This is a response by John Mack for a shareholder query in 2007 AGM“Do we take a lot of risk? Yes,” he said forcefully, in response to a shareholder who questioned him about Morgan Stanley’s reliance on risky trades and increased debt to finance these positions. “I think this firm has the capacity to take a lot more risk than it has in the past.”
At 2008 AGM, Mr. Mack is unlikely to be so bold.
The CtW Investment Group, a shareholder activist group representing union-sponsored pension funds with about $1.4 trillion, is weighing a campaign aimed at persuading Morgan Stanley investors to withhold their vote for Mr. Mack as chairman. The hope is to persuade Morgan Stanley’s board to appoint an independent chairman.
The proposal does not suggest that Mr. Mack leave the board or resign from his job as chief executive.
In a statement, a spokesman for the board, Mark Lake, said, “We are comfortable with John Mack’s role as both C.E.O. and chairman of Morgan Stanley and also have a strong independent lead director.”
Mr. Mack, still enjoys plenty of support from directors and shareholders, and they are expected to preserve his dual status for now.
Nevertheless, the move strikes a wounding blow to Mr. Mack. And by forcing investors to contemplate the risk measures, it raises awkward questions for the Morgan Stanley board about Mr. Mack’s decision-making, strategy and succession plans.
Chief executives of Wall Street firms that have taken major write-downs have stepped down, but Mr. Mack is the only one who remains in his post.
CtW is also weighing a call to withhold votes for C. Robert Kidder, Morgan Stanley’s lead director, and Howard J. Davies, the former head of the Financial Services Authority, Britain’s top financial regulator.
Both directors were on Morgan Stanley’s audit committee in 2005 when Mr. Mack took over as chairman and chief executive and allowed the top risk officer to report to Ms. Cruz instead of Mr. Mack.
The group has also sent letters to the boards of Merrill Lynch, Citigroup, Bank of America, Washington Mutual and Wachovia questioning the conduct of the audit committees of those financial institutions. Merrill Lynch, Bank of America and Wachovia all have chairmen that also hold the chief executive title.
To date, Mr. Mack has convinced investors as well as his board that the firm’s write-down was the unfortunate but isolated result of a group of traders who made a disastrous bet on the subprime market.
By doing so, Morgan Stanley has argued, they saddled the firm with an illiquid and ultimately worthless position in collateralized debt obligations.
Mr. Mack took full responsibility and asked his board not to pay him a bonus last year. He has also appointed a senior executive, Kenneth M. deRegt, to oversee risk and report to him.
Mr. Mack’s critics contend that it is not so much the faulty subprime trade that should be held against him as it has been a combination of other factors. Those include not only failed deals for Saxon Capital, a mortgage originator, and Goldfish, a credit card company, but more broadly, what they see as his failure to manage the firm’s capital position effectively.
Increased borrowing and an accumulation of risky assets put excessive strain on the firm’s equity position, they note, forcing Morgan Stanley to raise expensive funds from China when the trading losses arose, even though the firm made $2.3 billion in profit last year.
Mr. Patterson representing less then 1% said, “There was a failure of Mr. Mack’s leadership when the board restructured the risk reporting structure,” he said. “Shareholders should review this and they will review this.”
How investors will react remains unclear. While many top Morgan Stanley investors said privately how unhappy they were with Mr. Mack’s performance last year, they have not pushed Morgan Stanley to replace him. Their refrain has been a consistent one: who better is there to succeed him?
In fact, people who have spoken with board members about Mr. Mack say that directors share a similar view. While they too are unhappy with the losses, they see Mr. Mack, who is 63 and has spent 30 years at Morgan Stanley, as the person best placed to lead the firm to recovery.
Some disgruntled investors have begun to discuss names of outside executives who might be not only viable successors to Mr. Mack, but also would lend a degree of independent stature to a board that many investors say has become too beholden to its chairman and chief executive.
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