agree with and strongly support the comments submitted by The Business Roundta-ble with regard to the Proposed Election Contest Rules.
Eli Lilly and Company has worked consistently to be a leader in matters of corporate gov-ernance, and we feel strongly that corporate boards and management must hold themselves to the highest standards of corporate governance. We were implemented the requirements of the Sar-banes-Oxley Act of 2002 and the newly revised New York Stock Exchange governance listing standards well in advance of their effective dates. We strongly support enactment of the SEC's rules related to the Sarbanes-Oxley Act, and the newly revised New York Stock Exchange and NASDAQ corporate governance listing standards.
Based on our experience, however, we believe that the Proposed Election Contest Rules will not improve corporate governance. Instead, they will result in divisive, contested director elections and the consequent need to expend significant corporate resources in support of board-nominated candidates. They also could lead to the nomination and election of "special interest di-rectors" who further the agendas of the shareholders who nominated them, rather than the interests of all shareholders and the company's long-term business objectives. Forcing the company to put forward director nominees in this way is likely to result in divisive boards that have difficulty func-tioning, and it intrudes on existing directors' fiduciary duties to manage the affairs of their corpora-tions. Such management by referendum could stifle the innovation that is an essential characteristic of American business.
Importantly, the Proposed Election Contest Rules do not adequately consider the realities of the proxy process, including the considerable influence of proxy voting guidelines of institu-tional investors and Institutional Shareholder Services ("ISS"). It is likely that ISS, as well as many institutional investors, will revise their proxy voting guidelines to support shareholder access proposals, and many shareholders will vote in favor of such proposals at all companies as a matter of course because it is their policy to follow these guidelines regardless of the issuer. Further, the new Department of Labor voting disclosure rules will likely exacerbate the practice of rate adher-ance to voting guidelines. If access to company proxy materials is to be required, the SEC must revise the Proposed Rules to account for these realities and to target only those companies where shareholders have not had adequate access to an effective proxy process.
For all of these reasons, we oppose the adoption of the Proposed Election Contest Rules. If the SEC nevertheless proceeds to consider adoption of the Proposed Rules, we strongly urge it to modify the rules to better accord with the SEC's stated intent of targeting a small number of unre-sponsive companies. As proposed, the rules would impact many U.S. public companies - regard-less of their corporate governance practices or their responsiveness to shareholders. In particular, the trigger based on a majority-vote shareholder proposal to activate shareholder access would ap-ply to any company, not just those that have failed to respond to shareholder concerns. In addition, the possible third trigger discussed in the release, a company's failure to implement a majority-vote shareholder proposal, also would apply to any company and does not take into account the board's fiduciary duty when considering its response to a shareholder proposal.
The past two years have seen the adoption of the most sweeping corporate governance re-forms in the 70 years since the federal securities laws were exacted. We urge the SEC to assess the impact of these important corporate governance reforms before proceeding with the radical Pro-posed Rules.
Thank you for considering our concerns. If you would like to discuss these comments or any other issue, please do not hesitate to contact me at (317) 276-8658.
Alecia A. DeCoudreaux
cc: Hon. William H. Donaldson, Chairman, U.S. Securities and Exchange Commission