Lilly Endowment Inc.

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Lilly Endowment Inc.

2801 North Meridian Street
Indianapolis, Indiana 46208-0068
U.S.A.
Telephone: (317) 924-5471
Fax: (317) 926-4431
Web site: http://www.lillyendowment.org

Not-for-Profit Corporation
Incorporated: 1937
Total Assets: $8.6 billion (2004)
NAIC: 813211 Grantmaking Foundations

Operating out of Indianapolis, Indiana, Lilly Endowment Inc. is a private family endowment established by members of the Lilly family through gifts of stock in the giant pharmaceutical firm of Eli Lilly and Company. With some $10 billion in assets, the endowment distributes about $500 million in charitable contributions each year, about 60 to 70 percent of which, in keeping with the founders' wishes, remains in Indiana. In addition, the endowment, as directed by its founders, focuses its attention on three areas—religion, education, and community development—with a special emphasis on benefiting young people. Lilly Endowment has played a crucial role in the rebirth of downtown Indianapolis. All told, since its founding in 1937, Lilly Endowment has issued more than $5 billion in grants.

Lilly Family Business Dates to 1870s

The fortune that would one day form the financial backbone for the Lilly Endowment may be traced to 1876, when Colonel Eli Lilly (he served for the Union Army during the Civil War) opened a small pharmaceutical laboratory in Indianapolis to manufacture drugs. Lilly was a civic-minded man, a devotion he passed on to his descendants. Not only did he become the head of the Commercial Club to spur development of Indianapolis, he offered help to the masses devastated by the financial panic on 1893 and funded the building of a children's hospital. His son, Josiah Lilly, and grandson, also named Eli Lilly, proved adept at business and shared the colonel's philanthropic spirit. The younger Lilly, after earning a degree from the Philadelphia College of Pharmacy, joined the firm in 1907. He was instrumental in the development of a blueprinting process that could produce multiple copies of a manufacturing process, thus allowing for a significant increase in production. As head of the manufacturing division, he modernized the firm's overall approach to production, bringing in efficiency experts as well as instituting other changes, such as a guaranteed wage and a bonus system to create worker incentives. With the advent of World War I, the firm, dependent on European sources for drugs, was forced to engage in pharmaceutical research to develop substitutes. Following the war, Lilly headed the scientific unit which during the 1920s developed the first commercially available insulin for diabetics. This product initiated a series of blockbuster drugs that made the Lilly family immensely wealthy.

Eli Lilly succeeded his father as president of the family business in 1932. He also took on his grandfather's mantle as the family philanthropist. He began campaigning for the creation of a family endowment, and in 1937 he and his father and brother, Josiah Lilly, Jr., created an endowment through gifts of 17,500 shares of stock in Eli Lilly and Company worth $280,000. During Eli Lilly's time as president, the firm's revenues grew from $13 million to $117 million in 1948, when he became chairman after his father's death and his brother assumed executive responsibility. The value of the endowment's stock was growing steadily and now Eli Lilly had more time to devote to the foundation's activities.

During the first 40 years of its existence, the Lilly Endowment was essentially run by Eli Lilly out of his desk drawer. Board members were his friends and business associates, and there was no systematic approach to the endowment's charitable contributions. Some $5 million worth of rare books was donated to Indiana University, and a $5.5 million coin collection was donated to the Smithsonian Institution, to name a few of the foundation's diverse acts. Sharing an interest in archaeology and popular religious literature that held up the New Testament as a guidebook for character development in the modern era, Lilly supported archaeologists researching Indiana's ancient history as well as religious writers. During the early decades of the endowment, however, the contributions it made were to tried-and-true charities, including the Community Chest and the Red Cross. It was not until after Eli Lilly died in 1977 and the endowment became more of a formal foundation that it began to expand its activities and take advantage of its rising financial resources. Moreover, because of a change in federal tax laws in 1969, the endowment was required to spend more of its money.

In the late 1970s, the endowment decided to concentrate its activities in Indianapolis and began to play a crucial role in the city's development. At the time, the city was known for the annual Indianapolis 500 motor race and little more. Far from having no image, the city was in danger of developing a poor one, for, like many Midwest cities, it had begun to hemorrhage manufacturing jobs, becoming part of what was known as the Rust Belt. In a 1999 article, James Dunaway of Mediaweek offered a bleak picture of Indianapolis 20 years earlier: "In the center of the city, storefronts were empty or boarded up. There was a single, down-at-the-heels, 70-year-old hotel, with fewer than 200 rooms. The few downtown restaurants did most of their business at lunchtime. Even the well-known St. Elmo Steakhouse shut down every evening at 7:30. The heart of Indianapolis was a ghost town, and scheduling a convention in the city was like booking into a cemetery." In short, Indianapolis was a dying city. In 1979, a group of business leaders conducted research that recommended five areas in which the city could build a positive reputation that help launch a rebirth: arts and culture, education, health and medicine, food and nutrition, and sports. Given Indianapolis's association with the annual Memorial Day automobile race, it was not surprising that the leaders decided to focus their resources on sports, especially amateur sports. As a result, a non-profit organization, Indiana Sports Corp., was formed, the first in the nation dedicated to the identification, solicitation, and hosting of sporting events.

