The California Public Employees’ Retirement System, better known as Calpers, plans to withhold votes for three of the drugmaker’s directors who are up for reelection next month over the stock price and poor corporate governance. Among the directors is John Lechleiter, who becomes ceo next week and has been on the board for the past three years.

“It was on their watch that Eli Lilly experienced severe stock underperformance, poor corporate governance practices, and was unresponsive to shareowners,” Russell Read, Calpers’ chief investment officer, says in a statement.

The pension fund’s wrote a letter to shareholders saying that, as of Feb. 29, 2008, Lilly’s stock had significantly underperformed both the S&P 500 and the S&P 500 Health Care Index. The drugmaker, the fund continued, trailed index peers by 16.7 percent over three years, by 35.5 percent for five years, and by 55.7 percent over the past 10 years, while losing 6.5 percent the past decade on a total return basis. Calpers owns about 4.7 million shares in Lilly, which has about 1.14 billion shares outstanding.

In a written statement provided to The Wall Street Journal, Lilly disagreed with the fund’s claims that the three directors as unresponsive to shareholders. The drugmakers insists changes were made to corporate governance practices while the three directors were in place and that the one-year performance of its shares outperformed both the Standard & Poor’s 500 index and the pharmaceutical peer group.

Calpers also wants Lilly shareholders to vote in favor of its proposal to give shareholders the right to amend company bylaws by majority vote, because Lilly, Calpers maintained, doesn’t allow shareholders to amend bylaws (Most companies in the S&P 500 index do allow this). Lilly opposes the Calpers proposal, claiming that large shareholders could force changes in bylaws that hurt minority shareholders, and that the board has a fiduciary duty to consider and balance the interests of all shareholders.

In its statement, Lilly is taking steps to improve corporate governance, including the election of all directors annually, rather than in staggered terms, the Journal writes. Also, Lilly’s management is recommending a proposal to shareholders requiring directors to be elected by a majority of votes; currently, election requires only a plurality.

The three directors opposed by Calpers are among four up for re-election at Lilly’s annual shareholders meeting April 21 in Indianapolis. Lilly has 13 directors, including Sidney Taurel, who is retiring as CEO but who will remain chairman until December, when he will resign from the board.