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National and Global, United States

Monday, November 2, 2009

Defining a "WEDGIE" in Executive Compensation


The Washington Post reported today that The Supreme Court this week will hear a case that raises bedrock questions about the ability of the market to set "reasonable" corporate compensation, and experts say its outcome could hold important clues about the judiciary's view of extraordinary interventions in the economy by the executive branch and Congress.

At issue in Jones v. Harris Associatesis whether investment advisers charged too much for their services to a mutual fund under their control. But it contains natural parallels to the current controversy over executive compensation at publicly held companies.

"The fact that the Supreme Court is looking at compensation again is in itself extraordinary," said Charles M. Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, adding that the court's history is to defer to the markets rather than to intervene.

It may also set up what could be years of judicial review of the measures that the Obama administration and Congress have taken -- and envision -- to deal with the worst collapse of the economy in 75 years.

"It's like the thin edge of the wedge," said William A. Birdthistle of the Chicago-Kent College of Law, who has closely followed the mutual fund case. He said the economic solutions of the Obama administration and a Congress solidly in Democratic hands will be judged by "the last of the branches controlled by conservatives."

The case is just one of many that the business community is watching.
Business-related cases will also pose an early and interesting test for the court's newest justice, Sonia Sotomayor, who was a corporate lawyer and has ruled on many business cases as a Manhattan district judge and as a member of the business-heavy U.S. Court of Appeals for the 2nd Circuit. "She may have more corporate experience than the rest of the court combined," Birdthistle said, and the docket laden with business cases allows her "immediately to have a disproportionate impact" compared with a typical first-year justice.

"It is difficult to imagine a clearer violation of an adviser's fiduciary duty than when the adviser charges its captive fund more than others for similar (or lesser) services,"

"Executive compensation in large publicly traded firms often is excessive because of the feeble incentives of boards of directors to police compensation."

"I don't think that the court will use this case as a vehicle to send a message about executive compensation. The court's a judicial branch and not a political branch," said Richard Bernstein, a partner at Wilkie Farr Gallagher who worked with the Chamber of Commerce on its friend-of-the-court brief.

My response: Why Not? Give em a big wedgie!

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