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. |
|
| • | 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 | |||||||
| Zoe Cruz | 2004 | 300,000 | 7,740,000 | — | 9,446,064 | — | 6,100 | ||||||||
| Head of | 2003 | 300,000 | 7,850,000 | — | 4,552,860 | 185,311 | (5) | 17,480 | |||||||
| Fixed Income Division | 2002 | 300,000 | 4,600,000 | — | 2,391,063 | 126,886 | (5) | 14,590 | |||||||
| John P. Havens | 2004 | 300,000 | 7,110,000 | — | 8,677,170 | — | 6,100 | ||||||||
| Head of | 2003 | 300,000 | 5,850,000 | — | 3,223,543 | 131,205 | (5) | 17,480 | |||||||
| Institutional Equity Division | 2002 | 300,000 | 4,725,000 | — | 2,474,082 | 131,291 | (5) | 14,590 | |||||||
(1) Includes amounts contributed to various Morgan Stanley deferred compensation plans.
(2) The market value of the common stock underlying restricted stock units (RSUs) using the closing price per share of common stock on the applicable grant date, as reported on the New York Stock Exchange Composite Transaction Tape, and without recognizing any diminution in value attributable to the restrictions on RSUs. Fiscal 2004 RSUs were granted on December 14, 2004 (the closing price on that date was $54.71) and 50% vest on January 2, 2007 and 50% vest on January 2, 2008. Fiscal 2003 RSUs were granted on November 28, 2003 (the closing price on that date was $55.28) and 50% vest on January 2, 2006 and 50% vest on January 2, 2007. Fiscal 2002 RSUs were granted on December 5, 2002 (the closing price on that date was $42.40) and vested on January 2, 2005. Unvested RSUs are subject to earlier vesting upon termination of employment without cause or upon a change of control of Morgan Stanley and receive dividend equivalents at the same rate that dividends are paid on shares of common stock. These RSUs are neither transferable nor generally distributed in the form of shares of common stock for approximately five years after the grant date and are subject to cancellation in certain circumstances. The following lists the number of RSUs awarded in each applicable year and the total number and value of RSUs held as of fiscal 2004 year end (including the fiscal 2004 grant). The value ascribed to RSUs in this table differs from the value ascribed to them by the Compensation Committee. See the Compensation Committee report on executive compensation, beginning on page 11.
| Number of
RSUs awarded for performance in |
Total RSUs
held as of 11/30/04 |
|||||||||
| Named Executive Officer | Fiscal 2004 | Fiscal 2003 | Fiscal 2002 | Number Held | Market Value | |||||
|
|
|
|
|
|
|||||
| Philip J. Purcell Stephan F. Newhouse Vikram S. Pandit Zoe Cruz John P. Havens |
251,799 171,402 181,440 172,657 158,603 |
73,493 |
72,254 67,163 67,163 56,393 58,351 |
650,161 810,980 1,342,492 906,343 1,023,116 | $32,995,671 $41,157,235 $68,131,469 $45,996,907 $51,923,137 | |||||
(3) Amounts allocated under the 401(k) Plan and ESOP. For Fiscal 2004, Morgan Stanley allocated 100% to the ESOP. For fiscal 2003, Morgan Stanley allocated 23.3% and 76.7% to the 401(k) Plan and ESOP, respectively. For fiscal 2002, Morgan Stanley allocated 8.2% and 91.8% to the 401(k) Plan and ESOP, respectively.
(4) The Company’s Board-approved policy requires the Chairman and CEO to use Company aircraft, whenever feasible, when traveling by air. The amounts include $467,142 in fiscal 2004, $481,949 in fiscal 2003 and $273,364 in fiscal 2002 reflecting personal use of Company aircraft.
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(6) Includes payments and reimbursements under Morgan Stanley’s temporary overseas assignment policy, which is applicable to all employees serving on temporary overseas assignment and is designed to eliminate any financial detriment or gain to the employee from the overseas assignment. Includes a housing allowance of approximately $171,727 in fiscal 2002, $148,184 in fiscal 2003 and $239,016 in fiscal 2004 and tax equalization and reimbursement payments of approximately $690,672 in fiscal 2003.
(7) Restoration Options granted upon exercise of RORs.
Option grants in last fiscal year. The table below describes stock options granted to the Named Executive Officers during fiscal 2004 upon the exercise of options with restoration option rights (RORs) that had been granted before fiscal 2004. No stock options or RORs were granted to the Company’s Management Committee members, including the Named Executive Officers, for service in fiscal 2004.
| Name | Number
of Securities Underlying Options Granted(#)(1) (Restoration Options) |
% of Total
Options Granted to All Employees in Fiscal Year |
Exercise
Price Per Share($) |
Expiration
Date |
Grant Date
Present Value($)(2) |
||
| Philip J. Purcell Stephan F. Newhouse Vikram S. Pandit Zoe Cruz John P. Havens |
— 44,726 83,898 — — — |
— 1.0977 2.0590 — — — |
— 49.09 49.09 — — — |
— 1/2/2008 1/2/2009 — — — |
— 538,897 1,147,059 — — — |
(1) Restoration Options were granted to Mr. Newhouse on July 14, 2004 upon the exercise of RORs granted in prior fiscal years. Restoration Options vest upon grant and have the same expiration date and transfer restrictions as the underlying options. RORs may only be exercised while the grantee is an employee of the Company. RORs entitle the grantee, upon tendering shares of common stock to the Company to pay the option exercise price of the underlying options, to Restoration Options. Restoration Options entitle the grantee to acquire the number of shares of common stock equal to the number of shares of common stock tendered to pay the exercise price and withheld to pay taxes upon the exercise of the underlying options, at a per share price equal to the volume weighted average price of our common stock on the option’s exercise date. RORs do not increase the option holder’s net equity position. Instead, RORs preserve the holder’s commitment to the Company by maintaining the holder’s net equity position—the sum of shares owned and shares subject to option.
