Morgan Stanley misses a trick on Mack succession

September 15, 2011

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

Morgan Stanley’s board must have a strong sense of irony. It chose the third anniversary of the collapse of Lehman Brothers to reinstate one of Wall Street’s uglier traditions: combining the roles of chairman and chief executive. James Gorman will assume John Mack’s duties when he steps down as chairman at year’s end. That’s disappointing.

It’s too early to reward Gorman with another title. He’s making progress in rebuilding the bank. But it’s far from clear whether he will meet his two major goals by his self-imposed deadline next year. He must safely bulk up Morgan Stanley’s fixed-income trading division and improve performance at the brokerage unit.

Shareholders remain skeptical. Before Thursday’s announcement, Morgan Stanley’s stock had fallen by half from its high earlier in the year to trade at around half of book value. Of its major rivals, only Bank of America has suffered worse.

Splitting the roles isn’t just box-ticking corporate governance. Chief executives ought to be focused on the day-to-day job of running their companies. As Morgan Stanley’s performance attests, Gorman already has his hands full. A separate chairman can run interference with shareholders, regulators and policymakers.

Granted, occupying both roles gives a boss more power. That may aid Gorman in some important tasks, such as marshaling squabbling lieutenants. This may partly explain why the stock surged 7 percent on the news — along with the formal end of Mack’s tenure in the C-suite. After all, as chief he had the firm take on more risk, leading to a near $10 billion proprietary trading loss in the crisis. But meshing the two roles together creates inherent conflicts of interest which having a lead independent director — Robert Kidder, in Morgan Stanley’s case — can only partly offset.

Finally, it sends the wrong message to the rest of Wall Street. The financial crisis converted many bank boards to the dangers of concentrating too much power in one executive’s hands. Citigroup and Morgan Stanley withheld the chairmanship from their new chiefs. Wachovia and Washington Mutual stripped their incumbent chiefs of the title, while BofA did so at the behest of shareholders — and kept the split in place when Brian Moynihan succeeded Ken Lewis in 2009.

Morgan Stanley’s decision allows its peers to ignore some lessons of the crisis. And it bolsters the status quo at Goldman Sachs. That’s a poor way to commemorate the results of past follies.

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