O Prof Farlei Martins doutorando de direito da Puc-rio e professor da Ucam enviou a seguinte matéria
The New York Times
August 18, 2009
Supreme Court to Hear Case on Executive Pay
By ADAM LIPTAK
Last summer, Richard A. Posner, a federal appeals court judge, issued a
surprising and prescient dissent. Executive pay is out of control, he said,
and the marketplace cannot be trusted to rein it in.
Judge Posner is a conservative with libertarian leanings, and he is a leader
of the law and economics movement associated with the University of Chicago.
He often relies on economic analysis in his judicial decisions, and he
believes that many questions are best sorted out by the marketplace.
But corporate America has insulated pay decisions from market discipline,
Judge Posner wrote. “Executive compensation in large publicly traded firms
often is excessive,” he added, “because of the feeble incentives of boards
of directors to police compensation.”
The Supreme Court will hear the case this fall, as anger over huge bonuses
paid to the executives of failing companies continues to grow. The case,
Jones v. Harris Associates, may turn out to be the court’s first significant
statement on the corporate culture that helped lead to the Great Recession.
The case arose from the enormous fees mutual funds pay to their investment
advisers. A three-judge panel of Judge Posner’s court, the United States
Court of Appeals for the Seventh Circuit, in Chicago, threw out a lawsuit
brought by the investors in three Oakmark mutual funds who said the funds
had overpaid their investment adviser, Harris Associates.
The panel decision, written by Chief Judge Frank H. Easterbrook, another
leader of the law and economics movement, said the marketplace could be
trusted to regulate fees. Judge Posner, dissenting from the full court’s
decision not to rehear the case, said competition had not been effective in
keeping the compensation under control.
Before last year’s market collapse, the mutual fund industry held more than
$11 trillion in retirement and personal savings, and it paid advisers
perhaps $100 billion in fees.
Mutual funds are odd enterprises. They are typically formed and run by their
investment advisers, which select the fund’s board of directors. That board
then negotiates the adviser’s fees.
Here is how Warren Buffett analyzed the situation in his 2003 letter to
shareholders: “Year after year, at literally thousands of funds, directors
had routinely rehired the incumbent management company, however pathetic its
performance had been. Just as routinely, the directors had mindlessly
approved fees that in many cases far exceeded those that could have been
The plaintiffs in the case before the Supreme Court claimed that Harris
Associates had charged their funds twice as much as it charged its
unaffiliated clients, like pension funds.
The Oakmark funds paid Harris Associates 1 percent of the first $2 billion
in assets; independent clients were charged roughly one-half of 1 percent of
the first $500 million. One percent of a billion dollars is nice work if you
can get it.
“Mutual funds rarely fire their advisers,” Judge Easterbrook acknowledged.
But, he continued, “investors can and do ‘fire’ advisers cheaply and easily
by moving their money elsewhere.” A 2007 study from John C. Coates IV and R.
Glenn Hubbard supported this conclusion, finding that mutual fund fees are
kept in check by the movement of investors’ money.
But a brief supporting the plaintiffs filed in the Supreme Court by three
economists, Ian Ayres, Robert E. Litan and Joseph R. Mason, questioned that
study. New research in behavioral economics, the brief said, showed that
most investors had a very poor grasp of rudimentary truths about probability
and a disproportionate aversion to taking losses.
Mutual fund investors thus tend to look at past performance rather than
fees. And they have a tendency to sell winning investments too early and
hold losing ones too long.
Even if mutual fund investors could be counted on to act rationally, the
economists’ brief said, they do not have ready access to the information
they need to make sensible choices.
Instead of counting on investor behavior to keep fees in check, the brief
concluded, courts should look to how much advisers charged independent
clients like pension funds. A supporting brief from the federal government
made the same point.
There is academic research to support this view, too.
“In contrast to mutual fund investors,” Diane Del Guercio and Paula A. Tkac
wrote in a 2002 study, “pension clients punish poorly performing managers by
withdrawing assets under management and do not flock disproportionately to
But Judge Easterbrook questioned the value of such comparisons. The two
kinds of clients, he said, may have different needs. In its brief urging the
Supreme Court not to hear the case, Harris Associates added that the Oakmark
funds had outperformed “virtually every fund in their peer groups.”
Still, the tide seems to be turning toward skepticism about outsize
compensation. In April, a month after the Supreme Court agreed to hear an
appeal from Judge Easterbrook’s decision, the federal appeals court in St
Louis allowed a suit against another investment adviser, Ameriprise
Financial, to go forward. It was the first ruling in favor of unhappy mutual
fund investors suing over advisers’ fees since Congress imposed a fiduciary
duty on advisers in 1970.
Judge Easterbrook said the law had only a minor role to play, requiring no
more than making sure that advisers “make full disclosure and play no
But when public sentiment, economic research and even Judge Posner argue for
more vigorous judicial examination of whether compensation is fair, the
Supreme Court may just agree.