(2) Options are valued using the modified Black-Scholes option pricing model, employing the assumptions described below. Using an option pricing model such as Black-Scholes, an option’s value would depend upon the assumptions used. For example, the values could range from approximately $6.45 per option (assuming the option was exercised at the end of one year) to approximately $12.05 and $13.67 per option for the options expiring January 2, 2008 and January 2, 2009, respectively (assuming in both cases that the options were exercised at the end of their respective option terms; these values are reflected in the table). Each of the foregoing values assumes: (i) a stock price volatility of 33.8%; (ii) a risk-free rate of return that was the implied rate on the grant date of a zero coupon U.S. Treasury STRIPS having a remaining term approximately equal to the assumed term of the subject option; and (iii) the Company’s annualized dividend yield on the grant date was constant over the life of the option. The values are hypothetical and there is no assurance that such values will be realized. The actual value, if any, realized on the stock options will depend on the future price of the common stock.
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| Name | Shares Acquired on Exercise(#)(1) |
Value Realized($)(2) |
Number
of Securities Underlying Unexercised Options at Fiscal Year-End(#)(3) |
Value
of Unexercised In-the- Money Options at Fiscal Year-End($)(4) |
||||||
| Exercisable(5) | Unexercisable | Exercisable(5) | Unexercisable | |||||||
| Philip J. Purcell Stephan F. Newhouse Vikram S. Pandit Zoe Cruz John P. Havens |
750,000 158,452 269,596 129,240 496,602 |
18,062,781 2,668,584 10,835,039 5,091,377 19,958,434 |
1,903,384 756,059 1,045,126 465,941 683,994 |
165,360 156,567 156,567 185,311 131,205 |
15,167,941 6,071,395 7,379,484 3,754,501 4,432,873 |
— — — — — |
||||
(1) The number of shares underlying options exercised in fiscal 2004 by the Named Executive Officers. The number of shares Mr. Purcell, Mr. Newhouse, Mr. Pandit, Ms. Cruz and Mr. Havens received from options each exercised in fiscal 2004 (net of shares tendered to cover the exercise price and withheld to pay income tax) was 227,151, 29,828, 133,332, 63,681 and 265,071, respectively.
(2) The difference between the market price of the common stock on the exercise date and the option exercise price multiplied by the number of shares acquired upon exercise.
(3) The shares of common stock that would be acquired upon exercising certain of these options are subject to transfer restrictions. The Company has no stock appreciation rights outstanding.
(4) The value of unexercised, in-the-money options is the aggregate, calculated on a grant-by-grant basis, of the product of the number of unexercised options multiplied by the difference between $50.7037, the volume weighted average price of our common stock on November 30, 2004, and the exercise prices of all such options. The actual value, if any, realized on the options will depend on the difference between the market price of the common stock on the exercise date and the option exercise price.
(5) Includes options that vested and became exercisable on January 2, 2005.
Pension plans. The paragraphs below discuss the amounts the Company estimates it will pay to each of the Named Executive Officers in annual benefits upon retirement.
Mr. Purcell participates in several defined benefit pension plans, including some unfunded executive plans, which collectively provide a benefit of approximately $1,451,000 per year for life upon retirement at age 65 with 30 years of service, proportionately adjusted for less (or more) service on account of earlier (or later) retirement. As of November 30, 2004, Mr. Purcell was credited with 26 years of benefit service (rounded to the nearest whole year). The overall benefit is developed from a formula that generally disregards pay increases, but recognizes service after 1994. The amount estimated above is (1) before applicable deductions relating to benefits from retirement plans of Sears, Roebuck and Co. and (2) not subject to deductions for Social Security or other offset amounts.
Mr. Newhouse, Mr. Pandit, Ms. Cruz and Mr. Havens participate in defined benefit pension plans intended to qualify under Section 401(a) of the Internal Revenue Code, and other plans that are nonqualified, unfunded plans for certain key employees. The compensation of each executive for purposes of determining benefits under the plans during fiscal 2004 is the amount reported as base salary in the summary compensation table. As of November 30, 2004, the credited years of service (rounded to the nearest whole year) under the plans for Mr. Newhouse, Mr. Pandit, Ms. Cruz and Mr. Havens were 26, 22, 22 and 18 years, respectively. The estimates in the table below assume that the executive will participate in all of the applicable Company retirement plans and remains in service with the Company until retirement at age 65. “Final Average Compensation” is equal to the
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(payable as a single-life annuity)
| Final Average Compensation |
|||||||||||||||||
| 15 | 20 | 25 | 30 | 35 | |||||||||||||
| $ | 200,000 | $ | 80,000 | $ | 100,000 | $ | 100,000 | $ | 110,000 | $ | 120,000 | ||||||
| 300,000 | 120,000 | 140,000 | 140,000 | 140,000 | 151,830 | ||||||||||||
| 400,000 | 140,000 | 140,000 | 145,950 | 175,140 | 204,330 | ||||||||||||
| 500,000 | 140,000 | 146,760 | 183,450 | 220,140 | 256,830 | ||||||||||||
| 600,000 | 140,000 | 176,760 | 220,950 | 265,140 | 309,330 | ||||||||||||
| 700,000 | 155,070 | 206,760 | 258,450 | 310,140 | 361,830 | ||||||||||||
| 800,000 | 177,570 | 236,760 | 295,950 | 355,140 | 414,330 | ||||||||||||
| 900,000 | 200,070 | 266,760 | 333,450 | 400,140 | 466,830 | ||||||||||||
| 1,000,000 | 222,570 | 296,760 | 370,950 | 445,140 | 519,330 | ||||||||||||
Stock performance graph. The following graph compares the cumulative total shareholder return (rounded to the nearest whole dollar) of our common stock, the S&P 500 Stock Index and the S&P 500 Diversified Financials Index for our last five fiscal years. The graph assumes a $100 investment at the closing price on November 30, 1999 and reinvestment of dividends on the payment date without commissions. This graph does not forecast future performance of our common stock.
