To: Corporate Governance Committee From: Marilyn J. Branson Date: March 7, 2014 Re: Marco Consulting Group Proxy Vote Summary Report

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1 State Universities Retirement System of Illinois Serving Illinois Community Colleges and Universities 1901 Fox Drive Champaign, IL (217) (217) (FAX) Investment Department To: Corporate Governance Committee From: Marilyn J. Branson Date: March 7, 2014 Re: Marco Consulting Group Proxy Vote Summary Report For your review, the Marco Consulting Group (MCG) Proxy Vote Summary Reports for the 4 th quarter of 2013 and the calendar year 2013 are attached to this memorandum. MCG cast 2,080 individual proxy votes for SURS during the 4 th quarter and a total of 26,816 proxies for SURS during MCG s executive summary covers the highlights of the quarter s activity and each of the reports provides a summary of the votes cast during the two periods, which are organized according to issue topic.

2 TO: State Universities Retirement System ( SURS ) FROM: Greg A. Kinczewski, Vice President/General Counsel Maureen O Brien, Assistant Director of Proxy Services DATE: February 13, 2014 RE: Review of Vote Summary Report for Fourth Quarter 2013 The Vote Summary Report for the Fourth Quarter, 2013, summarizes Marco Consulting Group s ( MCG ) votes for the State Universities Retirement System of Illinois (SURS), which are organized into the 13 major categories listed below. The report provides summaries for each major category of management and shareholder-sponsored proposals. The shareholder proposals are identified as such in the title; all other categories are management proposals. The report covers votes at US and Canadian firms as well as global companies where SURS investment was pursuant to American Depository Receipts. 1. Anti-Takeover Related 2. Capitalization 3. Directors Related 4. Non-Salary Compensation 5. Reorganization and Mergers 6. Routine/Business 7. Shareholder Proposals: Compensation 8. Shareholder Proposals: Corporate Governance 9. Shareholder Proposals: Directors Related 10. Shareholder Proposals: Health/Environment 11. Shareholder Proposals: Other/Miscellaneous 12. Shareholder Proposals: Routine/Business 13. Shareholder Proposals: Social Proposal Overview MCG voted 2,080 proposals on behalf of SURS for the Fourth Quarter of Overall, the votes followed management s recommendations on 1,266 proposals (61%). We supported a majority of management-sponsored proposals in all categories except non-salary compensation. The proposals in this category largely seek shareholder approval for individual compensation plans or are advisory votes on overall compensation policies and procedures. MCG supports plans where pay is aligned with performance, is not excessive and follows best practices in corporate governance. MCG voted with management on 37% of non-salary compensation proposals. Headquarters Office 550 West Washington Blvd., Suite 900, Chicago, IL P: F: East Coast Office 25 Braintree Hill Office Park, Suite 103, Braintree, MA P: F: Western Office 1746 Cole Blvd. Suite 225, Golden, CO P: F:

3 Summaries by Issue Category Management Proposals 1. Anti-Takeover Related MCG voted with management on 39 out of 44 proposals (89%) in this category. The vast majority of proposals in this category (37) request approval to adjourn a meeting. Companies trying to assure passage of important votes sometimes seek approval to adjourn the meeting to solicit more votes if needed. MCG votes in favor of these proposals when the associated proposal is supported and likewise votes against when the associated proposal is opposed. This quarter, MCG voted in favor of adjourning on 35 proposals (95%). MCG supported all three proposals seeking shareholder approval to reduce supermajority vote requirements. A supermajority vote requirement is a high bar for proposals to pass. MCG prefers that the will of a simple majority of shareholders be the standard for implementing proposals, whether from management or shareholders. For the same reason, we opposed two resolutions to establish supermajority vote requirements for votes on amendments. Finally, we voted in favor of two proposals to allow shareholders to weigh in on whether the board would amend the terms of a poison pill or "shareholder rights plan" to terminate the agreement earlier than planned. Since poison pills discourage takeovers that may be in shareholders' interest, early termination of the plan is preferable. 2. Capitalization MCG voted with management on 19 of 28 (68%) proposals dealing with capitalization this quarter. These proposals seek to increase or decrease authorized common stock, issue warrants, preferred or common shares and consider stock splits. MCG supported four of 11 proposals (36%) to increase authorized stock where the amount sought was not excessive (i.e., not more than 50% of the current authorizations) or was necessary for a specific purpose. We also voted for one proposal to reduce authorized stock. We supported one item seeking approval for a stock split and four proposals seeking approval to reserve a stock split. Stock splits adjust the quantity of shares available to either encourage larger purchases of stock or increase the value of the shares. We opposed a request to issue preferred stock because all shares should have the same voting rights and dual class stock creates tiered holdings. We voted in favor of five routine requests on capitalization. One proposal sought shares for a private placement, another sought to reduce share capital, two items sought approval to convert securities and the fifth proposal sought authority to reissue repurchased shares. MCG voted in favor of four of five proposals under the Company Specific category, which dealt with issues such as voting rights and stock sales. The one proposal we opposed, at Waterstone Financial, Inc., sought shareholder approval to prohibit investors 2

