February 19, 2003

Fellow shareholder:

We cordially invite you to attend Morgan Stanley’s 2003 annual meeting of shareholders to:

Our Board of Directors recommends you vote “FOR” the election of directors and the ratification of auditors and “AGAINST” the shareholder proposal.

Enclosed are our proxy statement, a proxy, our summary annual report and our 10-K. For those of you who currently receive paper versions of these documents, we are pleased to offer you an opportunity to receive future versions over the internet. By following the instructions on page 23, you will receive electronic access to these documents and will help reduce printing and postage costs.

We hope you will read the proxy statement and submit your proxy. We appreciate your cooperation.

Very truly yours,

Table of Contents

Morgan Stanley  

1585 Broadway
New York, New York 10036  

February 19, 2003

 Proxy Statement

We are sending you this proxy statement in connection with the solicitation of proxies by our Board of Directors for the 2003 annual meeting of shareholders. We are mailing this proxy statement and the accompanying form of proxy to shareholders on or about March 3, 2003. In this proxy statement, we may refer to Morgan Stanley as the “Company,” “we” or “us.” When we refer to Morgan Stanley’s fiscal year, as in “fiscal 2002,” we mean the twelve-month period from December 1 through November 30.

Annual meeting information  

Date and location of the annual meeting.    We will hold the annual meeting on Friday, April 11, 2003, at 9:00 a.m., local time at our offices at 2500 Lake Cook Road, Riverwoods, Illinois 60015.

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 over the internet through our website at www.morganstanley.com. Please go to our website early to register and download any necessary audio software.

Voting information  

Record date.    The record date for the annual meeting is February 10, 2003. 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 to be voted on at the annual meeting. On the record date, 1,090,077,622 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. The DPSP/START Plan and the ESOP have additional confidential voting provisions.

Submitting voting instructions for shares held in your name.    If you hold shares in your name 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.  

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.

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.

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.

Votes required to elect directors and to adopt other proposals.    Directors are elected by a plurality of the votes cast. The ratification of Deloitte & Touche’s appointment and the shareholder proposal each requires the affirmative vote of a majority of the shares of common stock represented at the annual meeting and entitled to vote thereon in order to be approved.

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.

Item 1—Election of Directors  

Our Board currently has eleven directors, divided into three classes. Members of each class serve for a three-year term. Shareholders elect one class of directors at each annual meeting. At this annual meeting, shareholders will vote on the election of the four nominees described below.

The Board proposes, based on the recommendation of its Nominating and Governance Committee, the election of Philip J. Purcell, Robert G. Scott, C. Robert Kidder and Michael A. Miles as directors for a term ending at the 2006 annual meeting. The nominees are all current directors of Morgan Stanley, and each nominee has indicated that he 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.

Nominees for election to the Board of Directors for a three-year term ending in 2006

The Board of Directors recommends a vote “FOR” the election of all four nominees. Proxies solicited by the Board of Directors will be voted “FOR” these nominees unless otherwise instructed.

Directors continuing in office—term expiring in 2004

Directors continuing in office—term expiring in 2005

  Board meetings and committees.    The Board met 6 times during fiscal 2002. Each director attended at least 93% 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. The Board’s standing committees include the following.

Our Board has adopted written charters for the Audit, Compensation and Nominating and Governance Committees setting forth the roles and responsibilities of each committee. These charters are available at www.morganstanley.com.

The Nominating and Governance Committee will consider director candidates recommended by shareholders. Recommendations may be sent to Donald G. Kempf, Jr., Secretary, 1585 Broadway, New York, New York 10036. The procedure for nominating a person for election as a director at the 2004 annual meeting is described under “Other matters—Shareholder proposals for the 2004 annual meeting” on page 23.

Director compensation.    Employee directors receive no compensation for Board service.

Corporate governance  

Our Board of Directors has maintained corporate governance policies for many years and has updated them from time to time. Our Board has had in place several of the NYSE’s proposed corporate governance requirements for many years.

1.    Existing corporate governance highlights

2.    Recent developments

Our Nominating and Governance Committee reviewed various corporate governance proposals during 2002 and recommended changes to existing policies and practices to the full Board. Our Board has adopted: (1) revised corporate governance policies and Audit Committee charter; (2) charters for the Compensation and Nominating and Governance committees; (3) a revised and expanded definition of independence for our directors for fiscal 2003; and (4) a Code of Ethics and Business Conduct for all directors, officers and employees. The corporate governance policies (including our new independence definition), Code of Ethics and Business Conduct and committee charters are available at www.morganstanley.com.

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. Our Management Committee has adopted an Equity Ownership Commitment that its members retain 75% of net equity held and equity subsequently awarded to them. The Equity Ownership Commitment is available at www.morganstanley.com.

