Notice of 2005 Annual Meeting of Shareholders 2500 Lake Cook Road Riverwoods, Illinois March 15, 2005, 2:00 p.m., local time |
We cordially invite you to attend Morgan Stanley’s 2005 annual meeting of shareholders to:
| • | elect four directors to the Board of Directors for a three-year
term; |
| • | ratify the appointment of Deloitte & Touche LLP as independent
auditors; |
| • | amend Morgan Stanley’s Certificate of Incorporation to institute
the annual election of directors; |
| • | consider a shareholder proposal; and |
| • | transact such other business as may properly come before the meeting. |
We enclose our proxy statement, a proxy card, our summary annual report and our 10-K annual report. We hope you will read the proxy statement and submit your proxy. We appreciate your cooperation.
Very truly yours,
Chairman and Chief Executive Officer
Voting information
Item 1—Election of directors| New director Board meetings and committees Non-employee director meetings Director compensation Director attendance at annual meetings |
Beneficial ownership of Company common stock
| Stock ownership of directors and executive
officers Principal shareholders |
Item
2—Ratification of appointment of Morgan Stanley’s independent
auditors| Pre-approval of independent auditor services Independent auditors’ fees Fund-related fees Audit Committee report |
Item
3—Company proposal to amend
the Company’s Certificate of Incorporation to institute annual election
of directors Item
4—Shareholder proposal to
limit CEO compensationAnnex B: Audit Committee Charter
Annex C: Definition of Pre-Tax Earnings
New York, New York 10036
February 15, 2005
Proxy Statement
for the 2005 annual meeting of shareholders. We are mailing this proxy statement and the accompanying form of
proxy to shareholders on or about February 16, 2005. In this proxy statement, we refer to Morgan Stanley as the
“Company,” “we” or “us.” When we refer to Morgan Stanley’s fiscal year, as in “fiscal 2004,” we mean the
twelve-month period from December 1 through November 30.
Admission to the annual meeting. Only record or beneficial owners of Morgan Stanley’s common stock 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 to the annual meeting. You may listen to the meeting at www.morganstanley.com. Please go to our website early to register and download any audio software.
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. The Morgan Stanley 401(k) Plan (401(k) Plan) and the Employee Stock Ownership Plan (ESOP) also have confidential voting provisions.
Submitting voting instructions for shares held in street name. 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.
| • | Discretionary items. The
election of directors, the ratification of appointment of Morgan Stanley’s
independent auditors and the Company’s proposal to amend the Company’s
Certificate of Incorporation to institute the annual election of directors
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 NYSE member
brokers may vote your shares in their discretion. |
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| • | Non-discretionary items. The shareholder
proposal is a “non-discretionary” item and may not be voted
on by NYSE member brokers, including MS&Co. and MSDWI, absent specific
voting instructions from beneficial owners. |
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 your shares by proxy through the mail, telephone or internet as described on the proxy card. If you submit your proxy via the internet, you may incur costs such as 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 by mail, telephone or internet. Shares held in the following employee plans also are subject to the following rules.
| • | 401(k) Plan, Employee Stock Purchase Plan
(ESPP) and ESOP. 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
March 13, 2005. If the trustee or custodian, as applicable, 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 January 14, 2005, there were 24,493 shares in the 401(k) Plan accounts,
6,058,571 shares in the ESPP and 56,409,333 shares in the ESOP. |
| • | 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. Mellon
Bank, N.A. (Mellon) is custodian of restricted shares of common stock
awarded to employees under the 1995 Equity Incentive Compensation
Plan (EICP). Employees allocated shares held in the Trust, or whose
shares are held by Mellon, must submit their voting instructions for
receipt by the trustee or Mellon, as applicable, on or before March
13, 2005. 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 foreign jurisdictions, in the same proportion
as the voting instructions that it receives for shares held in the
Trust in connection with such plans. If Mellon does not receive your
instructions by that date, it will vote your shares in the same proportion
as the voting instructions that the trustee receives for shares held
in the Trust. On January 14, 2005, 74,691,900 shares were held in
the Trust in connection with such plans and Mellon held 1,113,982
shares under the EICP. |
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 Donald G. Kempf, Jr., Chief Legal Officer and 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.
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Withholding your vote or voting to “abstain.” In the election of directors, you can withhold your vote for any nominee. Withheld votes will be excluded entirely from the vote and will have no effect on the outcome. On the other proposals, you can vote to “abstain.” If you vote to “abstain,” your shares will be counted as present at the annual meeting for purposes of that proposal and your vote will have the effect of a vote against the proposal.
