| Morgan Stanley |
1585 Broadway
New York, New York 10036
February 24, 2006
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| Proxy Statement |
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We are sending you this proxy statement in connection with the solicitation of proxies by our Board of Directors for the 2006 annual meeting of shareholders. We are mailing this proxy statement and the accompanying form of proxy to shareholders on or about February 27, 2006. In this proxy statement, we refer to Morgan Stanley as the “Company,” “we” or “us” and the Board of Directors as the “Board”. When we refer to Morgan Stanley’s fiscal year, we mean the twelve-month period ending November 30 of the stated year (for example, fiscal 2005 is December 1, 2004 through November 30, 2005).
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| Annual meeting information |
Date and location. We will hold the annual meeting on Tuesday, April 4, 2006 at 9:00 a.m., local time, at our offices at 2000 Westchester Avenue, Purchase, New York.
Admission. Only record or beneficial owners of Morgan Stanley’s common stock or their proxies may attend the annual meeting in person. When you arrive at the annual meeting, please present photo identification, such as a driver’s license. Beneficial owners must also provide evidence of stock holdings, such as a recent brokerage account or bank statement.
Electronic access. You may listen to the meeting at www.morganstanley.com. Please go to our website early to register and download any audio software.
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| Voting information |
Record date. The record date for the annual meeting is February 3, 2006. You may vote all shares of Morgan Stanley’s common stock that you owned as of the close of business on that date. Each share of common stock entitles you to one vote on each matter voted on at the annual meeting. On the record date, 1,073,785,882 shares of common stock were outstanding. We need a majority of the shares of common stock outstanding on the record date present, in person or by proxy, to hold the annual meeting.
Confidential voting. Our Bylaws provide that your vote is confidential and will not be disclosed to any officer, director or employee, except in certain limited circumstances such as when you request or consent to disclosure. Voting of the shares held in the Morgan Stanley 401(k) Plan (401(k) Plan) and the Employee Stock Ownership Plan (ESOP) also is confidential.
Submitting voting instructions for shares held through a broker. If you hold shares through a broker, follow the voting instructions you receive from your broker. If you want to vote in person, you must obtain a legal proxy from your broker and bring it to the meeting. If you do not submit voting instructions to your broker, your broker may still be permitted to vote your shares. New York Stock Exchange (NYSE) member brokers may vote your shares under the following circumstances.
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Discretionary items. The election of directors, the ratification of appointment of Morgan Stanley’s independent auditors and each of the Company’s proposals to amend the Company’s Certificate of Incorporation to (1) accelerate the declassification of the Board, (2) eliminate the provision requiring plurality voting for directors and (3) eliminate certain supermajority vote requirements are “discretionary” items. Member brokers that do not receive instructions from beneficial owners may vote on these proposals in the following manner: (1) Morgan Stanley’s wholly-owned subsidiaries, Morgan Stanley & Co. Incorporated (MS&Co.) and Morgan Stanley DW Inc. (MSDWI), may vote your shares only in the same proportion as the votes cast by all record holders on the proposal; and (2) all other member brokers may vote your shares in their discretion.
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Non-discretionary items. The shareholder proposals are “non-discretionary” items and, absent specific voting instructions from beneficial owners, may not be voted on by NYSE member brokers, including MS&Co. and MSDWI.
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If you do not submit voting instructions and your broker does not have discretion to vote your shares on a matter, your shares will not be counted in determining the outcome of the vote on that matter at the annual meeting.
Submitting voting instructions for shares held in your name. If you hold shares as a record holder, you may vote by submitting a proxy for your shares by mail, telephone or internet as described on the proxy card. If you submit your proxy via the internet, you may incur costs such as cable, telephone and internet access charges. Submitting your proxy will not limit your right to vote in person at the annual meeting. A properly completed and submitted proxy will be voted in accordance with your instructions, unless you subsequently revoke your instructions. If you submit a signed proxy card without indicating your vote, the person voting the proxy will vote your shares according to the Board’s recommendations.
Submitting voting instructions for shares held in employee plans. If you hold shares in, or have been awarded stock units under, certain employee plans, you will receive directions on how to submit your voting instructions. Shares held in the following employee plans also are subject to the following rules.
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401(k) Plan, Employee Stock Purchase Plan (ESPP) and ESOP. Mellon Bank, N. A. (“Mellon”), the 401(k) Plan, ESPP and ESOP trustee or custodian, as applicable, must receive your voting instructions for the common stock held on your behalf in these plans on or before April 2, 2006. If Mellon does not receive your voting instructions by that date, it will vote your shares (in the case of the ESOP, together with forfeited shares in the ESOP) in each applicable plan, in the same proportion as the voting instructions that it receives from other plan participants in the applicable plan. On February 3, 2006, there were 129,011 shares in the 401(k) Plan accounts, 6,098,650 shares in the ESPP and 54,164,749 shares in the ESOP.
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Other equity-based plans. State Street Bank and Trust Company acts as trustee for a trust (Trust) that holds shares of common stock underlying stock units awarded to employees under several of Morgan Stanley’s equity-based plans. Employees allocated shares held in the Trust must submit their voting instructions for receipt by the trustee on or before April 2, 2006. If the trustee does not receive your instructions by that date, it will vote your shares, together with shares held in the Trust that are unallocated or held on behalf of former Morgan Stanley employees and employees in certain jurisdictions outside the United States, in the same proportion as the voting instructions that it receives for shares held in the Trust in connection with such plans. On February 3, 2006, 89,169,833 shares were held in the Trust in connection with such plans.
