Morgan Stanley: Becoming a “One-Firm Firm”

Time: Summer 1993
Scenario: John Mack has recently been appointed president of Morgan Stanley (MS). His primary goal is to recapture the “value of the franchise.”

History of Morgan Stanley

• Firm founded in 1935 when, in the wake of the Banking Act of 1933 (Glass-Steagall) requiring banks to separate commercial and investment-banking activities, six partners of J.P. Morgan left to form Morgan Stanley & Co. • In 1971, MS launched a sales and trading operation, a dramatic change from its exclusive focus on corporate finance to that point. The firm was very successful in this effort, dominating the sales and trading rankings for a decade. • In mid-1970s, MS began expanding internationally, before most other firms were acting on the potential of the global market. • By 1977, MS had over 1,000 employees, more than 4 times as many as in 1970. • While the firm had been one of the most prestigious banks on Wall Street and had developed exclusive relationships with many Fortune 500 companies, by the early 1980s the firm had started to rest on its laurels as many of its competitors were on the rise. • In the 1980s, corporations began to move from single long-term banking relationships to long-term transaction-based relationships predicated on receiving a variety of services. MS stumbled during this time, falling to sixth in global underwriting in 1983. • During this time, MS established merchant banking and asset management divisions, and beefed up its trading operations. • In 1986, MS netted $250 million from an IPO in which it sold 20% of its shares. • In the late ‘80s and early ‘90s, MS focused on P&Ls within each business unit, generating greater focus on the most profitable businesses and services. At the same time, this short-run focus caused decisions to be made without consideration for the long-term impact on the firm.

Tensions in the early 1990s

• By 1992, MS had over 7,000 employees in 18 locations generating more than $3 billion in revenues and was once again on . • The rivalry between one-time friends, the chairman, Fisher, and the president, Greenhill (arrogant, old-school banker-type), intensified. Greenhill led all of investment banking; Fisher ran sales and trading. • The tension between the two caused decision-making to take longer than it should have. • To speed decision-making, in 1992, MS abandoned the 14-person management committee (that met monthly) and replaced it with an operating committee (that met weekly). The committee was headed by Mack, a Fisher protégé who had been promoted from the head of Fixed Income to effectively become COO. • Mack became president in June 1992; Greenhill, having effectively been shoved aside, resigned within a month.

John Mack

• Joined MS in 1972, after having turned down an offer 8 months earlier, fearing he wouldn’t fit into the “blue blood” firm. • Mack became a managing director in 1979, and the head of Fixed Income in 1985. • Had a reputation as a “walk the halls, press the flesh manager,” also as a cost cutter and dynamic builder of new businesses.

Leadership problems

• Rapid growth, retirements, and defections from Greenhill’s ouster had left a shortage of experienced managerial talent. • As the firm grew, partners, who had traditionally hired and mentored recruits, had much less time to devote to these activities. • There was no systematic effort within MS to monitor individual’s performance. Instead there were annual “round tables,” in which the senior people in a division would all gather once a year and assess the junior people. But there was no formal framework or systematic approach to guide these conversations. • Since employees knew that their superiors determined their promotions and salaries, they would “manage up” – making their bosses happy but spending no time helping their peers or those below them. • Mack notes that he heard from everyone from analysts to VPs that they felt that no one was looking at their careers, mentoring them, or giving them feedback on performance and expectations about their future with MS.

Addressing the problems

• Fisher and Mack decided they needed to change MS’s values to help attract and retain top employees. They named this initiative the “One-Firm Firm.” • They implemented a new mission statement that said: “Morgan Stanley’s people are the source of our competitive advantage. We will distinguish ourselves by creating an environment that fosters teamwork and innovation, by developing and utilizing our employees’ abilities to the fullest, and by treating each other with dignity and respect.” • Among the changes Mack made were the following: o Promoted promising employees more aggressively o Hired away top talent from competitors o Reorganized divisions and reassigned personnel • Mack also hired Thomas DeLong, a former BYU professor who specialized in organizational development, to “bring HR to a new level.” DeLong become Chief Development Officer and set up an HR management division called the Office of Development. • Mack faced particular suspicion from the Investment Banking division, in large part since he had come from Fixed Income. In response, he devoted a great deal of time and effort to meeting with I-bankers and their needs. • To improve cooperation and collaboration, each division’s plans were discussed firm-wide so that everyone could clearly understand the entire firm’s goals, and their particular impact on them. • MS also introduced a training program, with training in four skill areas: technical, professional, product, and management. Training sessions brought together managers from lots of divisions and improved communication between them. • Mack also frequently had dinner with employees, from managing directors to analysts, and encouraged managers to do the same. His goal was to have employees feel comfortable with one another. • To strengthen the sense of MS as one firm, the firm set out to boost the proportion of compensation tied to the firm’s performance, rather than just the division’s performance. • A 15-person team of bankers was set up to devise a new system to evaluate performance. One issue this team wrestled with was whether the purpose of evaluations was developmental or evaluative. • As the team continued its work, there were some high profile resignations at MS.

“Mack and Morgan Stanley were entering uncharted waters. Only time would tell if the firm would succeed in its attempt to, once again, reinvent itself.”