It is remarkable that the federal appeals court judge who dissented on the Jones v. Harris Associates case made a point of saying that executive compensation needs to be reined in, The New York Times reports.
Judge Richard A. Posner, who normally believes economic questions are best left to the devices of the marketplace, decided the case, scheduled to be heard before the Supreme Court on Nov. 2, was different. “Executive compensation in large publicly traded firms,” he wrote, “often is excessive because of the feeble incentives of boards of directors to police compensation.”
With the public backlash against excessive compensation growing, combined with a growing realization that it may have contributed to the problems that caused the recession, the Supreme Court may be inclined to agree with the public.
Certainly, as Warren Buffett wrote in a 2003 letter to shareholders, fund boards have no incentive to replace or truly police investment advisors. “Year after year, at literally thousands of funds, directors routinely rehire the incumbent management company, however pathetic its performance,” Buffett wrote. “Just as routinely, directors mindlessly approve fees that in many cases far exceed those that could have been negotiated.”
While the defense argued in the appeals court that retail mutual fund investors could simply take their business elsewhere if they think fees are too high, a brief supporting the plaintiffs shows that mutual fund investors concentrate more on performance than they do on fees. Boards, they said, should look more closely at the discrepancy between fees charged to institutional and retail investors.
Also, of note is the fact that a federal appeals court in St. Louis is permitting another lawsuit claiming excessive fees charged by Ameriprise Financial to go forward.