1. 1 www.hro.com Denver Boulder Colorado Springs Dublin London Los Angeles Munich Phoenix Salt Lake City San Francisco Update on SEC’s Proxy Disclosure Enhancements Christine M. Daly Martha Dugan Rehm christine.daly@hro.com 303-866-0486 martha.rehm@hro.com 303-866-0464 CBA Securities Subsection Luncheon February 18, 2010

2. 2 SEC’s New Corporate Governance and Compensation Disclosure - Timing Proposed - 7/10/2009 (Rel. No. 33-9052) Adopted - 12/16/2009 (Rel. No. 33-9089) Effective – 2010 Proxy Season FYE on or after 12/20/2009 File proxy statement (or Form 10-K) on or after 2/28/2010 Compliance and Disclosure Interpretations (CD&I’s - 12/22/2009)

3. 3 SEC’s New Corporate Governance and Compensation Disclosure - Rules Reg. S-K, Item 401 (Directors, etc.) Reg. S-K, Item 402 (Exec. Comp.) Reg. S-K, Item 407 (Corp. Gov.) Form 8-K (Current Reports) Forms N-1A, N-2 and N-3 (registered investment companies) CD&I’s - 1/20/2010 and 2/16/2010

4. 4 SEC’s New Corporate Governance and Compensation Disclosure - Areas Compensation practices, including risk assessment Director qualifications, background; diversity as factor in nominee selection Board leadership structure and risk oversight Compensation table, reporting equity awards Compensation consultant disclosure Election results accelerated (4 bus. days)

5. 5 Compensation Risk Assessment Investors and regulators are concerned about compensation arrangements that encourage excessive risk taking The company’s overall compensation program should include a risk analysis and appropriate controls RiskMetrics – at a minimum talk about the company’s risk assessment process and mitigating features of its comp program (e.g., claw-backs and bonus banks)

6. 6 Compensation Risk Assessment Step 1: Perform a risk assessment of the company’s overall compensation policies and practices Step 2: Include narrative disclosure where risks arising from compensation practices are reasonably likely to have a material adverse effect on the company

7. 7 Compensation Risk Assessment Examples that may trigger disclosure: business unit carries significant portion of company’s risk profile business unit with compensation structured significantly different business unit that is significantly more profitable business unit where comp expense is a significant percentage of the unit’s revenues payment of bonus when goal achieved, while the income and risk to the company extend over a significantly longer period of time

8. 8 Compensation Risk Assessment What may need to be disclosed: the general design of the program and its implementation the company’s risk assessment or incentive considerations in structuring the policies and practices or in awarding or paying the comp mitigating factors such as claw-backs or holding period requirements policies regarding adjustments to comp policies and material adjustments made the extent to which the company monitors its comp program to determine whether its risk objectives are met

9. 9 Director Qualifications and Background Old Item 401(e) and (f) for directors / nominees 5 years business experience 5 years legal proceedings Current directorships New Item 401(e) and (f) Extends legal proceedings look back, 10 years Extends directorships look back, 5 years Adds other legal proceedings (e.g., SRP sanction; mail fraud) - material Adds individual qualifications

10. 10 Individual Director Qualifications Each director/nominee, not group Specific and particular experience, qualifications, attributes or skills Board focus, not committee service Determined as of time of the filing Applies to classified board Goal is to disclose current information about all directors of why board concluded person should serve or continue serving as of the time of the filing IR aspect of proxy statement

11. 11 Diversity in Director/Nominee Selection Old Item 407(c) – describe process for selecting nominees (retained) New Item specifically requires new disclosure if (and if, how) diversity is considered in selection nominees/directors Disclose diversity “policy” (beware...) If have policy, how implemented and assessed No definition of “diversity” (one size does not fit all) Not in proposed rules Encourage “diversity”?

12. 12 Board Leadership Structure New Item 407(h) Board leadership structure CEO/Chair combined or not Why chosen structure is appropriate Lead independent director existence and role, if CEO/Chair is combined Goal of transparency, not to dictate structure of leadership

13. 13 Board Role in Risk Oversight Disclosure of how company perceives role of board and senior management in managing material risks No definition of risk (but credit, liquidity, operational risks) Process oriented, not substantive risk disclosure Manner in which board administers oversight Structure of risk oversight (e.g., risk committee; reporting relationships; information receipt) Effect oversight function has on leadership structure

14. 14 Reporting of Equity Awards Change in amount reported for equity awards in Summary Compensation Table and Director Compensation Table Old rule – expense allocated over award’s expected term (e.g., 25% of 2009 option; 25% of 2008, 2007, and 2006 options) as reported in the financial statements New rule – 100% of grant date fair value reported in year of grant (regardless of vesting or expected term); performance award reported in table at “probable outcome” with footnote of maximum payout

15. 15 Reporting of Equity Awards Transition rule – must restate prior year numbers, including Total Compensation, for 2008 and 2007 May change who in current year is one of the top paid executive officers (e.g., new hire grant or performance award)

16. 16 Reporting of Equity Awards EXAMPLE – ELI LILLY AND COMPANY NameYearStockOptionsTotal Comp NEW RULE – 2010 Preliminary Proxy John Lechleiter 2009$11,250,000$0$20,927,649 2008$ 8,125,000$0$14,481,882 2007$ 4,972,500$0$ 9,274,015 OLD RULE – 2009 Proxy Statement John Lechleiter 2008$ 6,621,333$0$12,978,215 2007$ 4,641,000$ 390,000 $ 9,332,515 2006$ 3,510,000$3,967,976$11,305,093

17. 17 Compensation Consultant Disclose fees paid to compensation consultant and potential conflicts of interest Where board or comp committee has engaged its own consultant and the consultant received more than $120,000 during the fye, disclose: fees paid for board and non-board services whether decision to engage consultant (or its affiliates) for additional services to the company was made or recommended by management whether board or committee approved the other services provided to the company

18. 18 SEC Comments Trends in SEC comments: Peer group and benchmarking (“competitive;” describe how peers selected and data is used; disclose where actual payments fell in range) Performance targets (disclose any material performance targets; identify the specific targets; disclose actual results) Compensation Discussion and Analysis (shorten background and process-oriented information; include “how” and “why”) SEC change in position – will require amendment of filings if material deficiency (instead of “futures” comment)

19. 19 Director Elections - Impact Broker non-votes (NYSE Rule 452) Direct proxy access by shareholders (proposed rule 14a-11) Proxy disclosure enhancements (adopted 12/16/2009) Accelerated results – Form 8-K within 4 business days Proxy advisory firms more active

20. 20 Broker Non-Votes No broker discretionary voting in director elections Primary effect – lower retail vote turnout Ensure that proxy includes a “routine” proposal (e.g., ratify auditors) so broker votes count for quorum Analyze impact s/h base and state law Review and modify description of “vote required” and “how votes are counted”

21. 21 Update on SEC’s Proxy Disclosure Enhancements CBA Securities Subsection Luncheon February 18, 2010