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Item 1—Election
of directors |
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John E. Jacob
(70). Executive Vice President—Global Communications
of Anheuser-Busch Companies, Inc., a global corporation that includes
a brewing organization, a manufacturer of aluminum beverage containers
and park operations (since 1994). President and Chief Executive Officer
of National Urban League, Inc. (1982 to 1994). Director since: 2001 Other directorships: Anheuser-Busch Companies, Inc. and Coca-Cola Enterprises Inc. |
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Charles F. Knight
(69). Chairman Emeritus (since September 2004), Chairman
(1974 to September 2004) and Chief Executive Officer (1973 to October
2000) of Emerson Electric Co., a manufacturer of electronic and electrical
products. Director since: 1999 Other directorships: Anheuser-Busch Companies, Inc., International Business Machines Corporation, SBC Communications Inc. and BP p.l.c. |
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Miles L. Marsh
(57). Chairman and Chief Executive Officer of Fort James
Corporation, a manufacturer and marketer of consumer paper products
(August 1997 to November 2000). Chairman (January 1996 to August 1997)
and President and Chief Executive Officer (October 1995 to August
1997) of James River Corporation of Virginia. Director since: 1996 Other directorships: GATX Corporation and Whirlpool Corporation |
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Dr. Laura D’Andrea
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 SBC Communications Inc. |
| Our Board of Directors recommends a vote “FOR” the election of all four nominees. Proxies solicited by our Board of Directors will be voted “FOR” these nominees unless otherwise instructed. |
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| Directors continuing in office—term
expiring in 2006 |
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Philip J. Purcell (61). Chairman
of the Board and Chief Executive Officer (since May 1997). Chairman
and Chief Executive Officer of Dean Witter, Discover & Co. (1986
to May 1997). |
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C. Robert Kidder
(60). 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: Electronic Data Systems Corporation |
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Michael A. Miles
(65). Special Limited Partner (since January 1995) in
Forstmann Little & Co., a private investment firm with interests in
telecommunications, broadcasting, healthcare and other industries.
Director since: January 1995; 1993 to May 1994 Other directorships: Sears, Roebuck and Co., Time Warner Inc., Dell, Inc., AMR Corporation and Citadel Broadcasting Corporation |
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| Directors continuing in office—term expiring in
2007 |
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Edward A. Brennan
(71). Chairman, President and Chief Executive Officer
of Sears, Roebuck and Co. (until retirement in 1995). Director since: December 2004; 1993 to October 2003 Other directorships: AMR Corporation, 3M Company, The Allstate Corporation, Exelon Corporation and McDonald’s Corporation |
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John W. Madigan
(67). Chairman (January 1996 to December 2003), Chief
Executive Officer (May 1995 to December 2002) and President (May 1994
to July 2001) of Tribune Company, a media company. Currently Special
Partner in Madison Dearborn Partners, a private investment firm. Director since: 2000 |
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Dr. 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 1995). 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). |
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Sir Howard J.
Davies (54). The Director, London School of Economics
and Political Science (since September 2003). Chairman and Chief Executive,
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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Board meetings and committees. Our Board met thirteen times during fiscal 2004. Each current director 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. As a group, our directors attended approximately 92% of the total number of meetings of the Board and committees on which they served while they were members. The Board’s standing committees include the following:
| Committee | Current Members(1) | Primary Responsibilities | # of Meetings | ||||||||
| Audit | C. Robert Kidder (Chair) Sir Howard J. Davies John W. Madigan Dr. Klaus Zumwinkel |
• | Monitors the integrity of the Company’s consolidated
financial statements, the Company’s internal controls, the Company’s
risk management and the Company’s 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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| • | Monitors the qualifications and independence of the
independent auditor and performance of the Company’s internal and
independent auditors. |
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| Compensation | Charles F. Knight (Chair) Sir Howard J. Davies John E. Jacob Miles L. Marsh |
• | 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 such other officers as deemed appropriate. |
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| • | Administers our incentive and equity-based compensation
plans. |
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| Nominating and Governance |
Michael A. Miles (Chair) John E. Jacob |
• | Identifies and recommends candidates for election
to the Board. |
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| Miles L. Marsh Dr. Laura D’Andrea Tyson |
• | Establishes procedures for its oversight of the evaluation
of the 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 the Company’s compliance with
legal and regulatory requirements. |
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(1) During part of fiscal 2004, (i) Mr. Jacob and Dr. Tyson served on the Audit Committee, (ii) Robert P. Bauman, who retired from the Board, and Mr. Kidder served on the Compensation Committee and (iii) Mr. Bauman and Mr. Madigan served on the Nominating and Governance Committee.
