Will the Supreme Court Weigh In on the “Great Recession”?

Posted on August 21, 2009

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According to an article earlier this week by Adam Liptak in The New York Times, the Supreme Court has decided to hear a case this fall that “may turn out to be the court’s first significant statement on the corporate culture that helped lead to the Great Recession.”

Will the Supreme Court Weigh In on the Great Recession?According to Liptak:

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.

The case has the potential to have a significant impact in two ways:

  • Executive compensation – Those who want the government to stay out of the area of executive compensation argue that market forces, as well as corporate boards, effectively serve to regulate executive compensation. That view may be losing ground, however, as public opinion grows frustrated with stories of the (former) heads of failed enterprises walking away with millions of dollars in pay while taxpayers are left to foot the bill for bailouts.
  • Mutual fund governance – The case could force significant changes in the mutual fund industry which would impact workplace retirement plan sponsors and participants. Opponents of stricter government regulation of fees paid to mutual fund advisers claim that investors are free to take their money elsewhere. But, as the article notes, there is growing evidence from the field of behavioral economics that mutual fund investors don’t always behave in ways that lead to low fees. In essence, the plaintiffs are arguing that mutual fund advisers are taking advantage of small investors while providing much better pricing to pension funds and other institutional investors.

Of course, it’s also possible that the Supreme Court will punt and decide the case narrowly, such that the court avoids making a significant statement in either area. The outcome may depend, in part, on the state of the economy in the coming months and the resulting mood in the U.S. If there’s a strong a feeling that “business as usual” doesn’t create a level playing field, there may be calls for increased government regulation and involvement.