USSCT to chime in on executive compensation issues

By Cydney Posner

We may soon be hearing from the Supreme Court on the issue of executive compensation, or awfully close to it. The NYT is reporting that, this fall, the Court will hear Jones v. Harris Associates, in the midst of the public furor over soaring compensation paid to executives of failed companies. While the case itself arose in the context of fees paid by mutual funds to their investment advisers, it "may turn out to be the court's first significant statement on the corporate culture that helped lead to the Great Recession." A three-judge panel in the Seventh Circuit tossed a case brought by the investors in three mutual funds who said the funds had overpaid their investment adviser, Harris Associates. The panel decision, written by Chief Judge Frank H. Easterbrook, argued that the marketplace can be trusted to regulate fees. Surprisingly, Judge Posner (of the law-and-economics school), dissenting from the full court's decision not to rehear the case, said that competition had not been effective in the keeping compensation under control because the corporate world has insulated pay decisions from market discipline. In dissent, Judge Posner wrote: "Executive compensation in large publicly traded firms often is excessive...because of the feeble incentives of boards of directors to police compensation." While, as described in the article, mutual fund boards and advisers may seem more incestuous even than corporations (since they are typically formed and run by their investment advisers, who select the fund's board of directors, which then negotiates the advisers' fees), the case may still be one to watch as its outcome could have some influence on compensation decision-making in the corporate world as well.

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