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Our Board has adopted written charters for the Audit, Compensation and Nominating and Governance Committees setting forth the roles and responsibilities of each committee. The Board has determined that each non-employee director is independent in accordance with the standards of director independence established under our Corporate Governance Policies (attached as Annex A). Our Board has a substantial majority (10 of 11) of non-employee directors. All members of the Audit, Compensation and the Nominating and Governance Committees satisfy the standards of independence applicable to members of such committees established under applicable law and NYSE listing requirements. In addition, the Board has determined that each of Mr. Kidder and Mr. Madigan is an “audit committee financial expert” within the meaning of the current rules of the Securities and Exchange Commission (SEC).
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 chair of the Audit, Compensation or Nominating and Governance Committee leads non-employee board and committee sessions and the independent director sessions and is chosen by the non-employee directors and independent directors, respectively, based on who is the most knowledgeable and appropriate leader given the subject of the meeting. The session leader can retain independent consultants and schedule meetings. The non-employee directors met three times in fiscal 2004.
Director compensation. Employee directors receive no compensation for Board service. The Corporate Governance Policies provide that the Company should not enter into paid consulting agreements with nonemployee directors.
| • | Review of non-employee director compensation. In
2004, the Nominating and Governance Committee considered changes to
non-employee director compensation and retained a consultant, Towers
Perrin, to advise it. The Committee recommended to the Board changes
in non-employee director compensation to (i) increase annual cash
compensation, (ii) eliminate stock options and (iii) continue to award
common stock annually. In 2005, the Board approved the Committee’s
suggested changes, as described below. |
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| • | Fees. Non-employee directors now receive higher
annual retainers for service and no longer receive meeting fees:
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| • | Directors’ Equity Capital Accumulation
Plan (DECAP). Non-employee directors previously
received stock options upon becoming a director and annually thereafter.
Non-employee directors no longer receive stock options, but the number
of shares of common stock that they receive upon becoming a director
and annually thereafter while a director was increased.
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| 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 2004, we matched $2,000 in charitable gifts on
behalf of each of John E. Jacob and Charles F. Knight. Non-employee
directors do not receive Company retirement benefits. |
Corporate governance
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 Nominating and Governance and Compensation Committees reviewed various corporate governance and executive compensation issues during 2004 and recommended changes to existing policies and practices to the full Board. Based on these recommendations, our Board announced the following corporate governance initiatives:
| • | Our Board recommends that shareholders vote to destagger the Board. |
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| • | Our Company will not renew its Shareholder Rights Plan when it expires
in April 2005. Our Board adopted a policy that it will seek shareholder
approval for any new rights plan, unless the Board, in the exercise
of its fiduciary duties, determines it would not be in the best interest
of shareholders to do so. If a rights plan is adopted without first
submitting it to a shareholder vote, the rights plan will be submitted
to a shareholder vote within 12 months of adoption. This policy is
available at our corporate governance webpage. |
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| • | Our Company will make available a list of its annual corporate political
contributions and has published its Corporate Political Contributions
Policy Statement at our corporate governance webpage. |
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| • | No stock options or restoration option rights were granted to the
Company’s Management Committee members as part of their 2004 equity
incentive retention awards. Instead, Management Committee members’
2004 equity awards consisted solely of restricted stock units. |
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| • | The equity portion of Management Committee members’ annual incentive
compensation increased. The Equity Ownership Commitment, requiring
Management Committee members to retain 75% of net equity they currently
hold (or subsequently receive) remains at 75%, notwithstanding the
increase in the equity portion of incentive compensation. |
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| • | Our Corporate Governance Policies now provide that no director may
serve on the board of more than six public companies, including Morgan
Stanley. |
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| • | Beginning in fiscal 2005, the Company’s compensation plan for non-employee directors continues to include stock awards, but no longer includes stock options. Please see “Director compensation” on page 7 for more details. |
The Corporate Governance Policies (including our standards of director independence), Code of Ethics and Business Conduct, Board committee charters and Management Committee Equity Ownership Commitment are available at our corporate governance webpage and are available to any shareholder who requests them by writing to Morgan Stanley, Suite D, 1585 Broadway, New York, New York 10036. Our Standards of Director Independence and Audit Committee Charter are also attached as Annex A and Annex B, respectively.