4 with more than a 10% stake from voting their shares. The change would violate the oneshare, one-vote principle of stock ownership and could insulate the board from significant shareholders. 3. Directors Related MCG voted with management on 852 of 1,298 proposals (66%) related to directors this quarter. The vast majority of these proposals dealt with the election of directors to the board. We voted in favor of 838 out of 1,283 proposals (65%) to elect directors either individually or as a slate. Director nominees are evaluated on several factors including independence, attendance and whether they serve on an excessive number of other boards. Dissident shareholders waged four proxy fights this quarter to promote their nominees to corporate boards of directors. At Cracker Barrel, dissident shareholder Biglari Capital Corp., waged a proxy contest for the third year in a row. With a 19.8% stake, Biglari Capital is the largest investor at Cracker Barrel and continues to seek representation on the board. In past discussions, the Company had offered two board seats for unaffiliated candidates, but Biglari wanted to nominate Biglari s Chairman/CEO as well as its Vice Chairman to those seats. The dissident took issue with management decisions such as plowing money into new stores rather than returning excess cash to shareholders, erroneous return on invested capital calculations and far from stellar performance. A vote was cast against the dissident nominees and in favor of all management nominees because the Company performed well over the past several years and posted solid growth in numerous key operating metrics. The board also created substantial value for shareholders and continues to effectively communicate its strategy. At PLX Technologies, 10.3% shareholder Potomac Capital Partners contested the election of three out of eight of the Board s nominees. Over the last five years the Company has materially underperformed its peer group (28 percentage points) and the PHLX Semiconductor Index and Russell 2000 Index (by 25 and 38 percentage points, respectively). The dissident group was not only critical of the Company s poor financial performance history but also its ill-advised acquisition strategy over the last five years -- two companies were purchased for $70.0 million and later sold for $12.0 million. Additionally, the dissidents pointed out that the Board s interest is not aligned with shareholders only two of its six independent directors hold company stock. The dissident group pointed to examples to demonstrate their belief that the Board is spurred to unlock value for shareholders only as a response to shareholder activism. A vote was cast on the dissident s ballot for their three nominees and for outsider management nominees. At RCM Technologies, dissident investor group IRS Partners and Legion Partners Asset Management, with a 13.3% of the shares outstanding, sought two seats on the six member board. The dissident noted that between 2007 and September 2013 revenues were down 27%, EBITDA was down 37%, and net income was down 40%. The dissident further asserted that from 1997 through 2012, the Company spent $160 million on acquisitions and subsequently wrote off $149.3 million of the acquired assets. The dissident also pointed out the Company had a classified board, plurality vote standard and an insider Chairman until the proxy contest forced the board s hand to improve its 3