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|
Item 2—Ratification of appointment of Morgan Stanley’s independent auditors |
The Audit Committee has appointed Deloitte & Touche LLP as independent auditors for fiscal 2005 and presents this selection to the shareholders for ratification. Deloitte & Touche will audit our consolidated financial statements for fiscal 2005 and perform other permissible, pre-approved services.
Pre-approval of independent auditor services. The Audit Committee pre-approves all audit and permitted non-audit services (including the fees and terms thereof) to be performed for the Company by Deloitte & Touche. The Chair of the Audit Committee may pre-approve additional permissible proposed non-audit services that arise between Committee meetings, provided that the Audit Committee is informed of the decision to pre-approve the service at its next scheduled meeting.
Independent auditors’ fees. The following table summarizes the aggregate fees (including related expenses; $ in millions) for professional services provided by Deloitte & Touche related to fiscal 2004 and fiscal 2003. For fiscal 2005, the Audit Committee directed the Company to reduce Audit-Related Fees and Tax Fees for services provided by Deloitte & Touche as a proportion of the Audit Fees for services provided by Deloitte & Touche.
| 2004 | 2003 | |||||||
|---|---|---|---|---|---|---|---|---|
| Audit Fees(1) | $ | 31.3 | $ | 21.8 | ||||
| Audit-Related Fees(2) | $ | 6.0 | $ | 5.2 | ||||
| Tax Fees(3) | $ | 5.5 | $ | 3.8 | ||||
| All Other Fees(4) | $ | 0 | $ | 0 | ||||
| Total | $ | 42.8 | $ | 30.8 | ||||
(1) Both 2004 and 2003 Audit Fees include: (i) the audit of our consolidated financial statements included in our Form 10-K annual report and services attendant to, or required by, statute or regulation; (ii) reviews of the interim condensed consolidated financial statements included in our quarterly reports on Form 10-Q; (iii) comfort letters, consents and other services related to SEC and other regulatory filings; and (iv) accounting consultation attendant to the audit. Audit Fees for 2004 also include the audit of management’s report on the effectiveness of the Company’s internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404).
(2) Audit-Related Fees include: (i) data verification and agreed-upon procedures related to asset securitizations; (ii) assessment and testing of internal controls and risk management processes beyond the level required as part of the consolidated audit; (iii) statutory audits and financial audit services provided relating to investment products offered by Morgan Stanley, where Morgan Stanley incurs the audit fee in conjunction with the investment management services it provides; (iv) audits of employee benefit plans; (v) agreed upon procedures engagements; (vi) regulatory matters; and (vii) due diligence associated with mergers and acquisitions and with acquisitions of financial assets.
(3) Tax Fees include tax compliance, tax planning and tax advice. Tax compliance services include: (i) U.S. federal, state and local income and non-income tax compliance, including preparation and review of tax returns; (ii) non-U.S. income and non-income tax compliance, including preparation and review of tax returns; (iii) transfer pricing documentation; and (iv) compliance services provided relating to investment products offered by Morgan Stanley where Morgan Stanley incurs the fee in conjunction with the investment management services it provides. Tax planning and tax advice services include: (i) U.S. federal, state and local income and non-income tax planning and advice; and (ii) non-U.S. income and non-income tax planning and advice.
(4) There were no other professional services rendered in 2004 or 2003.
Fund-related fees. Morgan Stanley offers investment products, including money market, equity and fixed income funds and commodity pools (Funds). Deloitte & Touche provides audit, audit-related and tax services to
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| 2004 | 2003 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Audit Fees | $6.9 | $5.4 | |||||||
| Audit-Related Fees | $0.3 | $0.6 | |||||||
| Tax Fees | $1.8 | $1.0 |
| 2004 | 2003 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Audit Fees | $4.5 | $4.5 | |||||||
| Audit-Related Fees | $0.3 | $0.5 | |||||||
| Tax Fees | $0.7 | $0.7 |
A Deloitte & Touche representative will attend the annual meeting to respond to your questions and will have the opportunity to make a statement. If the shareholders do not ratify the appointment, the Audit Committee will reconsider it.
Our Board recommends a vote “FOR” the ratification of Deloitte & Touche’s appointment as Morgan Stanley’s independent auditors. Proxies solicited by the Board of Directors will be voted “FOR” this ratification unless otherwise instructed.