Beneficial ownership of Company common stock
Stock ownership of directors and executive officers. We encourage stock ownership by our directors, officers and employees to align their interests with your interests as shareholders. The following table sets forth
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| Common Stock Beneficially
Owned as of December 15, 2004 |
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| Name | Shares(1) | Underlying Stock Units(2) |
Subject
to Stock Options Exercisable within 60 days(3) |
Total(4) | ||||||||
| NAMED EXECUTIVE OFFICERS | ||||||||||||
| Philip J. Purcell Stephan F. Newhouse Vikram S. Pandit Zoe Cruz John P. Havens |
2,970,669 437,047 535,774 166,900 370,345 | 593,337 810,980 1,342,492 906,343 1,023,116 | 2,068,744 912,626 1,201,693 651,252 815,199 |
5,632,750 2,160,653 3,079,959 1,724,495
2,208,660 |
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| DIRECTORS | ||||||||||||
| Edward A. Brennan Sir Howard J. Davies John E. Jacob C. Robert Kidder Charles F. Knight John W. Madigan Miles L. Marsh Michael A. Miles Dr. Laura D’Andrea Tyson Dr. Klaus Zumwinkel |
205,414 2,000 1,000 19,500 2,012 — 15,200 42,788 7,498 4,000 |
— — 10,223 19,044 16,074 9,226 9,342 18,626 3,261 — |
84,108 6,000 30,000 92,087 54,000 47,156 70,000 84,087 59,796 12,000 |
289,522 8,000 41,223 130,631 72,086 56,382 94,542 145,501 70,555 16,000 |
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| All directors
and executive officers as a group (24 persons) |
5,696,998 | 8,020,172 | 11,204,402 | 24,921,572 | ||||||||
(1) Each director and Named Executive Officer has sole voting and investment power with respect to these shares, except as follows: (i) Mr. Purcell’s spouse has sole voting and investment power with respect to 45,362 shares, with respect to which Mr. Purcell disclaims beneficial ownership, and (ii) Mr. Brennan’s spouse has sole voting and investment power with respect to 23,301 shares. Mr. Purcell has sole voting and investment power with respect to 5,696 shares held in a custody account for which Mr. Purcell is the custodian, with respect to which Mr. Purcell disclaims beneficial ownership. Of the shares held by all directors and executive officers as a group, certain executive officers share voting and investment power with family members with respect to 153,933 shares (20,000 shares for which beneficial ownership has been disclaimed).
(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 voting provisions of the Trust described on page 2.
(3) Includes unvested options granted to executive officers with respect to fiscal 2003 compensation.
(4) Each executive officer and director beneficially owned less than 1% of the shares of common stock outstanding. All directors and executive officers as a group beneficially owned approximately 2.21% of the common stock outstanding.
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| Shares of Common Stock Beneficially Owned |
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| Name and Address | Number | Percent(1) | ||||||
| State Street Bank and Trust Company(2) 225 Franklin Street, Boston, MA 02110 |
94,267,589 | 8.5% | ||||||
| Barclays Global Investors, N.A., and other reporting entities(3) 45 Fremont Street, San Francisco, CA 94105 |
65,848,895 | 5.9% | ||||||
| FMR Corp.(4) 82 Devonshire Street, Boston, MA 02109 |
61,805,260 | 5.6% | ||||||
(1) Percentages calculated based upon common stock outstanding as of January 14, 2005 and holdings of common stock set forth in the Schedule 13G and Schedule 13G/A Information Statements described in notes 2-4 below. These Information Statements state that (i) FMR and Barclays beneficially owned 5.7% and 6.1%, respectively, of our common stock on December 31, 2004 and (ii) State Street beneficially owned 8.7% of our common stock on December 31, 2003.
(2) Based on a Schedule 13G Information Statement filed February 4, 2004 by State Street, acting in various fiduciary capacities. The Schedule 13G discloses that State Street had sole voting power as to 27,155,932 shares, shared voting power as to 64,664,771 shares, sole dispositive power as to 28,475,012 shares and shared dispositive power as to 65,792,577 shares; that shares held by State Street on behalf of the Trust and a Company sponsored equity-based compensation program amounted to 6.1% of the common stock as of December 31, 2003; and that State Street disclaimed beneficial ownership of all shares reported therein.
(3) Based on a Schedule 13G Information Statement filed February 14, 2005 by Barclays Global Investors, N.A., Barclays Global Fund Advisors, Barclays Global Investors, Ltd, Barclays Global Investors Japan Trust and Banking Company Limited, Barclays Life Assurance Company Limited, Barclays Bank PLC, Barclays Capital Securities Limited, Barclays Capital Inc., Barclays Private Bank & Trust (Isle of Man) Limited, Barclays Private Bank and Trust (Jersey) Limited, Barclays Bank Trust Company Limited, Barclays Bank (Suisse) SA, Barclays Private Bank Limited, Bronco (Barclays Cayman) Limited, Palomino Limited and Hymf 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 58,272,903 shares and 65,848,895 shares, respectively, and did not have shared power as to any shares.