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Revoking your proxy. You can revoke your proxy at any time before your shares are voted by (1) delivering a written revocation notice prior to the annual meeting to Thomas R. Nides, Secretary, Morgan Stanley, 1585 Broadway, New York, New York 10036; (2) submitting a later proxy; or (3) voting in person at the annual meeting. Attending the annual meeting does not revoke your proxy unless you vote in person at the meeting.
Votes required to elect directors. Directors are elected by a plurality of the votes cast. In December 2005, the Board announced a new Corporate Governance Policy regarding director elections. The policy provides that in any uncontested election, any nominee for director who receives a greater number of votes “withheld” for his or her election than votes “for” such election (a “majority withheld vote”) will promptly tender his or her resignation as a director. The Nominating and Governance Committee, without participation by any director so tendering his or her resignation, will consider the resignation offer and recommend to the Board whether to accept it. The Board, without participation by any director so tendering his or her resignation, will act on the Committee’s recommendation within 90 days following certification by the Inspector of Election of the shareholder vote. The Company will promptly issue a press release disclosing the Board’s decision, and, if the Board rejects the resignation offer, the Board’s reasons for that decision. The Company will also promptly disclose this information in a Securities and Exchange Commission (SEC) filing. If each member of the Nominating and |
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Governance Committee receives a majority withheld vote at the same election, then the independent directors who did not receive a majority withheld vote will act as a committee to consider the resignation offers and recommend to the Board whether to accept them.
Votes required to adopt other proposals. The ratification of Deloitte & Touche’s appointment and the approval of the shareholder proposals each requires the affirmative vote of a majority of the shares of common stock represented at the annual meeting and entitled to vote thereon. The approval of each of the Company’s proposals to amend the Company’s Certificate of Incorporation to institute the annual election of directors, to eliminate the provision requiring plurality voting for directors and to eliminate certain supermajority vote requirements requires the affirmative vote of eighty percent (80%) of the outstanding shares of common stock entitled to vote at the annual meeting.
Withholding your vote or “abstaining.” You can withhold your vote for any nominee in the election of directors. Withheld votes will be excluded entirely from the vote and will have no effect on the outcome (other than potentially triggering the director resignation requirement set forth in our new Corporate Governance Policy regarding director elections described above). On the other proposals, you can “abstain.” If you “abstain,” your shares will be counted as present at the annual meeting for purposes of that proposal and your abstention will have the effect of a vote against the proposal.
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| Information regarding election of directors |
Our Board currently has nine (9) directors, divided into three classes (a “classified” board). Our Board is also nominating two additional individuals, Donald T. Nicolaisen and Hutham S. Olayan, for election as directors at this annual meeting. With the election of all current directors and nominees, our Board would have 11 directors (9 independent).
The shareholders approved an amendment to our Certificate of Incorporation at the 2005 annual meeting of shareholders. The amendment provided that, at each annual meeting commencing with the 2006 annual meeting, directors elected at that and each subsequent meeting would serve for a term of one year rather than three. Accordingly, the classified board structure would be phased out and, commencing with the 2008 annual meeting, all directors would be elected annually.
During fiscal 2005, the Board announced its intention that all directors stand for election annually, commencing with the 2006 annual meeting of shareholders. As set forth in Item 3, the Board recommends that shareholders approve an amendment to our Certificate of Incorporation to provide that, at each annual meeting commencing with the 2006 annual meeting, all directors be elected to hold office for a term expiring at the next annual meeting, with each director to hold office until his or her successor shall have been duly elected and qualified. If our shareholders approve this amendment, it would remove the classified Board structure for this year’s director election. We discuss the proposed amendment to the Certificate of Incorporation more fully under Item 3.
Accordingly, you will be voting for two slates of nominees—one slate in Item 1A and one slate in Item 1B. Each director holds office until his or her successor has been duly elected and qualified or the director’s earlier resignation, death or removal. The nominees, other than Mr. Nicolaisen and Ms. Olayan, are all current directors of Morgan Stanley, and each nominee has indicated that he or she will serve if elected. We do not anticipate that any nominee will be unable or unwilling to stand for election, but if that happens, your proxy will be voted for another person nominated by the Board. |
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 Item 1A—Election of directors |
Under Item 1A, you are voting for director nominees listed below as “Item 1A nominees” for a one-year term expiring at the 2007 annual meeting, with each director to hold office until his or her successor shall have been duly elected and qualified. This election under Item 1A is not conditioned on approval of the Company’s proposal to amend our Certificate of Incorporation to accelerate declassifying our Board as set forth in Item 3.
Item 1A Nominees—Nominees for election for a one-year term ending in 2007
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Roy J. Bostock (65). Chairman of The Partnership for a Drug-Free America (since 2002). Chairman of the Committee for Economic Development (2002 to 2005). Chairman of B|Com3 Group, Inc., an advertising and marketing services firm that is now part of the Publicis Groupe S.A. (2000 to 2001). Chairman and Chief Executive Officer, D’Arcy, Masius Benton & Bowles (1990 to 2000).
Director since: 2005
Other directorships: Northwest Airlines Corporation and Yahoo! Inc. |
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Erskine B. Bowles (60). President of the University of North Carolina (since January 2006). Senior advisor to Carousel Capital LLC, a merchant bank (since 2001). General Partner at the private investment firm of Forstmann Little & Company (1999-2001).