5 corporate governance. Ultimately, the dissident made a compelling case for change given the weak shareholder returns, poor operating performance and subpar corporate governance. MCG supported one of the dissident nominees with the most proven track record in executive leadership. At MCP Ingredients, the Cray Group sought to elect three of its candidates to the Company s board. The Cray Group represents the interests of the Cray family, which at the time of the proxy contest held 24.3% of the Company s common stock and 92.4% of its preferred stock. The Cray Group cited concerns about the Company s lack of profitable growth and a broken agreement that if positive operating income was not achieved in 2012, the CEO would be replaced. It supported management s strategic plan but reasoned a new CEO and Chairman were necessary for implementation of the plan. An equity analyst confirmed that the Cray Group s claim had merit over the five-year period that captured the Chairman s (2004) and CEO (2008) entire tenures, the Company lost 37.9% value, as compared to gains of 13.9% and 45.5% for the peer group and index respectively. Given the magnitude of the Company s relative underperformance, MCG voted in favor of one dissident nominee. Moving on to other voting issues, MCG supported several good corporate governance measures this quarter, including three proposals to adopt a majority vote standard for director election and seven proposals to declassify the board. A majority vote standard requires that director nominees receive the support of more than 50% of votes cast to gain a seat on the board. Classified boards have directors serve in one of three classes and put up only one class at a time for election at the annual meeting. Declassifying the board removes this structure and requires that each director stand for election on an annual basis. Both of these measures enhance director accountability. Three proposals sought to adjust the size of the board, which we supported because the boards had a sufficient representation of independent directors. In a related matter, we voted in favor of one item to amend articles at The Standard Register Company to increase the size of the board. Finally, we opposed a Company-Specific proposal at Banco Santander Brasil SA to elect the Board Chairman and Vice-Chairman because they were insider nominees on a board that lacked independence. 4. Non-Salary Compensation MCG voted with management on 138 of the 376 proposals (37%) in this category. MCG voted in favor of 97 of 205 (47%) advisory proposals on executive compensation, popularly known as say-on-pay. We evaluate compensation by assessing whether pay aligns with performance and examining other practices to identify red flags for potential misuses of shareholders funds. The future timing of say-on-pay proposals accounted for another 38 resolutions and MCG voted for an annual election in all cases as opposed to voting on the issue every two or three years (and cast one do-not-vote selection because it appeared on an unsupported ballot in a proxy contest). Another 25 proposals this quarter sought shareholders advisory votes on severance agreements when a change in control took place. MCG voted in favor of 12 proposals, 48% of the total. We oppose severance arrangements where the recipients receive payments even if they do not lose their job or the deal falls through. We also oppose in 4

6 cases where the severance payout exceeds 2.99 times salary and bonus or provides for gross-ups on excise taxes. The other major items in this category seek approval to create or amend individual compensation plans for employees, executives and directors. MCG voted in favor of nine of 108 such proposals (8%). MCG generally opposes equity or cash compensation plans that are exclusive to top-tier management and/or lack rigorous performance standards. We also oppose stock plans that cause excessive dilution to current shareholder equity. 5. Reorganizations and Mergers MCG voted with management on 39 of 42 proposals (93%) in this category. MCG supported all 26 merger proposals this quarter as well as both proposals to approve a merger by absorption, all eight proposals seeking approval to issue shares in connection with an acquisition, one proposal to form a holding company and one proposal to approve a spin-off. We voted twice on whether Cracker Barrel should issue a special dividend. We cast one do not vote selection on the unsupported ballot in the proxy contest and against on the management ballot since the dividend was proposed by the dissident shareholder and appeared to be a short-sighted strategy. We opposed two of three proposals to change the jurisdiction of incorporation where the move would have weakened shareholders rights. We also opposed a Company- Specific proposal at Video Display Corporation to grant the CEO the authority to sell or otherwise dispose of any or all of the Company's assets. The move would eliminate shareholders' fundamental right to approve or reject substantial asset sales or other transactions the CEO negotiates. 6. Routine/Business MCG voted with management on 165 of the 237 proposals (70%) in this category. The ratification of auditors and deputy auditors accounts for nearly 93% of the routine matters voted on at companies this quarter. MCG supported 153 of 222 (69%) of these proposals and one to approve auditors and their remuneration. Votes are cast in favor unless auditors receive excessive amounts for non-audit services because auditors that receive hefty fees for non-audit work may be conflicted when conducting audit work. Three routine items sought to change the company name or location of the annual shareholder meeting, all of which we supported. We voted in favor of seven items to amend company articles dealing with housekeeping and other routine matters. We voted against two proposals seeking to approve other business. Such blank check approval for conducting other business that may come before the meeting is unnecessary and dissuades companies from providing shareholders the opportunity to assess all proposals that require their approval. 5