(4) Based on a Schedule 13G/A Information Statement filed February 14, 2005 by FMR, Edward C. Johnson 3d, Abigail P. Johnson and Fidelity Management & Research Company (Fidelity), a wholly-owned subsidiary of FMR. Certain of the shares listed above are beneficially owned by FMR subsidiaries and related entities. The Schedule 13G/A discloses that FMR had sole voting power as to 3,729,792 shares and sole dispositive power as to all 61,805,260 shares. The Schedule 13G/A states that Mr. and Ms. Johnson and various family members, through their ownership of FMR voting common stock and the execution of a shareholders’ voting agreement, may be deemed to form a controlling group with respect to FMR. The Schedule 13G/A indicates that 57,777,498 shares are beneficially owned by Fidelity as a result of acting as an investment adviser to several investment companies (ICs). Mr. Johnson, FMR, through its control of Fidelity, and the ICs each had sole dispositive power as to all such shares. Neither Mr. Johnson nor FMR had sole voting power as to such shares, as such power resides with the ICs’ Boards of Trustees and is carried out by Fidelity under written guidelines established by such Boards. The Schedule 13G/A also indicates that 2,323,095 shares are beneficially owned by Fidelity Management Trust Company (Fidelity Trust), a wholly owned subsidiary of FMR, as a result of its serving as investment manager of certain institutional accounts. Mr. Johnson and FMR, through its control of Fidelity Trust, each had sole dispositive power as to all such shares and sole voting power as to 2,012,095 of such shares and no power to vote 311,000 of such shares. The Schedule 13G/A indicates that 10,940 shares are beneficially owned by Strategic Advisors, Inc., a wholly-owned subsidiary of FMR, as a result of its serving as an investment
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Compensation Committee report on executive compensation.
Compensation governance. The Compensation Committee is responsible to Morgan Stanley’s Board of Directors and to shareholders 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.
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 our Management Committee’s compensation with the achievement of annual and long-term performance goals. We believe that compensation decisions are complex and best made after a deliberate 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 our Management Committee members to achieve strategic business objectives and to continue to perform at the highest levels in the future. We include a significant equity component in total compensation because we believe that equity-based compensation aligns the long-term interests of employees with those of shareholders.
In 2004, we directed the Company to take a fresh look at its executive compensation practices, with a focus on policies relating to Management Committee compensation. Our purpose was to confirm that the Company’s executive compensation policies remain aligned with the goal of enhancing shareholder value through programs that attract, motivate and retain key executives. We reviewed various materials during 2004, including the principles outlined in the 2003 Report of the National Association of Corporate Directors Blue Ribbon Commission on Executive Compensation and the Role of the Compensation Committee. We selected and engaged Towers Perrin to provide independent insights on executive compensation matters, both generally and within our industry. We analyzed the Company’s compensation practices, guided by three key principles, and noted examples of how the Company’s executive compensation practices follow these principles.
| 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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| 2) | Shareholder-aligned: Equity should be awarded
as a significant component of incentive compensation. |
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| 3) | Fair: Pay levels should be perceived as fair,
both internally and externally. |
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Our policy is to maximize the tax deductibility of compensation payments 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 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.
Management Committee compensation for fiscal 2004. Historically, Management Committee members received annual compensation (excluding employee benefits) comprised of base salary and incentive compensation consisting of a cash bonus and equity based awards (restricted stock units and stock options). The Committee and the Company referred to base salary and incentive compensation as an employee’s Total Reward. In general, the greater the Total Reward, the greater the percentage of the total that was awarded in the form of long-term equity-based compensation. In prior years, we ascribed a value to restricted stock units based on a 25% discount from fair market value of the common stock to account for the vesting characteristics and transfer restrictions on the restricted stock units. We also valued stock option awards based upon a ratio of three options per share (2.25:1 with a 25% discount). The 25% discount was sometimes referred to as the “EICP discount.”
In fiscal 2004, we did not ascribe a value to restricted stock units reflecting the EICP discount. For example, Mr. Purcell’s total compensation for fiscal 2004 is $22,000,000, including $13,796,250 in restricted stock units without an EICP discount. To compare with fiscal 2003, Mr. Purcell’s total compensation would be $16,037,500 reflecting a Total Reward of $14,000,000 and an EICP discount valued at $2,037,500.
1. Base salaries. Management Committee members receive a relatively 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 our Management Committee members.