Audit Committee report. The Audit Committee is responsible for monitoring the integrity of the Company’s consolidated financial statements, the Company’s system of internal controls, the Company’s risk management, the qualifications and independence of the Company’s independent auditor, the performance of the Company’s internal and independent auditors and the Company’s compliance with legal and regulatory requirements. We have the sole authority and responsibility to select, determine the compensation of, evaluate and, when appropriate, replace the Company’s independent auditors. The Committee has four independent directors and operates under a written charter adopted by the Board. The Board has determined that each Committee member is independent under the standards of director independence established under our Corporate Governance Policies and the NYSE listing requirements and is also “independent” for purposes of Section 10A(m)(3) of the Securities Exchange Act of 1934.
Management is responsible for the financial reporting process, including the system of internal controls, for the preparation of consolidated financial statements in accordance with generally accepted accounting principles and for the report on the Company’s internal control over financial reporting. The Company’s independent auditors are responsible for auditing those financial statements and expressing an opinion as to their conformity with generally accepted accounting principles and for attesting to management’s report on the Company’s internal control over financial reporting. Our responsibility is to oversee and review the financial reporting process and to review and discuss management’s report on the Company’s internal control over financial reporting. We are not, however, professionally engaged in the practice of accounting or auditing and do not provide any expert or other special assurance as to such financial statements concerning compliance with laws, regulations or generally accepted accounting principles or as to auditor independence. We rely, without independent verification, on the information provided to us and on the representations made by management and the independent auditors.
We held eight meetings during fiscal 2004. The meetings were designed, among other things, to facilitate and encourage communication among the Committee, management, the internal auditors and the Company’s
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We reviewed and discussed the Company’s progress on complying with Section 404 of the Sarbanes-Oxley Act of 2002, including the Public Company Accounting Oversight Board’s (PCAOB) Auditing Standard No. 2 regarding the audit of internal control over financial reporting. The Committee also met with Ernst & Young LLP, an accounting firm retained by the Company to assist in its compliance with Section 404. We also engaged Ernst & Young to review the Committee’s charter, policies and practices. Ernst & Young stated that the charter, policies and practices satisfy PCAOB’s requirements.
We reviewed and discussed the Company’s guidelines, policies and procedures for risk assessment and risk management and the major risk exposures of the Company and its business units, as appropriate. We reviewed and discussed with management its reports on risk management.
We reviewed and discussed the audited consolidated financial statements for the fiscal year ended November 30, 2004 with management, the internal auditors and Deloitte & Touche. We reviewed and discussed the restatements of the Company’s unaudited interim financial statements for the first three quarters of 2003 related to changes in the timing of recognition of expense of equity-based awards. We also discussed the update of the Company’s audited consolidated financial statements for fiscal 2003 and the Company’s unaudited interim financial statements for the first two quarters of fiscal 2004 resulting from the reclassification as held for sale of certain aircraft in the Company’s leasing portfolio. We also discussed the accounting issues relevant to the Company’s settlement agreement with the SEC that resolved an informal accounting investigation regarding valuation of certain impaired aircraft in the Company’s aircraft leasing business and of certain bonds in the Company’s high-yield bond portfolio. The Company did not restate past financial statements in connection with this agreement. We reviewed and discussed with management, the internal auditors and Deloitte & Touche management’s annual report on the Company’s internal control over financial reporting and Deloitte & Touche’s attestation report. We also discussed with management, internal auditors and Deloitte & Touche the process used to support certifications by the Company’s Chief Executive Officer and Chief Financial Officer that are required by the Securities and Exchange Commission and the Sarbanes-Oxley Act of 2002 to accompany the Company’s periodic filings with the Securities and Exchange Commission and the processes used to support management’s annual report on the Company’s internal controls over financial reporting.
We also discussed with Deloitte & Touche matters that independent accounting firms must discuss with audit committees under generally accepted auditing standards and standards of the PCAOB, including, among other things, matters related to the conduct of the audit of the Company’s consolidated financial statements and the matters required to be discussed by Statement on Auditing Standards No. 61, as amended (Communication with Audit Committees).
Deloitte & Touche also provided to the Committee the written disclosures and the letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees) and represented that it is independent from the Company. We discussed with Deloitte & Touche their independence from the Company. When considering Deloitte & Touche’s independence, we considered if services they provided to the Company beyond those rendered in connection with their audit of the Company’s consolidated financial statements, reviews of the Company’s interim condensed consolidated financial statements included in its Quarterly Reports on Form 10-Q and the attestation of management’s report on internal control over financial reporting were compatible with maintaining their independence. We also reviewed, among other things, the audit, audit-related and tax services performed by, and the amount of fees paid for such services to, Deloitte & Touche. We received regular updates on the amount of fees and scope of audit, audit-related and tax services provided.
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Respectfully submitted,
C. Robert Kidder, Chair
Sir Howard J. Davies
John W. Madigan
Dr. Klaus Zumwinkel
|
Item 3—Company proposal to amend the Company’s Certificate of Incorporation to institute annual election of directors |
In 1997, the boards of directors of each of Dean Witter, Discover & Co. and Morgan Stanley Group Inc., our predecessor companies, determined that the merger of the two companies in a merger-of-equals was in the best interest of shareholders and submitted the terms of the merger to the shareholders of each company. As submitted to shareholders for approval, the merger proposal provided that the certificate of incorporation of the merged company would have (i) a classified board of directors (approximately one-third of the directors are elected annually, each for a three-year term) and (ii) a provision that permits directors to be removed prior to the expiration of their terms only for cause and only by the affirmative vote of the holders of at least 80% of all of the shares of our capital stock outstanding and entitled to vote generally for the election of directors (“voting stock”), voting together as a single class. Each company’s shareholders approved the merger, with the result that our Company has had a classified board since May 31, 1997.