Director since: 2005
Other directorships: General Motors Corporation, Cousins Properties Incorporated |
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C. Robert Kidder (61). Principal, Stonehenge Partners, Inc., a private investment firm (since June 2004). President (November 2001 to March 2003) of Borden Capital, Inc., a company that provided financial and strategic advice to the Borden family of companies. Chairman of the Board (January 1995 to August 2004) and Chief Executive Officer (January 1995 to March 2002) of Borden Chemical, Inc. (formerly Borden, Inc.), a forest products and industrial chemicals company.
Director since: 1993
Other directorships: Schering-Plough Corporation
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John J. Mack (61). Chairman of the Board of Directors and Chief Executive Officer (since June 2005). Chairman of Pequot Capital Management (June 2005). Co-Chief Executive Officer of Credit Suisse Group (January 2003 to June 2004). President, Chief Executive Officer and Director of Credit Suisse First Boston (July 2001 to June 2004). President, Chief Operating Officer and Director of Morgan Stanley (May 1997 to March 2001).
Director since: 2005 |
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Donald T. Nicolaisen (61). Chief Accountant, Securities and Exchange Commission
(September 2003 to November 2005). Partner (1978 to September 2003) of PricewaterhouseCoopers,
an accounting firm.
Other directorships: Verizon Communications Inc. |
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Hutham S. Olayan (52). President, Chief Executive Officer and Director of Olayan America Corporation, the Americas-based arm of The Olayan Group (since 1985). Director of The Olayan Group, a private, multinational enterprise with diversified businesses and investments in the Middle East and globally (since 1981). |
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O. Griffith Sexton (61). Advisory director of Morgan Stanley (since 1995). Adjunct professor of finance at Columbia Business School (since 1995) and visiting lecturer at Princeton University (since 2000).
Director since: 2005
Other directorships: Investor AB |
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Our Board recommends a vote “FOR” the election of all nominees under Item 1A.
Proxies solicited by our Board will be voted “FOR” these nominees unless otherwise instructed.
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| Item 1B—Election of additional directors |
Under Item 1B, you are voting for the election of all director nominees listed below as “Item 1B nominees” for a term expiring at the 2007 annual meeting. The election of Item 1B nominees will be effective only if shareholders approve the amendment to the Certificate of Incorporation to accelerate declassification of the Board under Item 3. If Item 3 is approved, the Company intends to file the Certificate of Amendment to the Certificate of Incorporation with the Delaware Secretary of State promptly after the results of the shareholder vote are certified, and the term of office of the Item 1B nominees would begin at that time. If the proposal to amend our Certificate of Incorporation to accelerate declassifying our Board, as set forth in Item 3, is not approved by the requisite shareholder vote, then the election under Item 1B will not be effective and the terms of office of the directors listed below as the Item 1B nominees will not be shortened from the currently scheduled expiration of the terms of the directors in these two Board classes at the 2007 and 2008 annual meetings, respectively.
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Item 1B Nominees—Directors continuing in office with a term expiring in 2007 (unless shareholders approve the amendment to
our Certificate of Incorporation to accelerate declassifying our Board proposed in Item 3)
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Howard J. Davies (55). The Director, London School of Economics and Political Science (since September 2003). Chairman of the UK Financial Services Authority (August 1997 to September 2003). Deputy Governor, the Bank of England (September 1995 to August 1997).
Director since: 2004 |
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Klaus Zumwinkel (61). Chairman of the Board of Management, Deutsche Post AG, a global corporation comprised of four business divisions, including mail, express (including DHL Worldwide), logistics and financial services (since 1990).
Director since: 2004
Other directorships: Deutsche Lufthansa AG (Supervisory Board), Deutsche Telekom AG (Chairman, Supervisory Board), Karstadt Quelle AG (Supervisory Board) and Deutsche Postbank AG (Chairman, Supervisory Board). |
Item 1B Nominees—Directors continuing in office with a term expiring in 2008 (unless shareholders approve the amendment to our Certificate of Incorporation to accelerate declassifying our Board proposed in Item 3)
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Charles H. Noski (53). Corporate Vice President and Chief Financial Officer (December 2003 to March 2005) and Director (November 2002 to May 2005) of Northrop Grumman Corporation. Senior advisor to The Blackstone Group (March 2003 to November 2003). Vice Chairman of the Board (July 2002 to November 2002), Vice Chairman of the Board and Chief Financial Officer (February 2002 to July 2002) and Senior Executive Vice President and Chief Financial Officer (December 1999 to February 2002) of AT&T Corp. President, Chief Operating Officer and Director, Hughes Electronics Corporation (October 1997 to December 1999).
Director since: 2005
Other directorships: Microsoft Corporation and Air Products and Chemicals, Inc.
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Laura D. Tyson (57). Dean of the London Business School (since January 2002). Dean (July 1998 to December 2001) and Class of 1939 Chair in Economics and Business Administration (January 1997 to July 1998) at the Walter A. Haas School of Business at the University of California, Berkeley. Chair of the President’s National Economic Council (February 1995 to December 1996).
Director since: 1997
Other directorships: Eastman Kodak Company and AT&T Inc. |
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Our Board recommends a vote “FOR” the election of all nominees under Item 1B.
Proxies solicited by our Board will be voted “FOR” these nominees unless otherwise instructed.
