Supreme Court to Weigh in On Executive Pay

The Supreme Court has agreed to take a case on executive pay, Jones v Harris Associates.  In case is on manager's fees in the mutual fund industry but the holding will have profound effects on corporate governance in all industries.  The question is whether a mutual fund board of directors or mutual fund investors have adequate incentives to police executive fees, in this case the fees of the mutual fund managers.  Judge Easterbrook, writing for the majority, said yes; Judge Posner, writing alone in dissent said no.  On the facts, the mutual fund paid higher fees for managers managing its large public funds that it did for the same manager managing its private funds controlled by large institutional investors.  The Court could go with the new "behavorial economic" theorists that say small investors make predictable mistakes in both voting (incumbants always win) and in investing (holding losers too long and chasing winners) and that the boards of directors selected by small investors are not accountable in fact to them.  Or the Court could go with traditional economists that argue that investors power to sell their investments is power enough to control boards and executives that invest their funds and that other paternalistic overview systems (government oversight) would be worse, stifying innovation and competition.  This case will reaffirm or change existing practice and either result will have ripples across the governance of companies countrywide.