2. Incentive compensation. Our 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.
In fiscal 2004, we reviewed the Management Committee’s compensation over several meetings. We also received advice from our consultant, Towers Perrin. We made several changes to the Management Committee’s compensation program.
| • | We significantly increased the percentage of Management Committee
incentive compensation that would be paid in equity—from a tiered
formula, that increased from 30% for amounts up to $1 million to 50%
for amounts over $4 million, to a flat 65% of incentive compensation
for the CEO and 55% for all other Management Committee members. |
|
| • | We did not award stock options or restoration option rights. |
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| • | We did not ascribe a discount to restricted stock units. |
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3. Other compensation. We also reviewed the participation of Management Committee members in the Company’s retirement and savings plans. Management Committee members participate in the Company’s retirement and savings plans (pension, 401(k) and ESOP) and 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 19 discusses all of the supplemental pension arrangements for the five Named Executive Officers (NEO). Except as disclosed under the caption “Pension Plans,” 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 payments might be made after retirement under equity awards or deferred compensation arrangements. The Company “matches” certain employee contributions to its 401(k) savings plan with Morgan Stanley common stock. Company matching amounts for the NEOs are included under the caption “All Other Compensation” in the Summary compensation table on page 17. Management Committee members do not participate in the Company’s profit sharing.
The Company offers Management Committee members the use of a car for personal purposes or a transportation allowance. For security reasons, the Company’s Board-approved policy requires the CEO to use Company aircraft for personal travel; the value of such personal travel in fiscal 2004, $467,142, is disclosed in the “Other Annual Compensation” column in the Summary compensation table on page 17.
Awarding incentive compensation for fiscal 2004. In accordance with the Company’s compensation philosophy, we analyzed several qualitative and quantitative factors when awarding incentive compensation for fiscal 2004. We:
| • | reviewed the Company’s and business units’ achievements, financial
performance and financial ratios, including ROE, net revenues, consolidated
income before and after taxes, earnings per share, book value per
share, market share and several key business drivers, and compensation
expense compared to both net revenues and pre-compensation profit
before taxes (on an absolute basis, year-to-year and compared to competitor
performance); |
| • | reviewed Company, business unit and individual performance, both
on an absolute basis and against pre-established performance goals,
including comparison with estimated financial performance of most
of the Financial Services Companies identified below; |
| • | reviewed survey data regarding the Financial Services Companies
identified below 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; and |
| • | considered positive differentiation of brand, including positive
client development and customer satisfaction, on an absolute and comparative basis. |
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We certified in accordance with Section 162(m) that Morgan Stanley’s financial results for fiscal 2004 satisfied the performance criteria set in accordance with Section 162(m) for fiscal 2004. After an analysis of the considerations set forth above, we awarded incentive compensation to the Management Committee members for fiscal 2004 that was below the maximum amount yielded by the application of the compensation formula contained in the performance criteria.
CEO compensation for fiscal 2004. The CEO’s salary is based on the criteria described in this report. Based upon competitive data, we did not increase the CEO’s salary for fiscal 2004.
We determined incentive compensation for Mr. Purcell in accordance with the policies described above relating to all Management Committee members based on substantially the same factors and Section 162(m) performance criteria as for other Management Committee members. We evaluated him based on the Company’s overall performance, and its progress on strategic objectives, and compared his compensation over a three year period to that of Key Competitors’ CEOs. “Key Competitors” include the following companies: American Express Company; The Bear Stearns Companies Inc.; Citigroup Inc.; The Goldman Sachs Group, Inc.; JPMorgan Chase & Co.; Lehman Brothers Holdings Inc.; and Merrill Lynch & Co., Inc.
Mr. Purcell’s compensation reflects (i) the Company’s financial performance and (ii) results based on the Company’s progress and its performance priorities.
| • | The Company’s net income increased 18% from $3.8 billion in fiscal
2003 to $4.5 billion in fiscal 2004 driven by improved results in
Institutional Securities, Investment Management and Credit Services.
Profit margins remained steady at 28%. The Company’s ROE was 16.8%,
a strong performance in the 2004 business and interest rate environment.