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New directors and nominees. Messrs. Bostock, Bowles, Mack, Noski and Sexton joined the Board since the 2005 annual meeting of shareholders, and the Board recommends that shareholders elect Mr. Nicolaisen and Ms. Olayan at this annual meeting. The Nominating and Governance Committee has, as one of its responsibilities, the recommendation of director candidates to the full Board after receiving input from all directors, including the Chairman. During fiscal 2005, the Board retained a third party search firm, Spencer Stuart, to assist the Committee in identifying potential director candidates. The selection of directors is a collaborative process. The Committee members, other Board members, including the Chairman, executive officers and Spencer Stuart discuss potential candidates during the search process.
An executive officer of the Company recommended Mr. Nicolaisen and Mr. Noski, and several former senior employees of the Company recommended Mr. Sexton. Mr. Mack passed these recommendations on to Spencer Stuart and the Committee for further evaluation. Mr. Mack and Dr. Tyson jointly provided Mr. Bowles’ name to Spencer Stuart and the Committee for further evaluation. In addition, Mr. Mack suggested Mr. Bostock and Ms. Olayan to Spencer Stuart and the Committee for further evaluation.
The Committee members and other members of our Board met or spoke with each of the directors and nominees listed above to assess them as director candidates. The Committee unanimously recommended to the full Board that Messrs. Bostock, Bowles, Noski and Sexton be elected as directors and that Mr. Nicolaisen and Ms. Olayan be nominated as directors. The Board followed the Committee’s recommendations. It elected Messrs. Bostock, Noski and Sexton, effective September 15, 2005, and Mr. Bowles, effective December 2, 2005, and nominated Mr. Nicolaisen and Ms. Olayan for election at the 2006 annual meeting.
Upon Philip J. Purcell’s announcement in June 2005 of his intention to retire as Chairman and CEO, the Board retained Spencer Stuart and initiated a search for a new Chairman and CEO. Spencer Stuart and the Board developed a list of candidates for consideration. Spencer Stuart and several directors identified Mr. Mack as a CEO candidate. The Board elected Mr. Mack to serve as Chairman and CEO effective June 30, 2005.
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Board meetings and committees. Our Board met 21 times during fiscal 2005. Each current director except Dr. Zumwinkel attended at least 75% of the total number of meetings of the Board and committees on which the director served that were held while the director was a member. Dr. Zumwinkel attended over 20 meetings of Morgan Stanley’s Board and Audit Committee during fiscal 2005 and would have attended 75% of such meetings but he did not have actual notice of one meeting called on extremely short notice during the Spring of 2005. Dr. Zumwinkel did not receive the notice in time to participate in the meeting. In addition, Dr. Zumwinkel would have attended over 75% of such meetings but negotiation of a major acquisition by his employer precluded his attendance at three additional meetings over a two-day period. The Board’s standing committees include the following:
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Committee |
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Current Members |
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Primary Responsibilities |
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Audit(1) |
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C. Robert Kidder (Chair) Howard J. Davies
Charles H. Noski
Klaus Zumwinkel |
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Oversees the integrity of our Company’s consolidated financial statements, system of internal controls, risk management and compliance with legal and regulatory requirements. |
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Selects, determines the compensation of, evaluates and, when appropriate, replaces the independent auditor, and pre-approves audit and permitted non-audit services. |
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Oversees the qualifications and independence of the independent auditor and performance of our Company’s internal and independent auditors. |
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Compensation, Management Development and Succession(2) |
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Erskine B. Bowles
Howard J. Davies
C. Robert Kidder |
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Annually reviews and approves the corporate goals and objectives relevant to the compensation of the Chairman and CEO and evaluates his performance in light of these goals and objectives. |
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Determines the compensation of our executive officers and other appropriate officers |
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Administers our incentive and equity-based compensation plans. |
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Oversees plans for management development and succession. |
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Nominating and Governance(3) |
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Laura D. Tyson (Chair)
Roy J. Bostock |
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Identifies and recommends candidates for election to the Board. |
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Establishes procedures for its oversight of the evaluation of our Board and management. |
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Recommends director compensation and benefits. |
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Reviews annually our corporate governance policies. |
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Assists in monitoring our Company’s compliance with legal and regulatory requirements. |
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(1)Mr. Noski joined the Audit Committee in September 2005. Mr. John W. Madigan served on the Committee during fiscal 2005 and resigned from the Board in December 2005. Effective March 10, 2006, Mr. Noski will become Chair of the Committee, and Dr. Zumwinkel will conclude his service on the Committee.
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(2) Mr. Kidder joined the Compensation, Management Development and Succession Committee in September 2005, and Mr. Bowles joined in January 2006. Mr. Charles F. Knight, the former Committee Chair, and Mr. John E. Jacob served on the Committee during fiscal 2005 and each resigned from the Board in September 2005. Mr. Miles L. Marsh served on the Committee during fiscal 2005, was Chair subsequent to Mr. Knight and resigned from the Board in December 2005. The Committee currently does not have a Chair. Effective March 10, 2006, Mr. Kidder will become Committee Chair.
(3) Mr. Bostock joined the Nominating and Governance Committee in September 2005. Mr. Michael A. Miles, the former Committee Chair, and Mr. Jacob served on the Committee during fiscal 2005 and each resigned from the Board in September 2005. Dr. Tyson, a Committee member during fiscal 2005, became Chair subsequent to Mr. Miles. Mr. Marsh, who served on the Committee during fiscal 2005, resigned from the Board in December 2005. Effective March 10, 2006, Dr. Zumwinkel will join the Committee.