Indianapolis Enjoys Growth in Amateur Sports in the 1980s

Sports Corp. started out with no office, no money, and just one employee, Sandy Knapp, a former cheerleader for the Indiana Pacers professional basketball team. Lily Endowment provided a six-figure grant that got Sports Corp. started, and in 1980 the organization made its first major move, bidding on the 1982 National Sports Festival, later renamed the U.S. Olympic Festival. Despite its lack of suitable facilities, such as a track-and-field stadium, competitive swimming facilities, a velodrome, or a softball complex, Indianapolis won the bid. According to Knapp, "We used a lot of smoke and mirrors." In addition to the city and state and other private donors, Lilly Endowment made major contributions to the construction of the necessary facilities. It provided $10.7 million of the $21.5 million needed to build swimming pools, and $4 million out of the $5.9 million needed for the track and field stadium. Thousands of volunteers were also instrumental in making a major success out of the festival, which set attendance and ticket sales records and allowed Indianapolis to become the self-proclaimed "Amateur Sports Capital of the United States." Indianapolis also looked to boost its image through professional sports. In 1981, the endowment contributed $25 million of the $77.5 million needed to convert the downtown convention center into a 61,000-seat football stadium. It was a risky maneuver, given that the city had no prospects of receiving a new National Football League franchise, but it paid off when in 1984 Indianapolis was able to lure away the Baltimore Colts. The Hoosier Dome, later renamed the RCA Dome, was also used to secure three NCAA basketball Final Four tournaments.

In 1984, Lilly endowment named James T. Morris president. A former chief of staff for Indianapolis mayor Richard Lugar (who went on to become a U.S. Senator), Morris had joined the endowment in 1973 as the director of community development, then worked his way up through the ranks as vice-president and executive vice-president. He was also a founding member of the Indiana Sports Corp. During his five-year tenure at the helm, the endowment was actively involved in Indianapolis's efforts to secure the 1987 Pan American Games and made sizeable contributions to the construction of new facilities. The games were very successful, drawing more than one million spectators to the city and generating an estimated $175 million in business. All told, during the 1980s Lilly endowment contributed more than $300 million to Indianapolis, which included funding for such sports facilities as the Hoosier Dome, Market Square Arena, William F. Kuntz Memorial Soccer Stadium, the Indiana University Natatorium, the National Institute of Fitness and Sport, and the American College of Sports Medicine, as well as other venues used for bicycling, track and field, and skating activities and events. With Indianapolis's reputation vastly improved and the downtown area revitalized, Lilly Endowment in the late 1980s shifted its focus from athletics to education, another area of need in the city and state. In the long-term, education had accounted for 29 percent of the endowment's spending but had declined to 19 percent during the 1980s when there was a special emphasis on community development. Spending on religion during this period remained relatively stable, slipping from 17 percent to 15 percent. It was religious funding that gave the endowment a national reach, however. Lilly Endowment was, in fact, the largest foundation in the country that placed a significant emphasis on religion.

Company Perspectives:

The Lilly family's foremost priority was to help the people of their city and state build a better life. Although the Endowment also supports efforts of national significance and an occasional international project, we remain primarily committed to our hometown, Indianapolis, and home state, Indiana.