Consolidated net revenues increased 14% from $20.9 billion in fiscal
2003 to $23.8 billion in fiscal 2004. |
| • | The Company strengthened its balance sheet, improved its capital
and liquidity positions and maintained strong credit ratings, including
ratings from Fitch, Moody’s and Standard & Poor’s of “AA–,” “Aa3”
and “A+,” respectively. In September, Standard & Poor’s placed the
Company’s credit ratings on positive outlook. |
| • | The Company improved or maintained market share in several key areas:
it ranked #1 in equity and equity-related underwriting and #2 in global
debt underwriting and in completed mergers and acquisitions. It also
maintained leadership positions in secondary market trading in equity
and fixed income securities, reflecting progress on the Company’s
client-focused strategy. The Company posted strong market shares in
the sales and trading businesses. |
| • | Investment performance improved significantly in the Investment
Management business. The Institutional Securities Group and Investment
Management both posted net revenue gains in 2004. Credit Services
posted net revenue gains in 2004. Credit quality improved significantly
in Credit Services, with the managed credit card charge-off rate improving
by 60 basis points. The Individual Investor Group’s net revenues increased
while margins decreased. |
| • | The Company positively differentiated the Morgan Stanley brand as
measured by media tracking, retail brand tracking and customer satisfaction
surveys. |
| • | The Company undertook an in-depth, comprehensive review of business
practices, products and conflicts. The review, and discussion of it
with various regulators, involved significant and dedicated attention
on the part of management. |
| • | The Company announced two strategic acquisitions, Barra, Inc., which
closed in 2004, and PULSE EFT Association, which closed in early 2005. |
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relative pay versus that of competitor CEOs.
| • | We reviewed Mr. Purcell’s work with several important institutional
clients, his work on industry matters and his overall leadership. |
| • | We also considered that over the last three years, Mr. Purcell’s
cumulative pay (base salary and incentive compensation) ranked last
against Morgan Stanley’s Key Competitors identified above, while the
Company’s cumulative pre-tax profit and three-year average ROE ranked
above the median. |
| Base salary | $ 775,000 | |
| Cash bonus | $ 7,428,750 | |
| Restricted stock units | $13,796,250 |
Mr. Purcell’s equity-based awards contain the terms and conditions discussed on page 17 in the Summary compensation table. 65% of Mr. Purcell’s incentive compensation was equity-based and its value is tied to the long-term performance of Morgan Stanley’s common stock. As described above, in contrast to compensation in prior fiscal years, we did not ascribe a value to Mr. Purcell’s restricted stock units based on a 25% discount from fair market value of the common stock to compensate for the vesting characteristics and transfer restrictions on the restricted stock units.
Annual CEO compensation review. During the course of 2004, we reviewed all forms of Mr. Purcell’s compensation and balances in equity, retirement and non-qualified deferred compensation plans, including base salary, cash bonus, long-term incentive awards, realized stock option gains and the value of perquisites received for fiscal 2004. We also reviewed total payment obligations to Mr. Purcell under the Company’s voluntary nonqualified deferred compensation plans, the 401(k) Plan, ESOP, ESPP, qualified and non-qualified pension plans, as well as the aggregate values of restricted stock units and stock options held at fiscal year-end.
Mr. Purcell does not have a change in control severance agreement or any agreement entitling him to base salary, cash bonus, perquisites or new equity grants following termination of employment. All equity grants and all cash compensation amounts originally allocated to the plans referenced below were disclosed in prior proxy statements (for years when the Company was publicly held).
The total value (as of November 30, 2004) of equity awards and balances under voluntary non-qualified deferred compensation plans, the 401(k) Plan, ESOP, ESPP and pension plans that would be available to Mr. Purcell if his employment terminates with the Company on or before November 30, 2005 under several scenarios are described below.
If Mr. Purcell voluntarily terminates his employment or is terminated as a result of a change in control, he would retain $48,133,499 in equity awards granted in prior years that were previously disclosed. Additionally, he would retain balances in voluntary non-qualified deferred compensation plans, the 401(k) Plan, ESOP and ESPP, totaling $3,244,131 and would be entitled to an annual pension benefit of $1,268,438 payable for life, valued at $10,960,086 as of November 30, 2004.
In the event that Mr. Purcell is terminated by the Company “for cause”, he would forfeit $34,744,657 in equity awards granted in prior years that were previously disclosed. He would retain equity awards for which restrictions have ended, valued at $13,388,842, as well as all balances in voluntary non-qualified deferred compensation plans, the 401(k) Plan, ESOP, ESPP and pension plans, as referenced above.
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The following table details the awards described above.
| 2005 Termination Scenarios | ||||||||
| Voluntary/ Change in Control |
“For Cause” | |||||||
| Equity Awards Previously Granted and Disclosed as
Compensation(1) Other Plan Holdings |
$ | 48,133,499 | (2) | $ | 13,388,842 | |||
| Morgan Stanley 401(k) Plan (1) | $ | 990,247 | $ | 990,247 | ||||
| Employee Stock Ownership Plan (1) | $ | 776,692 | $ | 776,692 | ||||
| Employee Stock Purchase Plan (1) | $ | 198,410 | $ | 198,410 | ||||
| Non-Qualified Deferred Compensation Plans | $ | 1,278,782 | $ | 1,278,782 | ||||
| Subtotal | $ | 3,244,131 | $ | 3,244,131 | ||||
| Pension Plans (3) | ||||||||
| Annual Benefit | $ | 1,268,438 | $ | 1,268,438 | ||||
| Present Value of Benefit | $ | 10,960,086 | $ | 10,960,086 | ||||
(2) Includes the value of restricted stock and stock options granted as part of compensation in prior years and previously disclosed for fiscal years 1997 through 2004.
