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Muted Protest at Morgan StanleySubmitted by: L. Reed Walton, Publications

Despite a ?vote no? campaign supported by labor investors and public pension funds, all the directors at Morgan Stanley were re-elected with at least 90 percent shareholder support, the Wall Street firm announced after its April 8 annual meeting.

The shareholder campaign was led by CtW Investment Group, the investment arm of the Change to Win labor federation. CtW urged investors to vote against directors C. Robert Kidder, Sir Howard J. Davies--former head of Britain?s Financial Services Authority--and Chairman/CEO John J. Mack. Davies received a 9.5 percent withhold vote, while Kidder had 9 percent opposition. Mack received a 5.5 percent negative vote, according to a company press release.

The labor federation claimed that Kidder and Davies failed to stop Mack from implementing a business strategy focused on risk-taking and greater investment in residential mortgages and collateralized debt obligations (CDOs). Morgan Stanley announced $3.7 billion in losses for the fourth quarter of 2007, its first quarterly loss as a publicly traded company.

?We knew going into the meeting it wasn?t going to be a high vote, based on talking to shareholders over the past few weeks,? CtW Director of Value Strategies Michael Garland told Risk & Governance Weekly.

At the meeting, Mack told shareholders he appreciated their ?strong support? in electing the board members by ?substantial margins.? Morgan Stanley was the first of six U.S. financial firms with significant credit-related losses to hold its annual meeting this year. The results suggest that most Morgan Stanley investors were either satisfied by the steps that the company has taken in response to the credit crisis or didn?t think that board members should be blamed for the losses.

CtW also pushed Mack to step down as chairman of the board, claiming the combined positions created a captive board that was reluctant to challenge Mack?s decisions. Though many pension funds agree that Mack should step down as chairman, many institutional investors support Mack as CEO, Garland said.

Roy Bostock, a member of the board?s nominating committee, received the lowest support of all directors on the ballot: 90.1 percent, the company reported. Bostock?s re-election was opposed by the California Public Employees? Retirement System (CalPERS) and the California State Teachers? Retirement System (CalSTRS).

CalPERS spokesman Clark McKinley told R&GW that the pension system elected to vote against Bostock because he was classified as non-independent under the pension fund?s governance guidelines, which mandate independent directors on key committees such as nominating or governance committees. Bostock?s son-in-law is managing director of Morgan Stanley?s asset management division.

In addition to Bostock, CalSTRS voted against eight of the 11 directors, including Mack and Kidder, who chairs the compensation committee, Bloomberg News reported. The pension fund cited pay concerns as the reason for withholding support from the eight directors. Regulatory filings indicate that Mack received $1.6 million in salary and pension benefits, plus $8.43 million in vesting stock options last year, though news reports indicated he declined a performance bonus because of the company?s ?embarrassing? fourth-quarter loss. Kidder?s fellow compensation committee members, Donald Nicolaisen and Erskine Bowles, received 93.5 and 96.9 percent support, respectively.

Overall, the level of dissent at Morgan Stanley was less than at last year?s meeting. In 2007, director Roy Bostock received almost 12 percent opposition due to independence issues, and director Laura Tyson had a 10.9 percent negative vote. Former director Klaus Zumwinkel had 25 percent opposition in 2007 and 12.5 percent in 2006 over concerns about the number of boards he sat on. In 2006, shareholders also withheld 3.5 percent support from Kidder and 2.8 percent from Mack amid criticism of the CEO?s compensation.

At this year?s meeting, investors gave 36.8 percent support to a shareholder proposal asking for an annual advisory vote on executive pay, the company?s press release indicated. The proposal, submitted by the American Federation of State, County, and Municipal Employees (AFSCME), was backed by CtW, CalPERS, CalSTRS, and the State Universities Retirement System of Illinois, among others. Richard Ferlauto, director of pension and benefit policy for AFSCME, said the measure likely didn?t pass because Morgan Stanley was able to explain its pay practices to shareholders, and has had good financial performance on average.

Full post as published by Institutional Shareholder Services -- Corporate Governance Blog on April 14, 2008 (boomark / email).