The merits of a classified board of directors have been extensively discussed. Some investors believe classified boards have the effect of insulating directors from a corporation’s shareholders, and several major corporations have determined that, regardless of the merits of a classified board in deterring coercive takeover attempts, under current corporate governance trends, it is advisable that all directors of a corporation be elected annually.
A shareholder proposal submitted by Evelyn Y. Davis to declassify our Board of Directors has been presented to our shareholders in five of the last six years and has received a majority of votes cast at our past three annual meetings. The Board of Directors has considered carefully the advantages and disadvantages of maintaining a classified board structure and, in the past, concluded that it would be in the best interests of the Company and our shareholders to maintain the classified board. This year, the Board has again given due consideration to the various arguments for and against a classified board, including consultation with internal and outside advisors. After this review, the Board of Directors, upon the recommendation of the Nominating and Governance Committee, determined that it is advisable to declassify the Board.
If the proposed amendment is approved by our shareholders, at each annual meeting of shareholders commencing with the 2006 annual meeting, directors elected to succeed those directors whose terms then expire shall be elected by a plurality vote of all votes cast at such meeting to hold office for a term expiring at the next annual meeting of shareholders, with each director to hold office until his or her successor shall have been duly elected and qualified. Commencing with the 2008 annual meeting of shareholders, all directors shall be elected annually. Furthermore, any director chosen as a result of a newly created directorship or to fill a vacancy on the Board of Directors (i) prior to the 2008 annual meeting of shareholders shall hold office for a term expiring at the annual meeting of shareholders at which the term of office of the class to which they have been elected expires or (ii) subsequent to the 2008 annual meeting of shareholders shall hold office for a term expiring at the next annual meeting of shareholders. In addition, the proposal would provide that subsequent to the 2008 annual meeting of
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The proposed amendment to our Certificate of Incorporation provides that Article VII will be deleted and replaced in its entirety by the following:
Board of Directors
| Subject to the rights of the holders of any series of Preferred
Stock, or any other series or class of stock as set forth in this
Certificate of Incorporation, to elect additional directors under
specified circumstances, the number of directors of the Corporation
shall be fixed in such manner as prescribed in the Bylaws of the Corporation
and may be increased or decreased from time to time in such manner
as prescribed by the Bylaws. Unless and except to the extent that the Bylaws of the Corporation shall so require, the election of directors of the Corporation need not be by written ballot. Subject to the succeeding provisions of this paragraph, the directors, other than those who may be elected by the holders of any series of Preferred Stock or any other series or class of stock as set forth in this Certificate of Incorporation, shall be divided into three classes, initially consisting of 6, 4 and 4 directors. One class of directors initially consisting of 4 directors shall be initially elected for a term expiring at the annual meeting of stockholders to be held in 1998, another class initially consisting of 4 directors shall be initially elected for a term expiring at the annual meeting of stockholders to be held in 1999, and another class initially consisting of 6 directors shall be initially elected for a term expiring at the annual meeting of stockholders to be held in 2000. Members of each class shall hold office until their successors are elected and qualified. At each annual meeting of the stockholders of the Corporation commencing with the 1998 annual meeting but prior to the 2006 annual meeting, directors elected to succeed those directors whose terms then expire shall be elected by a plurality vote of all votes cast at such meeting to hold office for a term expiring at the third succeeding annual meeting of stockholders after their election, with each director to hold office until his or her successor shall have been duly elected and qualified. At each annual meeting of the stockholders of the Corporation commencing with the 2006 annual meeting, directors elected to succeed those directors whose terms then expire shall be elected by a plurality vote of all votes cast at such meeting to hold office for a term expiring at the next annual meeting of stockholders, with each director to hold office until his or her successor shall have been duly elected and qualified. Commencing with the 2008 annual meeting of stockholders of the Corporation, the foregoing classification of the Board of Directors shall cease. Subject to the rights of the holders of any series of Preferred Stock, or any other series or class of stock as set forth in this Certificate of Incorporation, to elect additional directors under specified circumstances, vacancies resulting from death, resignation, retirement, disqualification, removal from office or other cause, and newly created directorships resulting from any increase in the authorized number of directors, may be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors, and directors so chosen (i) prior to the 2008 annual meeting of stockholders shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires, or (ii) subsequent to the 2008 annual meeting of stockholders shall hold office for a term expiring at the next annual meeting of stockholders, and in each case until such director’s successor shall have been duly elected and qualified. No decrease in the number of authorized directors constituting the Board of Directors shall shorten the term of any incumbent director. |
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| Subject to the rights of the holders of any series of Preferred
Stock, or any other series or class of stock as set forth in this
Certificate of Incorporation, to elect additional directors under
specified circumstances, any director may be removed from office at
any time, but only by the affirmative vote of the holders of at least
80 percent of the voting power of the then outstanding Voting Stock,
voting together as a single class, and, prior to the 2008 annual meeting
of stockholders, only for cause. |
Our Board of Directors recommends you vote “FOR” this proposal. Proxies solicited by the Board of Directors will be voted “FOR” this proposal unless otherwise instructed.
