Lilly shareholders reject stock plan

INDIANAPOLIS -- Eli Lilly and Co. shareholders Monday rejected a union pension fund's proposal to count stock options as an expense against earnings -- a move supporters contend would provide a more accurate picture of the drug maker's finances.\nA growing number of companies, notably General Electric and Coca-Cola, are making the change this year in response to the corporate reform movement.\nBut most shareholder proposals opposed by companies have been defeated, and Lilly's board of directors opposed the advisory proposal considered at the company's annual meeting. The proposal won 41 percent approval, failing to gain a majority among holders of 827 million shares for which ballots were cast.\nSidney Taurel, Lilly's chairman, president and chief executive, said that the board that sets U.S. accounting standards last month voted unanimously to draft new rules requiring companies to consider employee stock options as an expense. But it is expected to be another year before the new rules are adopted.\n"We believe it makes sense to wait until the standards board establishes new rules that can be consistently applied by all companies," Taurel said.\nThe proposal at Lilly's meeting was presented by the Massachusetts Carpenters Pension & Annuity Funds, a Lilly investor group.\n"Failure to expense stock options with company income statements can obscure and understate the cost of executive and employee compensation," said David M. Monger, who represented fund members.\nOne unresolved issue is which method to use in calculating stock option expenses. The value depends on a stock's performance over time and how long option recipients hold onto them.\nCounting options as an expense also could put Lilly at a disadvantage against industry competitors that do not do so, Taurel said.\nCurrent accounting rules give companies the option to declare the expense, but have come under criticism following numerous corporate scandals and complaints that undeclared options amount to misleading investors with false accounting.\nA companion proposal from the pension fund would have tied stock option grants to Lilly's performance against pharmaceutical industry peers. It also failed.\nMonday's meeting came a week after Lilly reported a 35 percent drop in first-quarter earnings as one-time expenses more than offset a 13 percent sales growth. That growth represents Lilly's strongest quarterly showing since losing its Prozac patent in August 2001, leading to cheaper generic versions of the anti-depressant.\n"The past couple of years have been an anxious time for all Lilly stakeholders," Taurel said. "But I believe this company has come through this period in better shape and with stronger prospects for future growth than any of our major competitors."\nLilly's Prozac troubles and quality-control problems at some Indianapolis manufacturing plants caused Lilly shares to sink to a 52-week low of $43.75 in July. With investor fears about the manufacturing issues easing and new Lilly drugs reaching the market or awaiting approval, Lilly shares have recovered.\nShares closed at $64.04 Monday on the New York Stock Exchange, up 76 cents, or about 1 percent.\nLilly is the nation's eighth-largest drug maker, measured by revenue, and has 43,000 employees worldwide, including more than 16,000 in Indiana.