PSERS Joins Chorus for Change at Morgan Stanley

July 22, 2005 ( - A large Pennsylvania public pension fund has waded into the Morgan Stanley fray with a strongly worded letter to the Morgan Stanley board complaining about its executive pay practices.

In a letter from Nicholas Maiale, chairman of the $26-billion Pennsylvania State Employees’ Retirement System (PSERS), and Peter Gilbert, PSERS Chief Investment Officer, the fund executives noted that despite poor stock performance and numerous other “corporate disappointments,” three current and former executives have been awarded “the potential of receiving a shocking $166 million.”  The PSERS letter was delivered to Morgan Stanley Lead Independent Director Miles Marsh, according to the PSERS  Web announcement .

Asserting that the “massive giveaways have shattered shareowner confidence in the current board,” Maiale and Gilbert urged the Morgan Stanley panel to take steps to “demonstrate a commitment to the shareowners you were elected to serve.” PSERS said it currently holds more than $29 million of Morgan Stanley securities

Specifically, Maiale and Gilbert urged the Morgan Stanley board to:

  • establish an executive compensation plan “that holds management accountable for the performance of the company by only rewarding good performance.” Under such a plan, compensation incentives would be long-term and linked to the achievement of specific strategic goals.
  • Voluntarily adopt a majority-vote standard for the election of corporate directors. As is the case with most other US corporations, Morgan Stanley allows directors to be elected with a plurality of votes cast. That means any board member who is unopposed will get elected as long as a single vote is cast. Shareholders may cast a “withhold” vote on a candidate as a gesture of no-confidence, but that doesn’t block the director’s election.

Maiale told the Wall Street Journal that his group isn’t only a shareholder but also a client of Morgan Stanley’s, paying the New York firm $9 million a year in fees to manage billions of dollars in assets. He said the Wall Street firm’s board needs to “shape up and pay attention to how you’re producing return to shareholders and not throwing out these extravagant compensation packages.”

The Pennsylvania group is the third pension-fund investor in recent days to indicate publicly that it wants significant changes in how Morgan Stanley’s board is elected and how it operates – particularly with regard to executive compensation.

Last week pension officials of the American Federation of State, County, and Municipal Employees, whose members own about 4% of Morgan’s shares valued at more than $2 billion, asked for a meeting with board members to discuss reforms. They have tentatively set a meeting for mid-August.

The Central Laborers’ Pension Fund, an Illinois-based organization that owns about $375,000 of Morgan Stanley shares, filed a federal lawsuit against the company’s directors, former executives and lawyers alleging breach of fiduciary duty, mismanagement and negligence over decisions involving pay and other matters.

A Morgan spokesman told the Journal that the board “appreciates the opportunity to have a constructive dialogue with the company’s shareholders.”

PSERS has more than 200,000 members.