The “Corporate governance” section on page 8 describes several corporate governance initiatives that the Board announced, including the revision of the approach to incentive compensation awards for Management Committee members.
|
Item 4—Shareholder proposal to limit CEO compensation |
The Catholic Equity Fund, 1100 West Wells St., Milwaukee, WI 53233, owner of approximately 2,900 shares of common stock, CHRISTUS Health, 2600 North Loop West, Houston, TX 77092, owner of 18,600 shares of common stock and Dominican Sisters, 775 West Drahner Rd., Oxford, MI 48371, owner of 165 shares of common stock, have notified Morgan Stanley that they intend to present the following proposal and related supporting statement at the annual meeting:
RESOLVED: The shareholders urge the Board of Directors:
| • | To limit the Compensation paid to the CEO in any fiscal year to
no more than 100 times the average Compensation paid to the company’s
Non-Managerial Workers in the prior fiscal year, unless the shareholders
have approved paying the CEO a greater amount; |
|
| • | In any proposal for shareholder approval, to provide that the CEO
can receive more than the 100-times amount only if the company achieves
one or more goals that would mainly reflect the CEO’s contributions
rather than general market conditions; and |
|
| • | In that proposal, to assure the shareholders that the Board will
seriously consider reducing the CEO’s compensation in the event of
any unusual reduction in the company’s workforce resulting from outsourcing
or other factors. |
“Compensation” means salary, bonus, the grant-date present value of stock options, the grant-date present value of restricted stock, payments under long-term incentive plans, and “other annual” and “all other compensation” as those categories are defined for proxy statement purposes.
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| 1. | Unless internally anchored, market-based compensation methods tend
to produce excessive CEO compensation; |
|
| 2. | Very high CEO pay should require shareholder approval since it tends
to produce sub par share performance long-term; and |
|
| 3. | Very highly paid CEOs should realize that they might share some
pain when choosing job reductions as a means to achieve corporate
goals. |
Our resolution would not arbitrarily limit CEO compensation. Rather, it would offer the board the opportunity to persuade the shareholders that very high CEO compensation would make the company more competitive and would be in their interest.
At Morgan Stanley, CEO Compensation averaged 14.4 million dollars in the fiscal years ended November 30, 2001, 2002, and 2003. This is 565 times the $25,501 that the average U.S. worker makes according to the AFL-CIO’s Executive Paywatch (http://www.aflcio.org/corporateamerica/paywatch/). In their 2004 analyses of executive pay versus shareholder return, Business Week gave the CEO its worst rating (http://www.businessweek.com/pdfs/2004/0416_execpay.pdf), and Forbes gave the CEO a grade of D (http://www.forbes.com/lists/2004/04/21/04ceoland.html).
OUR BOARD OF DIRECTORS RECOMMENDS YOU VOTE “AGAINST” THIS PROPOSAL. Our Board believes this proposal is not in the best interest of shareholders and opposes this proposal for the following reasons.
| • | Attract and retain Chief Executive Officer. Our Company
must have the flexibility to tailor compensation packages to meet
competitive market conditions in order to attract and retain executives,
including our CEO, in our highly competitive industry. The proposal
does not account for the factors that must be considered in determining
appropriate CEO compensation, including financial and other performance
goals of our Company, as well as our CEO’s individual performance.
The proposal would place our Company at a competitive disadvantage
by imposing an arbitrary limit on CEO compensation. |
| • | Compensation program performance-based. Our Compensation
Committee’s philosophy is to link closely our CEO’s compensation with
the achievement of annual and long-term performance goals. By imposing
arbitrary constraints on our CEO’s compensation, the proposal would
undermine the performance-based nature of our compensation program. |
| • | Compensation Committee duties. Our Compensation Committee
is required by New York Stock Exchange rules and the Committee’s charter
to review and approve corporate goals and objectives relevant to CEO
compensation, to evaluate the CEO’s performance in light of those
goals and objectives, and to determine and |
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| approve the CEO's compensation level based on this evaluation. The
proposal's arbitrary cap on CEO compensation and requirement for shareholder
approval of performance goals in order to exceed the cap would hinder
the Committee's ability to fulfill its duties. |
|
| • | Compensation Committee flexibility. The Compensation
Committee is composed solely of independent directors and retains
an independent consultant to advise it. The Committee exercises its
business judgment by regularly considering its approach to CEO compensation.
For example, in 2004, the Committee increased to 65% the portion of
the CEO's bonus paid in the form of restricted stock units, and did
not award stock options or restoration option rights
to the CEO as it had in the past. The proposal would impair the Committee's
exercise of its business judgment and would limit its ability to design
effective performance goals to retain and incent our CEO and our other
senior executives and to account for changes in our Company's needs
and competitive market conditions. |
| • | Shareholders approved compensation limits. Our shareholders
have already approved a limit on the compensation awardable to our
CEO and our other senior executives, which ensures the tax deductibility
of these compensation payments for purposes of Internal Revenue Code
Section 162(m). |
David P. Purcell and Paul M. Purcell, sons of Philip J. Purcell, are each principals in the general partner of two limited partnerships, Continental Partners, L.P. and Continental Healthcare Fund (QP), L.P., in which Philip J. Purcell owns in excess of 10% of the limited partnership interests. MS&Co. is a prime broker for these limited partnerships and from time to time these limited partnerships may transact other business with the Company’s subsidiaries. All such transactions are in the ordinary course of the Company’s business and on substantially the same terms as comparable transactions with unrelated third parties. During fiscal 2004, these two limited partnerships together paid less than $1 million in commissions to Morgan Stanley for brokerage services.
