Yesterday, the Supreme Court vacated the judgment of the Seventh Circuit in the much watched case of Jones v. Harris Associates L.P. The Court held that in order to demonstrate that a mutual fund investment advisor breached the “fiduciary duty with respect to the receipt of compensation for services,” a mutual fund shareholder must show that the advisor charged “a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining.” The holding essentially confirms a standard (known as the Gartenberg standard) that had been applied in most lower courts over the past 30 years, closing the door on the ability of judges to impose what they deem to be reasonable fees and instead letting the marketplace decide.
Of particular note in the case was that in the Seventh Circuit proceedings, Judge Posner’s dissent questioned the ability of the market to police excessive compensation more broadly, noting that “executive compensation in large publicly traded firms often is excessive because of the feeble incentives of boards of directors to police compensation” and that “competition in product and capital markets can’t be counted on to solve the problem.” The Supreme Court did not pick up on any of these broader topics, noting “[t]he debate between the Seventh Circuit panel and the dissent from the denial of rehearing regarding today’s mutual fund market is a matter for Congress, not the courts.”
The State of Shareholder Engagement Today
I think that one of the key observations about this year’s proxy season is that we are seeing unprecedented levels of issuer engagement with shareholders on issues, including on corporate governance and executive compensation concerns. Movements such as “say on pay” are all about driving more engagement, although it is perhaps too soon to tell whether increased engagement is really making a difference.
The IRRC Institute and ISS recently announced that they are jointly conducting a study of the state of issuer-investor engagement in the United States. They just started the process of seeking input from issuers and investors on their engagement activities, utilizing a short web-based survey that investigates the issues, goals and outcomes of engagement. IRRCI/ISS hope that “[r]esponses will provide important information on the level and focus of engagement activity, as well as insight into the expectations and experiences of both issuers and investors. The goal of the study is to illuminate how the engagement process can become more productive and successful for both issuers and investors.”
How to Prepare for ISS’ New GRId
In this podcast, Ning Chiu of Davis Polk discusses how to prepare for RiskMetrics Group’s new Governance Risk Indicators (“GRId”), including:
– What is ISS’ new governance rating service?
– How does it differ from CGQ?
– What governance areas do you recommend that companies focus on most going forward?
– Dave Lynn