Our Board has adopted a written charter for each of the Audit Committee, Compensation, Management Development and Succession Committee and Nominating and Governance Committee setting forth the roles and responsibilities of each committee. The charters are available at our corporate governance website at www.morganstanley.com. The Board has determined that Messrs. Bostock, Bowles, Davies, Kidder, Nicolaisen, Noski, Ms. Olayan and Drs. Tyson and Zumwinkel are independent in accordance with the director independence standards established under our Corporate Governance Policies (attached as Annex A). Seven of nine of our current directors are independent. Upon the election of Mr. Nicolaisen, Ms. Olayan and the current directors, nine of eleven directors would be independent. All members of the Audit, Compensation, Management Development and Succession and Nominating and Governance Committees satisfy the standards of independence applicable to members of such committees. In addition, the Board has determined that Messrs. Kidder and Noski are “audit committee financial experts” within the meaning of the current SEC rules.
Non-employee director meetings. Pursuant to the Company’s Corporate Governance Policies, non-employee directors may meet in non-employee director or committee sessions at the discretion of the non-employee directors. If any non-employee directors are not independent, then the independent directors shall schedule an independent director session at least once per year. The lead director leads non-employee board sessions and the independent director sessions.
Director compensation. Employee directors receive no compensation for Board service.
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Retainers. Non-employee directors receive the following annual retainers for their Board service (retainers are pro-rated when a director joins the Board at a time other than at the annual meeting of shareholders): |
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Retainer |
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Board member ................................................................................................................. |
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75,000 |
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Committee chair .............................................................................................................. |
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15,000 |
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Committee member ......................................................................................................... |
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7,500 |
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Directors’ Equity Capital Accumulation Plan (DECAP). Under DECAP, non-employee directors receive 4,000 shares of common stock upon becoming a director and annually thereafter while a director. DECAP also provides that the non-employee directors may elect to (i) receive all or a portion of their annual Board or committee Chair or member retainers, on a current or deferred basis, in cash or shares of common stock and (ii) defer receipt of common stock grants. Directors receive dividend equivalents on any deferred common stock in the form of additional deferred common stock.
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Other benefits. Morgan Stanley offers to match certain charitable gifts by non-employee directors up to $2,000 per year. During fiscal 2005, we matched $2,000 in charitable gifts on behalf of former directors John E. Jacob, Charles F. Knight and John W. Madigan. Non-employee directors do not receive Company retirement benefits for Board service. The Corporate Governance Policies provide that the Company should not enter into paid consulting agreements with non-employee directors.
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Advisory Director. Mr. Sexton has been an advisory director since 1995 and was a full-time Company employee prior to becoming an advisory director. Until his election to the Board in September 2005, the Company provided Mr. Sexton with cash payments, Company-subsidized medical and dental insurance, administrative support and office space. Mr. Sexton received approximately $79,000 in cash payments in fiscal 2005 prior to his election. Following his election, Mr. Sexton no longer receives cash payments and pays for his medical and dental insurance provided through the Company.
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Director attendance at annual meetings. The Company’s Corporate Governance Policies state that directors are expected to attend annual meetings of shareholders. All eleven directors in office attended the 2005 annual meeting.
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| Corporate governance |
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Morgan Stanley has a corporate governance webpage at the “Inside the Company” link under the “About Morgan Stanley” link at
www.morganstanley.com (www.morganstanley.com/about/inside/governance).
Our Board announced several corporate governance initiatives during 2005.
Our Board recommends, as part of implementing some of these initiatives, that you vote for Items 3, 4 and 5 to amend our Certificate of Incorporation to:
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Accelerate the declassification of the Board so that all directors are elected annually beginning at this annual meeting;
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Eliminate the provision requiring plurality voting for directors; and
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Eliminate certain supermajority vote requirements.
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Our Board also announced these initiatives during 2005:
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Eliminating a provision in the Bylaws that required a supermajority Board vote to remove the Chairman and Chief Executive Officer.
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Establishing a lead director position. Miles L. Marsh served as our first lead independent director until he resigned from the Board. Our independent directors are considering the appointment of a new lead independent director
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Broadening the Compensation, Management Development and Succession Committee’s charter to include oversight of plans for management development and succession.
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Adopting a new Corporate Governance Policy favoring the periodic rotation of Board committee assignments and chairs.
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Adopting a new Corporate Governance Policy, set forth under Votes required to elect directors beginning on page 2, regarding voting for directors. In an uncontested election, any nominee for director who receives a greater number of votes “withheld” from his or her election than votes “for” such election will promptly tender his or her resignation as a director. The Board’s Nominating and Governance Committee will consider the resignation and recommend to the Board whether to accept it. The Board will act on the Committee’s recommendation within 90 days after certification of the shareholder vote, and the Company will publicize the Board’s decision.
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Awarding a 2005 year-end bonus to the Chairman and Chief Executive Officer entirely in restricted stock units and in an amount pro-rated to reflect that he had served for five months in fiscal 2005.
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Increasing to 65% (for fiscal 2005 year-end bonuses) from 55% (for fiscal 2004 year-end bonuses) the equity component of annual bonuses awarded to all members of the Company’s Management Committee other than the Chairman and Chief Executive Officer.
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Adopting a new Corporate Governance Policy opposing the future grant of restoration option rights, which entitle option holders to receive “reload” options upon exercise of existing options.
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Adopting a new Corporate Governance Policy expressly providing that, in considering director candidates, the Board will take into account the diversity of a candidate’s perspectives, background and other demographics.