7 Shareholder Proposals 7. Shareholder Proposals: Compensation MCG voted for all three shareholder proposals related to compensation this quarter. The two Company-Specific proposals called for more specific performance measures to be tied to executive compensation. The remaining proposal at United Natural Foods suggested the board limit change-in-control agreements that allow time or performance hurdles on outstanding equity awards to lapse when the company faces an ownership change. 8. Shareholder Proposals: Corporate Governance MCG supported three of seven shareholder proposals (43%) related to corporate governance. At United Natural Foods, we voted to reduce the supermajority vote requirement and at The L.S. Starrett Company we voted in favor of a requirement that the board submit poison pills or shareholder rights plan to a vote prior to implementation. Poison pills automatically decrease the value of the stock when an investor acquires a significant stake and in doing so can discourage takeovers that may be in shareholders interests. We cast two votes at MGP Ingredients on confidential voting, one do not vote selection on the unsupported management ballot and a vote against on the dissident ballot. The proposal asked shareholders to approve an amendment to the Company s bylaws that would provide for confidential voting at the annual meetings and at future stockholder meetings. Confidential voting, or voting by secret ballot, is one of the key structural issues in the proxy system. It ensures that all votes are based on the merits of proposals and are cast in the best interests of shareholders. We opposed the proposal on the dissident ballot (and cast a do not vote selection on the management ballot) in this case because the proposal did not include a clause for proxy contests. In the event of a contested election, the Company would be bound by the confidential voting policy, placing the firm at a disadvantage to the dissidents, who would not be bound by it. Confidential voting should apply to both the Company and dissident group in a contested shareholder meeting. The remaining three proposals came in under the Company-Specific category. We voted in favor of a proposal to repeal any bylaw amendments aimed at thwarting dissidents from gaining seats on the board and cast one do not vote selection on the same item on the unsupported ballot in a proxy contest at MGP Ingredients. We voted against a proposal at Oracle to ignore abstention votes because investors may select a vote to abstain to express concern about a lack of information available to assess the merits of a proposal or to show mild disapproval without casting an outright vote against. Since votes to abstain are cast as a legitimate vote selection often with the intention of conveying a more subtle message to the board, they should be included in any vote tally. 9. Shareholder Proposals: Directors Related MCG supported 15 of the 35 proposals (43%) in this category. 6

8 In total, MCG supported eight of 22 (36%) nominees on dissident ballots this quarter. At Oracle, we voted in favor of the establishment of a board committee to oversee human rights issues. We supported two of four proposals to declassify the board. The two cases where we cast a do not vote selection and opposed the proposal occurred at the MGP Ingredients proxy contest. Four additional proposals to amend articles appeared on two separate ballots in the same proxy contest. All six proposals, three items on two ballots (declassify, amend articles on special meetings, amend articles on filling vacancies), would have enabled the dissidents to push through their agenda unilaterally, rather than winning broad shareholder support by convincing investors of the merit of their claim. We cast a do not vote selection in each case on the unsupported ballots and opposed on the other ballot. MCG supported items to promote shareholder rights, including one proposal in support of shareholders being able to act by written consent, one for cumulative voting and two for a majority voting standard for the election of directors. Shareholders can take action between annual meetings if they have the ability to act by written consent. Cumulative voting allows shareholders to pool all available director votes to support a few key candidates. Majority voting requires director nominees receive more than 50% to be seated on the board. 10. Shareholder Proposals: Health/Environment MCG supported the only proposal in this category, which requested The Estee Lauder Companies adopt a policy on sustainable sourcing of palm oil, whose cultivation causes environmental concerns. 11. Shareholder Proposals: Other/Miscellaneous MCG voted for both proposals in this category. One proposal at Cardinal Health requested the company disclose its political spending, which gives shareholders a clear picture of how the firm is expending resources on political activities. The other proposal requested Elizabeth Arden to report on the Company s use of animals to test its products. 12. Shareholder Proposals: Routine/Business MCG supported three of five proposals (60%) in this category. We voted for two of three proposals requesting an independent Chairman of the Board, which increases the board s accountability to shareholders and oversight of the CEO. In the third case, we cast a do not vote selection on an unsupported ballot in a proxy contest. The remaining two proposals fell into the Company-Specific category. We opposed one at Emerson Radio to issue a special dividend that may not have benefited all shareholders and we supported a proposal at Cisco Systems that the company provide shareholders with expert advice on its proxy items. 13. Shareholder Proposals: Social Proposal We voted on one item in this category, which appeared on two ballots in the Cracker Barrel proxy contest. We cast one do not vote selection and another in favor. The 7

9 proposal was notably different from a typical shareholder proposal. It sought a shareholder vote in support of the Company s decision to work toward ceasing the use of pork produced using gestation crates. 8