Morgan Stanley shareholders refuse to give Mack the knife

Morgan Stanley shareholders voted against a proposal that would have required the chairman be an independent director who hasn’t previously served as an executive officer of the company.

Shareholders rejected the plan today at the company’s annual meeting in Purchase, New York, where they approved all of management’s proposals and voted against all of the measures proposed by shareholders, Chief Legal Officer Gary Lynch said.

Morgan Stanley’s board of directors unanimously opposed the idea, saying in the proxy that investors are best served by “maintaining the flexibility to have any individual serve as chairman of the board.” The proposal was submitted by the Laborers National Pension Fund. Current Chairman John Mack, 65, was also chief executive officer until this year, when James Gorman, 51, took over.

In response to a shareholder at the meeting who said it appeared Mack was still running the company, Mack said he would quit if Gorman ever told him he was an obstacle.

“I made it very clear to James Gorman that at any point if I’m in his way, he needs to let me know and I’ll resign,” Mack said.

The meeting was held at the headquarters of Morgan Stanley’s wealth-management unit. Fewer than 75 outside shareholders attended the one-hour meeting, including one woman who was knitting throughout the proceedings.

Shareholders voted to re-elect board members, and approved 38 million additional shares to be used for equity-based compensation during the next year. Morgan Stanley said in the proxy that the shares are needed to address calls from regulators that a greater proportion of pay be comprised of stock.

Morgan Stanley executives have sent letters to shareholders in the past month asking them to vote in favor of the proposal on approving new shares. Two proxy advisory groups have come out in opposition and four institutional shareholders have sent in their votes against it, according to the website Proxy Democracy.

Shareholders approved 25 million shares at last year’s meeting as the firm added thousands of employees from Smith Barney, and Morgan Stanley said in a letter that it will likely be back to request more shares in 2011.

Morgan Stanley last month reported its largest quarterly profit since 2007, as it recovers from the financial crisis that included a $10 billion bailout from the government in 2008 and the bank’s first annual per-share loss in 2009. Last year, it repaid the taxpayer funds and took a controlling stake in a joint venture with Citigroup Inc.’s Smith Barney brokerage.

The firm and competitors remain embroiled in a Securities and Exchange Commission probe, started at least a year ago, that’s examining whether Wall Street misled investors when selling mortgage-linked securities.

Gorman said today in an interview after the meeting that the company hasn’t received any Wells notices or recent subpoenas from the SEC and hasn’t been contacted by the Department of Justice. Wells notices are issued by regulators to inform companies of completed investigations that may have discovered infractions.

The agency has been looking for abuse “across the spectrum,” enforcement chief Robert Khuzami said April 16, when the SEC sued Goldman Sachs Group Inc., accusing the company of fraud in the sale of a collateralized debt obligation. While federal prosecutors are scrutinizing the market, Morgan Stanley isn’t the subject of a formal criminal investigation, a person familiar with the government’s review said last week. Goldman Sachs is contesting the lawsuit.

Morgan Stanley’s operating environment is “extremely fluid” because of regulatory reform legislation being debated in Congress and “various industrywide” regulatory probes, Gorman said. He said regulators looking into practices from several years ago is a “necessary consequence” of the financial crisis and is “appropriate.”

The financial industry needs to “acknowledge the mistakes that were made in recent years” and work to regain trust of the public, Gorman said.

“We need to understand why people are so angry at Wall Street,” he said.

Related Topics: Morgan Stanley & Co.