Roger C. Hochschild received benefits under DFS’s relocation policy for U.S. professional employees in connection with his appointment as President and Chief Operating Officer of DFS and his relocation to DFS’s
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Morgan Stanley offers mortgage products to the public and extends a discount on select mortgage loan origination fees to some customers, including Company employees. Since December 1, 2003, the Company extended credit in the ordinary course of business to (i) Mr. Purcell's son Michael Purcell and (ii) Shereen Abdel-Meguid, a sister of Tarek Abdel-Meguid, one of the Company's executive officers. Mr. Abdel-Meguid co-signed for the loan to his sister. The Company sold these loans in the ordinary course of business to unaffiliated third parties before the end of fiscal 2004. The information below covers the period from origination until the loans were sold. Michael Purcell's mortgage loan was an adjustable rate loan bearing interest at 2.875%, the greatest amount outstanding on this loan was $1,000,000 and there was a discount on the origination fee. Ms. Abdel-Meguid's mortgage loan was an adjustable rate loan bearing interest at 3.125%, the greatest amount outstanding on this loan was $2,395,000 and there was a discount on the origination fee. These transactions did not involve more than the normal risk of collectability or present other unfavorable features, and were on substantially the same terms, including interest rate, collateral and discount on the origination fee, as those prevailing at the time for comparable transactions with other persons.
During fiscal 2004, we engaged in transactions in the ordinary course of business with each of State Street Bank and Trust Company (State Street), FMR Corp. (FMR), Barclays Global Investors, N.A. (Barclays) and certain of their respective affiliates. Each of FMR and Barclays beneficially owned more than 5% of the outstanding shares of Morgan Stanley common stock as of December 31, 2004, and State Street beneficially owned more than 5% of the outstanding shares of Morgan Stanley common stock as of December 31, 2003, the most recent dates with respect to which each publicly disclosed its beneficial ownership of Morgan Stanley common stock. Such transactions were on substantially the same terms as those prevailing at the time for comparable transactions with unrelated third parties. We also enter into financial services transactions (e.g., trading in securities, commodities or derivatives) with, and perform investment banking, financial advisory, brokerage and other services for, entities for which our directors serve as executive officers, and may make loans or commitments to extend loans to such entities. The transactions are conducted, services are performed, and loans and commitments are made in the ordinary course of business and on substantially the same terms, including interest rate and collateral, that prevail at the time for comparable transactions with other persons. The loans do not involve more than the normal risk of collectability or present other unfavorable features.
Other business. We do not know of any other matters that may be presented for action at the meeting other than those described in this proxy statement. If any other matter is properly brought before the meeting, the proxy holders will vote on such matters according to their judgment.
Communications with directors. Shareholders and other interested parties may contact any of the Company's directors (including any director presiding at an executive session of non-employee directors), a committee of the Board, the Board's non-employee directors as a group or the Board generally, by writing to them at Morgan Stanley, Suite D, 1585 Broadway, New York, New York 10036. Shareholder communications received in this manner will be handled in accordance with the procedures approved by the Company's independent directors. The Board's Policy Regarding Shareholder Communications with the Board of Directors is available at our corporate governance webpage at www.morganstanley.com.
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Shareholders of record of the Company who comply with the notice procedures set forth below may make a director recommendation for consideration by the Nominating and Governance Committee. Shareholders may make recommendations at any time, but recommendations for consideration as nominees at the annual meeting of shareholders must be received not less than 120 days before the first anniversary of the date of the proxy statement released to shareholders in connection with the previous year's annual meeting. Therefore, to submit a candidate for consideration for nomination at the 2006 annual meeting of shareholders, shareholders must submit the recommendation, in writing, by October 19, 2005. The written notice must demonstrate that it is being submitted by a shareholder of record of the Company and include information about each proposed director candidate, including name, age, business address, principal occupation, principal qualifications and other relevant biographical information. In addition, the shareholder must provide confirmation of each candidate's consent to serve as a director. Shareholders must send recommendations to the Nominating and Governance Committee, Morgan Stanley, Suite D, 1585 Broadway, New York, New York 10036.
The Nominating and Governance Committee identifies, evaluates and recommends director candidates to the Board. The Corporate Governance Policies set forth Board membership criteria. The Company seeks highly qualified candidates from diverse professional backgrounds who combine a broad spectrum of experience and expertise with a reputation for integrity. They should have experience in positions with a high degree of responsibility and be leaders in the companies or institutions with which they are affiliated. The Company selects Board members based upon contributions they can make to the Board and management and their ability to represent the interests of Morgan Stanley's shareholders, regardless of gender or race. Because of the potential for conflicts of interest, the Board does not seek members employed as attorneys, investment bankers, accountants or consultants. It also does not seek as members portfolio managers, representatives from its institutional shareholder base, competitors or any particular employee constituency.
The Committee accepts shareholder recommendations of director candidates and evaluates such candidates in the same manner as other candidates. Upon identifying a director candidate, the Committee initially determines the need for additional or replacement Board members and evaluates the director candidate under the criteria described above based on the information the Committee receives with the recommendation or otherwise possesses, which may be supplemented by certain inquiries. If the Committee determines, in consultation with other directors, including the Chairman of the Board, that a more comprehensive evaluation is warranted, the Committee may then obtain additional information about the director candidate's background and experience, including by means of interviews. The Committee will then evaluate the director candidate further, again using the evaluation criteria described above. The Committee receives input on such director candidates from other directors, including the Chairman of the Board, and recommends director candidates to the full Board for nomination. The Committee may engage a third party to assist in identifying director candidates or to assist in gathering information regarding a director candidate's background and experience. If the Committee engages a third party, the Committee approves the fee that Morgan Stanley pays for these services.
Shareholders may nominate director candidates by complying with our Bylaw provisions discussed below.
