CalPERS to Oppose 7 on 2 Drug Firms’ Boards

The California Public Employees’ Retirement System, the biggest U.S. pension fund, will vote against seven Genentech Inc. and Eli Lilly & Co. directors because of perceived conflicts of interest, including the hiring of auditors for consulting.

CalPERS will vote against audit committee members Charles A. Sanders, Herbert W. Boyer and Mark P. Richmond at Genentech and Winfried Bischoff, Franklyn Prendergast and Kathi P. Seifert at Lilly, said Bill McGrew, an investment officer at CalPERS.

Boyer also has a conflict unrelated to the company’s auditor, as does Genentech director Jonathan Knowles, CalPERS said.

The decision is part of CalPERS’ plan to block the election of directors who have or who create conflicts of interest at companies in which the fund holds shares. CalPERS withheld its votes last month from six Hewlett-Packard Co. directors because, like directors at Genentech and Lilly, they hired Ernst & Young for both audit and non-audit work.

“You don’t want your external auditor auditing their own work,” McGrew said.

The pension fund holds 5.5 million shares in Indianapolis-based Lilly and 321,000 shares in South San Francisco-based Genentech, according to Bloomberg data.

Two proxy advisory services, Institutional Shareholder Services and Glass, Lewis & Co., recommended electing the Lilly directors, company spokeswoman Terra Fox said.

“We believe that the very rigorous preapproval process by Lilly’s audit committee of all audit and non-audit services provides the best assurance of the independence of our external auditors,” Fox said.

Lilly’s shares fell 37 cents to $68.78, while Genentech fell 83 cents to $110.15. Both trade on the New York Stock Exchange.

CalPERS also has voted against directors at Applied Materials Inc. and Freddie Mac, the second-largest buyer of U.S. mortgages, for hiring auditors to do consulting.

CalPERS will withhold its votes from Knowles, who serves on Genentech’s compensation and nomination committees, because he works for Roche Holding, the Swiss company that holds about half of Genentech’s stock, McGrew said. An employee of a major corporate stakeholder in Genentech cannot represent all shareholders’ interests, he said.

Boyer, a co-founder of Genentech, does not qualify as an independent director and shouldn’t sit on the audit, compensation and nomination committees, McGrew contended. Federal law requires audit committee members to be independent, and listing rules call for independent directors on audit and compensation committees.

Lilly will hold its annual shareholders meeting April 19 at the company’s corporate headquarters in Indianapolis. Genentech will hold its shareholder meeting April 16, the pension fund said on its website.

Bischoff, Seifert and Prendergast didn’t immediately return calls seeking comment, nor did Genentech spokeswoman Debra Charlesworth.