The following table sets forth the beneficial ownership of common stock, as of December 31, 2002, by each of our directors and executive officers named in the summary compensation table (Named Executive Officers), as well as by all our directors and executive officers as a group.

⁽¹⁾ Each director and executive officer has sole voting and investment power with respect to these shares, except as described in this footnote: 45,362 shares owned by Mr. Purcell’s spouse and 5,244 shares held for Mr. Purcell’s child in a custodial account for which Mr. Purcell is custodian, with respect to all of which he disclaims beneficial ownership; 150,000 shares, held by an exchange fund on behalf of Mr. Scott, with respect to which the fund investment manager has sole voting and investment power but which may be redeemed by Mr. Scott within 60 days if the fund holds the shares; 25,000 shares, held by a charitable foundation, with respect to which Mr. Scott has shared voting power only and disclaims beneficial ownership; 31,068 shares owned by Mr. Brennan’s spouse; 5,200 shares, owned by Mr. Kidder’s spouse, with respect to which Mr. Kidder has shared investment power only; and 229,557 shares, shown in the table as held by the directors and executive officers as a group (for 20,000 of which beneficial ownership has been disclaimed), with respect to which certain executive officers (other than Named Executive Officers) have shared voting and investment power with family members.  

⁽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 options granted to executive officers in respect of fiscal 2002 and 2001 compensation.  

⁽⁴⁾ Each executive officer and director beneficially owned less than 1% of the shares of common stock outstanding. The group consisting of all directors and executive officers beneficially owned approximately 2.5% of the common stock outstanding.

Principal shareholders.    The following table contains information regarding the only persons we know of that beneficially own more than 5% of our common stock.

⁽¹⁾ Based on a Schedule 13G Information Statement filed February 5, 2003 by State Street, acting in various fiduciary capacities. The Schedule 13G discloses that State Street had sole voting power as to 25,531,977 shares, shared voting power as to 72,062,642 shares, sole dispositive power as to 26,924,552 shares and shared dispositive power as to 73,197,177 shares; that shares held by State Street on behalf of the Trust and a Company-sponsored equity-based compensation program amounted to 6.7% of the common stock; and that State Street disclaimed beneficial ownership of all shares reported therein.  

⁽²⁾ Based on a Schedule 13G Information Statement filed February 13, 2003 by FMR, Edward C. Johnson 3rd, 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 discloses that FMR had sole voting power as to 6,439,372 shares and that Mr. and Ms. Johnson did not have sole voting power as to any shares. The Schedule 13G also discloses that FMR and Mr. and Ms. Johnson had sole dispositive power as to all shares and no shared voting or dispositive power. The Schedule 13G 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 indicates that 72,479,625 shares are beneficially owned by Fidelity as a result of acting as an investment adviser to several investment companies (Funds). Mr. Johnson, FMR, through its control of Fidelity, and the Funds 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 Fund’s Boards of Trustees and is carried out by Fidelity under written guidelines established by such Boards. The Schedule 13G also indicates that 3,965,047 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 3,706,747 shares. The Schedule 13G indicates that 2,706,884 shares are beneficially owned by Fidelity International Limited (FIL), an entity independent of FMR. Mr. Johnson is Chairman of FIL, and approximately 40% of the voting power of FIL is held by a partnership controlled by him and family members. FIL had sole voting and dispositive power as to all such shares. FMR and FIL are of the view that they are not required to attribute to each other shares beneficially owned by the other corporation.  

Executive compensation

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. The Committee operates under a written charter adopted by the Board. We also authorize all awards under Morgan Stanley’s equity-based employee compensation plans.

Compensation policies.    Our fundamental policy is to link closely our Management Committee’s compensation with the achievement of annual and long-term performance goals. We award compensation based upon Company, business unit and individual performance in a manner that motivates our Management Committee members to achieve strategic business objectives. We provide total compensation comparable to that of Morgan Stanley’s competitors, thereby enabling Morgan Stanley to attract and retain employees critical to its long-term success and the creation of shareholder value. We also 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.

We consider several factors in awarding compensation. We assess Morgan Stanley’s results, compare them to estimates of competitors’ results and receive input and estimates from external sources regarding the competitive marketplace for the talents and skills of Morgan Stanley’s employees. We utilize both quantitative and qualitative factors when determining total compensation for Management Committee members and when awarding equity-based compensation to employees. Quantitative factors include, among others, absolute levels of, and year-to-year changes in, return on equity (ROE), net revenues, net income, profit before taxes, earnings per share, book value per share, market share and several key business drivers. Qualitative factors include achievement of pre-established performance goals and subjective assessments of individual performances. We utilize ROE as a key measure of corporate performance, both on an absolute basis and compared to estimates of our competitors’ performance. We also review the ratios of compensation to net revenues and compensation to pre-compensation profit before taxes. We review survey data regarding competitors for purposes of monitoring Management Committee compensation levels in relation to similar jobs in the marketplace. We engaged Towers Perrin, an independent consulting firm, to assist us and to obtain independent analysis and insights on the compensation practices in our industry. We considered all these factors, but determined total compensation based upon a more subjective process, focusing primarily on Company and business unit financial performance, on an absolute and comparative basis, individual performance and expected market compensation.