(3) Gross pension benefit accrued as of November 30, 2004 and payable at age 65 with 26 years of benefit service. Present value assumes payment in the form of a life annuity with a discount rate of 6.05% and GATT 2003 mortality.
Fiscal 2005 CEO compensation. In an effort to provide enhanced transparency for 2005 in establishing compensation for the CEO, we have adopted the following pay criteria for 2005. If ROE is less than 10%, the Firm will pay no incentive compensation to the CEO. We expect total CEO compensation will be less than or equal to the amount derived by multiplying Mr. Purcell’s 2004 compensation by the sum of one plus the percentage change from 2004 to 2005 in the Company’s “Pre-Tax Earnings” (as defined in Sect. 14 of the 1995 Equity Incentive Compensation Plan and attached as Annex C). For example, if Pre-Tax Earnings increase by 5%, we expect the CEO’s total compensation to increase by a maximum of 5%. Conversely, if Pre-Tax Earnings decrease by 5%, we expect the CEO’s total compensation to decrease by at least 5%.
In evaluating the CEO’s performance, we will review ROE, net revenue growth and stock price metrics (such as P/E ratio and P/B ratio), relative to competitors, as well as other factors outlined above that were used in evaluating the CEO’s 2004 performance. We will also consider Standard and Poor’s, Fitch and Moody’s longterm debt ratings and expect market share rankings in the top three positions for equity and equity-related underwritings and completed mergers and acquisitions transactions.
At the Company, and generally in the industry in which the Company competes, eligible employees annually receive equity awards based on annual performance. 65% of the CEO’s incentive compensation amount yielded by the performance-based approach described above will be awarded in equity. Equity awards will be granted as all restricted stock units, and the number of units will be determined by dividing 65% of the incentive compensation amount by 100% of the grant date fair market value of Morgan Stanley common stock.
Conclusion. Attracting and retaining talented and motivated management and employees is essential to create long-term shareholder value. Offering a competitive, performance-based compensation program with a large equity component helps to achieve this objective by aligning the interests of Management Committee members and other key employees with those of shareholders. We believe that Morgan Stanley’s fiscal 2004 compensation program met these objectives.
Respectfully submitted,
Charles F. Knight, Chair
Sir Howard J. Davies
John E. Jacob
Miles L. Marsh
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| ANNUAL COMPENSATION | LONG-TERM COMPENSATION AWARDS |
||||||||||||||
| Name and Principal Position | Fiscal Year |
Salary ($)(1) | Bonus ($)(1) | Other
Annual Compensation ($) |
Restricted Stock Awards ($)(2) |
Securities Underlying Options (#) |
All
Other Compensation ($)(3) |
||||||||
| Philip J. Purcell | 2004 | 775,000 | 7,428,750 | 481,833 | (4) | 13,775,923 | — | 6,100 | |||||||
| Chairman of the Board | 2003 | 775,000 | 7,112,500 | 500,276 | (4) | 4,062,693 | 165,360 | (5) | 17,480 | ||||||
| and CEO | 2002 | 775,000 | 5,612,500 | 287,808 | (4) | 3,063,570 | 162,572 | (5) | 14,590 | ||||||
| Stephan F. Newhouse | 2004 | 425,000 | 7,683,750 | 334,760 | (6) | 9,377,403 | 128,624 | (7) | 6,100 | ||||||
| President | 2003 | 425,000 | 6,787,500 | 909,149 | (6) | 3,846,658 | 156,567 | (5) | 17,480 | ||||||
| 2002 | 425,000 | 5,287,500 | 247,575 | (6) | 2,847,711 | 151,117 | (5) | 14,590 | |||||||
| Vikram S. Pandit | 2004 | 425,000 | 8,133,750 | — | 9,926,582 | — | 6,100 | ||||||||
| President and Chief Operating Officer of | 2003 | 425,000 | 6,787,500 | — | 3,846,658 | 156,567 | (5) | 17,480 | |||||||
| Institutional Securities Group | 2002 | 425,000 | 5,287,500 | — | 2,847,711 | 151,117 | (5) | 14,590 | |||||||