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Our Corporate Governance Policies (including our director independence standards), Code of Ethics and Business Conduct, Board Committee charters, Policy regarding Communication by Shareholders and Other Interested Parties with the Board of Directors, Policy regarding Director Candidates Recommended by Shareholders, Policy regarding Corporate Political Contributions, Shareholder Rights Plan Policy, Procedures for Reporting Auditing and Accounting Concerns and the Management Committee Equity Ownership Commitment are available at our corporate governance webpage at www.morganstanley.com and are available to any shareholder who requests them by writing to Morgan Stanley, Suite D, 1585 Broadway, New York, New York 10036. Our Director Independence Standards are also attached as Annex A.
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| Beneficial ownership of Company common stock |
Stock ownership of directors, director nominees and executive officers. We encourage our directors, officers and employees to own our common stock thereby aligning their interests with your interests as shareholders. The following table sets forth the beneficial ownership of common stock, as of January 9, 2006, by each of our current directors, director nominees, current executive officers named in the summary compensation table (Named Executive Officers), the former CEO and former Co-President, as well as by all our current directors and current executive officers as a group.
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Common Stock Beneficially Owned as of January 9, 2006 |
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Shares(1) |
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Underlying
Stock Units(2) |
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Subject to
Stock Options
Exercisable within 60
days(3) |
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|
Total(4) |
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|
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|
|
|
|
|
|
|
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NAMED EXECUTIVE OFFICERS |
|
|
|
|
|
|
|
|
|
|
|
|
| |
John J. Mack |
1,587,846 |
701,921 |
|
1,008,899 |
|
3,298,666 |
|
| |
Zoe Cruz |
178,571 |
1,121,446 |
|
651,252 |
|
1,951,269 |
|
| |
Walid A. Chammah |
42,787 |
487,020 |
(5) |
611,074 |
|
1,140,881 |
|
| |
Neal A. Shear |
10,991 |
723,210 |
|
608,987 |
|
1,343,188 |
|
| |
Jonathan Chenevix-Trench |
140,928 |
570,740 |
|
619,316 |
|
1,330,984 |
|
|
|
|
|
|
|
|
|
|
| |
DIRECTORS AND NOMINEES |
|
|
|
|
|
|
|
| |
Roy J. Bostock |
2,000 |
4,020 |
|
— |
|
6,020 |
|
| |
Erskine B. Bowles |
— |
4,441 |
|
— |
|
4,441 |
|
| |
Howard J. Davies |
2,000 |
4,061 |
|
6,000 |
|
12,061 |
|
| |
C. Robert Kidder |
39,500 |
19,637 |
|
76,087 |
|
135,224 |
|
| |
Donald T. Nicolaisen |
— |
— |
|
— |
|
— |
|
| |
Charles H. Noski |
— |
4,788 |
|
— |
|
4,788 |
|
| |
Hutham S. Olayan |
— |
— |
|
— |
|
— |
|
| |
O. Griffith Sexton |
643,201 |
4,719 |
|
— |
|
647,920 |
|
| |
Laura D. Tyson |
10,758 |
4,190 |
|
59,796 |
|
74,745 |
|
| |
Klaus Zumwinkel |
8,000 |
— |
|
12,000 |
|
20,000 |
|
| |
All directors and executive officers as a
group (29 persons)(6) |
3,086,292 |
7,074,093 |
|
5,981,647 |
|
16,142,032 |
|
| |
FORMER EXECUTIVE OFFICERS |
|
|
|
|
|
|
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| |
Philip J. Purcell |
2,198,315 |
474,850 |
|
1,910,948 |
|
4,584,113 |
|
| |
Stephen S. Crawford |
5,954 |
223,829 |
|
416,498 |
|
646,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(1) Each current director, director nominee, Named Executive Officer and former executive officer listed has sole voting and investment power with respect to these shares, except as follows: Mr. Mack’s spouse is the sole trustee of a grantor retained annuity trust and has sole voting and investment power with respect to 142,626 |
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shares held in the trust. Mr. Mack can acquire these shares from the trust during its term. Mr. Purcell’s spouse has sole voting and investment power with respect to 45,362 shares; Mr. Purcell disclaims beneficial ownership of such shares.
(2) Shares of common stock held in the Trust corresponding to stock units. Directors and executive officers may direct the voting of the shares corresponding to their stock units. Voting by executive officers is subject to the provisions of the Trust described on page 2.
(3) See Aggregated option exercises in last fiscal year and fiscal year-end option values on page 24 for information regarding option valuation.
(4) Each executive officer and director beneficially owned less than 1% of the shares of common stock outstanding. All current directors and current executive officers as a group beneficially owned approximately 1.48% of the common stock outstanding.
(5) Does not include 23,727 shares owned by Mr. Chammah’s former spouse corresponding to units.
(6) Includes current directors and executive officers only.
Principal shareholders. The following table contains information regarding the only persons we know of that beneficially own more than 5% of our common stock.
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Shares of Common Stock
Beneficially Owned |
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Name and Address |
Number |
|
Percent(1) |
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|
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| |
State Street Bank and Trust Company (State Street)(2)
225 Franklin Street, Boston, MA 02110 |
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88,782,390
|
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8.3% |
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Barclays Global Investors, N.A.,
and other reporting entities (Barclays)(3)
45 Fremont Street, San Francisco, CA 94105 |
|
64,581,639 |
6.0% |
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|
(1) Percentages calculated based upon common stock outstanding as of February 3, 2006 and holdings of common stock set forth in the Schedule 13G Information Statements described in notes 2-3 below. These Information Statements state that State Street and Barclays beneficially owned 8.4% and 6.1%, respectively, of our common stock on December 31, 2005.