In 1989, Lilly Endowment named a new president, John M. Mutz, who had served as Indiana's lieutenant governor from 1981 to 1986. After failing to secure the Republican nomination for governor in 1988, Mutz elected to remain in public service by taking the helm at Lilly Endowment. He took charge of a foundation with $2.1 billion in assets, one of the five largest philanthropies in America. Among his greatest achievements during his five-year tenure was the establishment of the GIFT initiative (Giving Indiana Funds for Tomorrow), which set up community foundations in each of Indiana's 92 counties. With the endowment's seed money, the individual foundations then launched their own fundraising activities to develop even more charitable funding for Indiana, while getting more people involved at the community level. Also during Mutz's time in charge, Lilly Endowment reached the $1 billion mark in total contributions in its history, 70 percent of which had been given away in the previous ten years. Because Elli Lilly prospered, spurred by the sales of the antidepressant drug Prozac, the firm's stock grew by 95 percent from 1989 to 1991 and the asset base of the endowment soared, reaching $3.9 billion. As the economy soured, however, Eli Lilly stock plummeted, resulting in a $1 billion loss to the endowment. Lilly Endowment now received some criticism in the press about its dependence on Elli Lilly stock rather than on developing a more diversified investment approach usually followed by such organizations, which placed about 38 percent of its assets in stocks, 35 percent in bonds, and the rest in other investments. For confidential reasons, this was not case with the Lilly Endowment. Possibly the founders had stipulated that investments be kept in Lilly stock. Moreover, having about 16 percent of its outstanding shares in the hands of the endowment benefited Eli Lilly in some ways, bolstering the company's stock price and providing some protection from a hostile takeover bid. Whatever its rationale, the endowment did not change its investment practice, electing to view what transpired in the early 1990s as little more than a paper loss. Nevertheless, the endowment had to cut back on its contributions to avoid selling off stock.

In 1994, Mutz was replaced as president by N. Clay Robbins, an Indianapolis attorney whose practice had specialized in laws relating to tax-exempt organizations. A Sunday school teacher, he was especially interested in the endowment's contributions to religious programs but was also dedicated to improving the educational attainment of Indiana citizens. The state ranked a disappointing 47th in the percentage of adults holding an undergraduate college degree. In the mid-1990s, the endowment began making sizeable contributions to Indiana institutions of higher learning to improve that ranking, then in 1998 launched the Lily Endowment Community Scholarship program to provide four-year, full-tuition scholarships to Indiana colleges. In addition, it contributed funds to organizations already involved in efforts to prepare young people for college.

Asset Base Soars in 1990s

While Wall Street enjoyed one of its longest bull markets in history, the price of Eli Lily stock soared in the 1990s, resulting in a massive increase in the endowment's assets, growing from $5.3 billion in 1995 to $12.7 billion in 1997. Lilly Endowment now became the largest private foundation in the country, eclipsing the Ford foundation, which had taken a diverse portfolio approach and now had $9.4 billion in assets. As a result of this windfall, the amount of money Lilly Endowment had to distribute grew from $253 million in 1997 to more than $400 million in 1998. What's more, the organization was required by law to give away 5 percent of its investment assets each year, based on an average value over the course of the year. Rather than search out new charities, Lilly Endowment elected to make larger general grants to organizations to which it already contributed, essentially trusting them to make wise use of the funds. For instance, the United Way of Central Indiana, received $50 million, the largest single grant ever made to a community United Way organization. In 1997, it had received $5.4 million from the endowment. Other large grants included $42 million to the United Negro College Fund, $25 million to the National Urban League, and $25 million to the GIFT program.

In the late 1990s, Lilly Endowment began to contribute money to Indiana colleges and universities in an effort to stem the flow of college graduates leaving the state to seek work elsewhere. According to a study partially funded by the endowment, more than 36 percent of Indiana residents and more than 89 percent of non-residents left the state after graduation. To address the "brain drain" problem, Lilly Endowment made sizeable contributions to several Indiana universities to help them develop marquee departments that would attract students, with the hope that this program would elevate the educational standing and thereby attract employers in search of a talented workforce. Much of the money was also earmarked for high technology projects, which might lead to start-up companies and a new source of jobs, thus making up for the loss of traditional manufacturing jobs in Indiana.

As the stock market continued to flourish, Lilly Endowment steadily increased the amount of money it gave each year, distributing a record $594.1 million in 2001. In 2002, as the price of Lilly stock declined, the endowment cut back to $563 million. Also during 2002, the $10.1 billion foundation was surpassed by the Bill & Melinda Gates Foundation, with more than $24 billion in assets, as the largest private foundation in the country. The fortunes of Lilly Endowment remained closely tied to the price of Lilly stock, which performed well in 2003 but dipped somewhat in 2004. Nevertheless, the board showed no inclination to change the endowment's investment strategy, content to adjust the amount it gave away from year to year. In the long-run, holding onto Lilly stock had proven an effective strategy, allowing the endowment to make more than $5 billion in grants since its foundation in 1937.

Key Dates:

1937:: Lilly family forms an endowment.
1977:: Eli Lilly dies.
1984:: James Morris is named president.
1987:: Pan American Games are held in Indianapolis.
1989:: John Mutz is named president.
1994:: Clay Robbins is named president.
1998:: Lilly Endowment becomes the largest private foundation.
2002:: Gates Foundation surpasses the Lilly Endowment as the largest private endowment.