Resisting Corporate Corruption, 3rd Edition

Case 1Morgan Stanley Seeks a Sustainable Business Model after the Financial Crisis

“In retrospect, many firms were too highly leveraged, took on too much risk and did not have sufficient resources to manage those risks … we have made a number of changes to our compensation practices … to ensure that employee compensation is linked even more closely to performance and does not encourage unnecessary and excessive risk-taking …”¹

Testimony of John J. Mack before Financial Crisis Inquiry Commission

JOHN J. MACK, CHAIRMAN AND CEO OF MORGAN STANLEY & CO. (MS), let his cell phone go to voice mail. Undoubtedly it was another reporter seeking comments on second quarter 2009 earnings. They would get no comments, certainly nothing they could print. Morgan Stanley had just reported a loss. That made three consecutive quarterly losses for the firm. Mack had resolved to let CFO Colm Kelleher handle the press this time. He had bigger fish to fry regarding the direction of the firm. In particular, Mack had to decide whether the business model he had sponsored was to continue or be changed. If it was to continue, could it be reconciled with the new compensation system Mack put in place to reinforce the firm’s ethical culture? If it was to be changed, could the new business model generate anything like the returns MS had earned prior to the Financial Crisis?

Truth be told, John Mack was shaken. He had taken over as MS’ CEO in 2005. The takeover had been messy, a veritable Wall Street coup d’état. ...