(2) Based on a Schedule 13G Information Statement filed February 14, 2006 by State Street, acting in various fiduciary capacities. The Schedule 13G discloses that State Street had sole voting power as to 29,244,065 shares, shared voting power as to 59,538,325 shares, sole dispositive power as to no shares and shared dispositive power as to 88,782,390 shares; that shares held by State Street on behalf of the Trust and a Company-sponsored equity-based compensation program amounted to 5.65% of the common stock as of December 31, 2005; and that State Street disclaimed beneficial ownership of all shares reported therein.
(3) Based on a Schedule 13G Information Statement filed January 26, 2006 by Barclays Global Investors, N.A., Barclays Global Fund Advisors, Barclays Global Investors, Ltd and Barclays Global Investors Japan Trust and Banking Company Limited. In the Schedule 13G, the reporting entities do not affirm the existence of a group. The Schedule 13G discloses that the reporting entities, taken as a whole, had sole voting and sole dispositive power as to 56,379,426 shares and 64,581,639 shares, respectively, and did not have shared power as to any shares.
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| Executive compensation |
Compensation, Management Development and Succession Committee report on executive compensation.
Compensation governance. The Compensation, Management Development and Succession Committee is responsible for approving compensation awarded to all members of the Company’s Management Committee, including the Named Executive Officers. The Committee authorizes all awards under Morgan Stanley’s equity-based compensation plans and operates under a written charter adopted by the Board. |
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Compensation philosophy. Morgan Stanley’s executive compensation programs are designed to attract, motivate and retain executives critical to the Company’s long-term success and the creation of shareholder value. Our fundamental philosophy is to link closely the Management Committee’s compensation with the achievement of annual and long-term performance goals. We believe that compensation decisions are best made after a review of Company performance and industry compensation levels. We award compensation that is based upon Company, business unit and individual performance and that is designed to motivate the Management Committee members to achieve strategic business objectives and to continue to perform at the highest levels in the future. Equity awards are a significant component of total compensation because we believe that equity-based compensation aligns the long-term interests of employees with those of shareholders. The Committee believes that compensation decisions should be primarily based upon the following three key principles.
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1. |
Performance-based: Pay levels should be determined based on Company, business unit and individual results compared to quantitative and qualitative performance priorities set at the beginning of the year.
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• |
Management Committee compensation expense generally moves in line with Company profits.
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• |
Profit before taxes and return on equity (ROE) are key performance measures considered in making pay decisions.
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2. |
Shareholder-aligned: Equity should be awarded as a significant component of incentive compensation.
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• |
Equity awards have historically comprised a significant portion of incentive compensation awarded to the CEO and other Management Committee members. In 2005, the Committee significantly increased the equity component of 2005 year-end compensation to 100% for the Chief Executive Officer and to 65% for all other Management Committee members.
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• |
In 2002, Management Committee members adopted an Equity Ownership Commitment that calls for members to retain until retirement or other termination of employment 75% of net equity held and subsequently awarded to them. This reflects senior management’s commitment to the Company.
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3. |
Competitive and fair relative to industry standards: Pay levels should be perceived both internally and externally as competitive and fair relative to industry standards.
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• |
Management Committee absolute pay levels are considered relative to those of the Company’s peers.
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• |
Competitive pay levels are considered in the context of an evaluation of the Company’s and the relevant business unit’s results compared to the financial performance of peers.
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• |
Management Committee pay is compared to senior Managing Directors’ pay to ensure appropriate internal relationships are achieved.
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Our policy is to maximize the tax deductibility of compensation paid to Management Committee members under Section 162(m) of the Internal Revenue Code and the regulations thereunder (Section 162(m)). Our shareholders have approved our incentive plans and a performance formula that is designed and administered to qualify compensation awarded thereunder as “performance-based.” We may, however, authorize payments to Management Committee members that may not be fully deductible if we believe such payments are in our shareholders’ interests.
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Compensation Consultant. In 2005, the Committee retained Hewitt Associates as an executive compensation consultant. A Committee member suggested that the Committee consider retaining Hewitt as a consultant, and the then Committee chair interviewed Hewitt. After the interview, the chair recommended that the Committee retain Hewitt, which the Committee subsequently did.
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Management Committee compensation for fiscal 2005. Management Committee members’ compensation (excluding employee benefits) consists of the following:
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1. Base salaries. Management Committee members receive a small portion of their overall compensation as base salary. We consider individual experience, responsibilities and tenure when determining base salaries. Base salaries are generally in the range of median base salaries paid by certain key competitors included in the group of financial services companies identified below to employees having duties and responsibilities comparable to those of the Management Committee members.
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2. Incentive compensation. Management Committee members’ total compensation is heavily weighted towards performance-based long-term incentive compensation. Consistent with our compensation philosophies discussed above, Management Committee compensation was determined based on Company, business unit and individual performance and the individual’s position.
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• |
In fiscal 2005, we reviewed the Management Committee’s compensation over the course of several meetings, taking into account advice we received from our consultant, Hewitt. We also reviewed and considered input on compensation practices from unaffiliated third parties.
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We significantly increased the percentage of Management Committee incentive compensation that would be paid in the form of equity from 55% to 65% and we awarded the CEO his incentive compensation completely in the form of equity. As in 2004, we decided again not to award stock options or restoration option rights.
