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

2. SEC’s New Corporate Governanceand 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. SEC’s New Corporate Governanceand 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. SEC’s New Corporate Governanceand 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. 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. 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 arereasonably likely to have a material adverse effect on the company

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. 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. 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. Individual Director Qualifications • Each director/nominee, not group • Specific and particular experience, qualifications, attributes or skills • Board focus, not committee service • Determined asoftime 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. 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. 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. 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. 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. 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. 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. 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. 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. Director Elections - Impact • Broker non-votes (NYSE Rule 452) • Direct proxy accessby 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. 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. Update on SEC’s Proxy Disclosure Enhancements CBA Securities Subsection LuncheonFebruary 18, 2010