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.

Compensation program.    Our Management Committee members receive annual compensation (excluding employee benefits) composed of base salary and incentive compensation consisting of a cash bonus and equity-based awards (restricted stock units and stock options). Base salary and incentive compensation constitute a Management Committee member’s “Total Reward.” In general, the greater the Total Reward, the greater the percentage of the total that is awarded in the form of long-term, equity-based compensation.

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 Reward is heavily weighted toward performance-based, incentive compensation. Their annual incentive compensation varies by Company, business unit and individual performance. We believe this links their compensation with Company, business unit and individual performance, and is consistent with our compensation policies discussed above. Generally, a portion of the annual incentive compensation is paid in cash, and a significant portion is paid in equity. 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-based compensation provides a continuing incentive to Management Committee members to foster Morgan Stanley’s success long after we award the compensation and aligns their interests with those of shareholders.

Compensation for fiscal 2002.    We analyzed several different factors when awarding incentive compensation for fiscal 2002. We:

These factors were not, however, the sole items we considered, and we did not target Total Rewards to fall at any particular point within a range established by a comparison of the financial performance of, or compensation levels of, the Financial Services Companies or the other competitors operating in the same or similar businesses as the Company. For purposes of this report, the term “Financial Services Companies” means the following companies (or subdivisions thereof): Alliance Capital Management; American Express Company; The Bear Stearns Companies Inc.; Capital One Financial Corporation; Citigroup Inc.; Credit Suisse Group; Deutsche Bank AG; The Goldman Sachs Group, Inc.; J.P. Morgan Chase & Co.; Lehman Brothers Holdings Inc.; MBNA Corporation; Merrill Lynch & Co., Inc.; MFS Investment Management; PIMCO Advisors; Providian Financial Corporation; Prudential Financial, Inc.; Putnam Investments; T. Rowe Price Group, Inc. and UBS AG.

We believe Morgan Stanley performed well in very challenging market conditions that continued to deteriorate during the year. The global markets for mergers and acquisitions and equity new issuances were down significantly. Retail participation and flows into equity mutual funds continued to decrease sharply. Morgan Stanley’s Credit Services business, however, performed very well as higher non-interest revenues offset consumer credit weaknesses. ROE was approximately 14%, an acceptable return for tough conditions and with long-term interest rates at 4%.

Our relative financial performance was very good with margins and return on capital at or near the highest of our key competitors. Market share results were mixed this year. Our largest business, sales and trading, continued to show good momentum. For Credit Services and the Individual Investor Group, market share was largely unchanged. In Investment Management and Investment Banking, we experienced a decline in market share.

We certified in accordance with Section 162(m) that Morgan Stanley’s financial results for fiscal 2002 satisfied the performance criteria set in accordance with Section 162(m) for fiscal 2002. After an analysis of the considerations set forth above, we awarded above-base incentive compensation to the Management Committee members for fiscal 2002 that was equal to or below the maximum amount yielded by the application of the compensation formula contained in the performance criteria. We awarded incentive compensation to the Management Committee members, partly in cash and partly in the form of long-term equity components (restricted stock units and options). We awarded an average of approximately 39% of each Management Committee member’s Total Reward in long-term equity. We ascribed value to restricted stock units based on a 25% discount from the fair market value of the common stock to compensate for the vesting characteristics and the significant restrictions on disposition of these units. Accordingly, the value we ascribed to such units differs from the amounts reported in the summary compensation table under the column headed “Restricted Stock Awards” because the amounts contained in the table are based on the fair market value of the common stock on the grant date without any discount. We valued stock option awards based upon a ratio of three options per share of Morgan Stanley’s common stock (2.25:1 with a 25% discount). The ratio is based upon Morgan Stanley’s historical practices and is competitive with Morgan Stanley’s key competitors’ compensation practices.

CEO compensation for fiscal 2002.    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 2002.

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 the other Management Committee members. Based on his individual and Morgan Stanley’s performance, Mr. Purcell’s Total Reward was $11,000,000, consisting of the following components:

Mr. Purcell’s compensation was down over 26% compared to fiscal 2001 and 56% compared to fiscal 2000. The equity-based awards contain the terms and conditions discussed in the following tables. Approximately 42% of Mr. Purcell’s fiscal 2002 compensation is tied to the performance of Morgan Stanley’s common stock. Mr. Purcell’s compensation reflects Morgan Stanley’s financial performance and his individual leadership through a very challenging year.

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 2002 compensation program met these objectives.

Respectfully submitted,  

Charles F. Knight, Chair
Robert P. Bauman