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The Management Committee’s equity compensation was granted in the form of restricted stock units. The stock units are subject to cancellation under certain circumstances, such as competitive activity, termination for cause, soliciting clients or employees, misuse of proprietary information or making disparaging comments relating to the Company. These stock units are paid in the form of shares, but generally are not delivered, and therefore are not available for transfer, until approximately five years after grant. The equity grants are subject to the Management Committee’s Equity Ownership Commitment described in this report. The value of equity awards cannot be realized immediately and depends upon the future market value of Morgan Stanley’s stock. We believe that equity compensation, the value of which depends upon the Company’s future financial performance and stock price, provides an incentive to Management Committee members to foster Morgan Stanley’s success and protect its business interests.
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In 2005, all Management Committee members, as a condition to receiving year-end equity awards, agreed, among other things, to provide the Company with 180 days notice of their resignation. Failure to comply with the notice period, or, within 180 days of the termination of employment, soliciting certain clients or customers, or hiring or soliciting certain Company employees, will result in forfeiture of their equity awards granted in respect of 2005 and in the future. We believe the covenant agreement promotes, among other things, the protection of confidential business information and the continuity of employment, provides the Company with a smooth transition of business responsibilities and business relationships if employees leave the Company, and maintains the Company’s customer and employee relationships and goodwill worldwide. We believe the covenant agreement further aligns the interests of Management Committee members and our shareholders.
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3. Other compensation. We also reviewed the participation of Management Committee members in the Company’s retirement and savings plans. All Management Committee members are eligible to participate in Company-sponsored retirement and savings plans (pension and/or defined contribution), and U.S. benefits-eligible members are potentially eligible to participate in other post-retirement programs, such as retiree medical, on the same basis as other similarly-situated employees. The text under the caption Pension plans beginning on page 24 discusses all of the pension arrangements for the Named Executive Officers (NEOs). Except as disclosed under the caption Pension plans, or under Former CEO settlement and release agreement on page 19 and Former Co-President’s 2005 agreement beginning on page 19, the Company has no other agreements currently in effect in which the Company agrees to pay any supplemental pension amount to a NEO after retirement, although
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payments might be made after retirement under equity awards or deferred compensation arrangements. The Company contributes to its defined contribution plans based on the terms of the plans. Company contributions to defined contribution plans for the NEOs are included under the caption All Other Compensation in the Summary compensation table on page 21. Management Committee members are not eligible to receive the Company’s profit sharing award.
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The Company offers certain Management Committee members, including the CEO, the use of a car for personal purposes. For security reasons, the Company’s Board-approved policy requires the CEO to use Company aircraft, whenever feasible, for all travel, including personal travel. The value of such personal air travel in fiscal 2005, $407,762, is disclosed in the Other Annual Compensation column in the Summary compensation table on page 21.
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4. Other compensation matters. The fiscal 2005 compensation and separation related payments for Mr. Purcell, the former CEO, under his settlement and release agreements and that of certain other former members of the Management Committee are discussed beginning on page 19.
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Awarding incentive compensation for fiscal 2005. In accordance with the Company’s compensation philosophy, we analyzed several qualitative and quantitative factors when awarding incentive compensation for fiscal 2005. We:
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• |
reviewed survey data regarding compensation at several competitors for purposes of monitoring Management Committee compensation levels in relation to similar jobs in the marketplace, including both estimates for the current year and on a historical basis;
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• |
reviewed the Company’s and business units’ achievements, financial performance and financial ratios, including ROE (both book and economic capital), net revenues, and income from continuing operations, both before and after certain events that occurred in 2005 such as the write-down of our aircraft leasing business (AWAS), management new hire and severance expense, certain litigation expenses and the World Trade Center insurance settlement;
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• |
reviewed compensation expense as a percentage of net revenues and profit before taxes, both on a GAAP and on an economic basis, given the requirement to amortize certain equity based awards over several years;
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• |
reviewed Company, business unit and individual performance and career progress, both on an absolute basis and against pre-established performance goals, and in comparison with estimated financial performance of the financial services companies identified below; and
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• |
reviewed data on the Company’s price to book value ratio and price to earnings ratios and stock price for 2005 and on a historical basis.
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We determined incentive compensation based upon the facts and circumstances, considering all of the factors above. We believe Morgan Stanley delivered strong financial performance in 2005, particularly given the extraordinary events in 2005 that included a new Chief Executive Officer and significant Management Committee turnover. We also considered Hewitt’s advice in determining whether the amounts and types of compensation the Company pays its senior management are appropriate. The factors discussed above were not, however, the sole items we considered, and we did not target incentive compensation at any particular point within a range established by a comparison of the financial performance of, or compensation levels of, the competitors identified below or the other competitors operating in the same or similar businesses as the Company. We reviewed historical and projected compensation for the following companies (or subdivisions thereof): American Express Company; The Bear Stearns Companies Inc.; Citigroup Inc.; Credit Suisse Group; Deutsche Bank AG; The Goldman Sachs Group, Inc.; JPMorgan Chase & Co.; Lehman Brothers Holdings Inc.; Merrill Lynch & Co., Inc.; UBS AG; and Wachovia Corporation.
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We certified in accordance with Section 162(m) that Morgan Stanley’s financial results for fiscal 2005 satisfied the performance criteria set in accordance with Section 162(m) for fiscal 2005. After an analysis of the
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