Morgan Stanley should keep two at the top

July 11, 2011

By Antony Currie
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

NEW YORK — Morgan Stanley should keep two at the top. John Mack is due to retire as chairman at the end of the year and the board may well grant the title to James Gorman, adding to his duties as chief executive. Combining the two roles is far more common in the United States than in Europe. But the directors should resist the temptation.

Gorman’s rebuilding of the firm is taking time. His progress has been slowed by the ongoing uncertainty over regulatory reform and the economy’s affect on earnings across the financial sector. Gorman isn’t without success. He notably saved $800 million of annual costs by persuading Mitsubishi UFJ 8306.T to convert its preferred shares into common.

But Gorman is only edging slowly toward his two biggest goals of repairing and expanding fixed-income trading and the Morgan Stanley Smith Barney retail brokerage. Not only is it too early in the bank’s progress to consider granting him another title, but making him chairman could prove a distraction from his day-to-day responsibilities.

A CEO tending to those can leave the chairman to focus on monitoring top executives and shareholder interests. Chief executives should do the same, but there’s an inherent conflict of interest to juggling the concerns of investors with one’s own ambitions. Appointing an independent lead director only partly offsets that.

Consider the fate of rivals like Bank of America, Lehman Brothers and Merrill Lynch, where having the same man serve as chairman and chief executive impeded the ability of the board and other executives to challenge the concentrated power. Arguably, that also affected Morgan Stanley, which lost some $10 billion on a subprime mortgage trade, encouraged by the desire of Mack — who held both jobs at the time — to ramp up risk.

Of course, splitting the roles is no panacea: it didn’t prevent some European banks from getting into trouble. And others with one man in both positions came through the crisis less financially scarred than others, such as JPMorgan and Goldman Sachs. But BofA and Citigroup have wisely embraced the structure. If the right people are put in the two jobs, it creates a more effective balance of power — and better corporate governance.

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