Shareholder proposals for the 2006 annual meeting. Shareholders intending to present a proposal at the 2006 annual meeting and have it included in our proxy statement for that meeting must submit the proposal in writing to Donald G. Kempf, Jr., Secretary, 1585 Broadway, New York, New York 10036. We must receive the proposal no later than October 19, 2005.
Shareholders intending to present a proposal at the 2006 annual meeting, but not to include the proposal in our proxy statement, or to nominate a person for election as a director, must comply with the requirements set forth
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Cost of soliciting your proxy. We will pay the expenses of the preparation of the proxy materials and the solicitation by the Board of your proxy. Our directors, officers and employees, who will receive no additional compensation for soliciting, D.F. King & Co., Inc. and Innisfree M&A Incorporated may solicit your proxy, in person or by telephone, mail, facsimile or other means of communication. We will pay D.F. King and Innisfree fees not exceeding $20,000 each, plus expenses. We will also reimburse brokers, including MS&Co., MSDWI and other nominees, for costs they incur mailing proxy materials.
Shareholders sharing an address. Consistent with notices sent to record shareholders sharing a single address, we are sending only one summary annual report, Form 10-K annual report and proxy statement to that address unless we received contrary instructions from any shareholder at that address. This “householding” practice reduces our printing and postage costs. Shareholders may request or discontinue householding, or may request a separate copy of the summary annual report, Form 10-K annual report or proxy statement as follows:
| • | Record shareholders wishing to discontinue or begin householding,
or any record shareholder residing at a householded address wanting
to request delivery of a copy of the summary annual report, Form 10-K
annual report or proxy statement, should contact our transfer agent,
Mellon Investor Services, at 1-800-622-2393 (U.S.), (201) 329-8660
(outside the U.S.) or www.melloninvestor.com, or may write to them
at P.O. Box 3315, South Hackensack, NJ 07606-1915. |
| • | Shareholders owning their shares through a bank, broker or other
holder of record who wish to either discontinue or begin householding
should contact their record holder. Any householded shareholder may
request prompt delivery of a copy of the summary annual report, Form
10-K annual report or proxy statement by contacting us at (212) 762-8131
or may write to us at Investor Relations, 1585 Broadway, New York,
NY 10036. |
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Standards of Director Independence
2. Relationships not deemed material for purposes of director independence.
|
A-1 |
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s
| A-2 | |
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Membership
| 1. | The Committee shall be comprised of at least three (3) Board members
appointed by the Board after considering the recommendation of the
Nominating and Governance Committee. No Board member shall serve simultaneously
on the Committee and the audit committee of more than two (2) other
public companies, unless the Board shall determine that such simultaneous
service would not impair the Board member’s ability to serve effectively
on the Committee. Such determination shall be disclosed in the proxy
statement. Committee members shall serve at the pleasure of the Board
and for such term as the Board determines. The Board shall designate
one Committee member as the Committee’s chair. |
|
| 2. | Each Committee member shall have no material relationship with the
Company and shall satisfy the independence requirements of the Company,
the New York Stock Exchange (“NYSE”), the Securities Exchange Act
of 1934 (the “Exchange Act”), and the rules and regulations of the
Securities and Exchange Commission (“SEC”). |
|
| 3. | Each Committee member shall be financially literate in accordance
with NYSE requirements or must become financially literate in accordance
with such requirements within a reasonable period of time after his
or her appointment to the Committee. |
|
| 4. | At least one Committee member shall have accounting or related financial management expertise in accordance with NYSE requirements. |
Operations
| 1. | The Committee shall hold regular meetings at least four times per
year and report to the Board on a regular basis. Meetings shall include
any participants the Committee deems appropriate and shall be of sufficient
duration and scheduled at such times as the Committee deems appropriate
to discharge properly its responsibilities. |
|
| 2. | The Committee shall meet periodically with management, the independent
auditor and the internal auditor in separate executive sessions. |
|
| 3. | The Committee may form and delegate to one or more subcommittees
all or any portion of the Committee’s authority, duties and responsibilities,
and may establish such rules as it determines necessary or appropriate
to conduct its business. |
|
| 4. | The Committee shall have direct access to, and complete and open
communication with, the Company’s management and internal and independent
auditor and may obtain advice and assistance from internal legal,
accounting or other advisors. The Committee may retain independent
legal, accounting or other advisors. The Committee shall have authority
to perform or supervise investigations, and the Company shall provide
for appropriate funding, as determined by the Committee, for the payment
of expenses related to any such investigation. |
|
B-1 |
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| 5. | The Company shall provide for appropriate funding, as determined
by the Committee, for the payment of: (i) compensation to the independent
auditor engaged for the purpose of preparing or issuing an audit report
or performing other audit, review or attest services or other permitted
services for the Company; (ii) ordinary administrative expenses of
the Committee that are necessary or appropriate in carrying out its
duties and responsibilities; and (iii) compensation to an independent
legal, accounting or other advisors retained by the Committee. |
|
| 6. | The Committee shall review and assess annually its performance and
report the results to the Board. The Committee shall review and assess
annually the adequacy of this charter and, if appropriate, recommend
changes to the charter to the Board. |
| The Committee shall: |
|
| Oversight of the Company’s Relationship with the Independent Auditor |
| 1. | Have the sole authority and responsibility to appoint (which appointment
may be presented to shareholders for ratification), compensate, retain,
oversee, evaluate and, when appropriate, replace the independent auditor
engaged for the purpose of preparing or issuing an audit report or
performing other audit, review and attest services. The independent
auditor shall report directly to the Committee. |
|
| 2. | Preapprove all audit, review and attest services and permitted non-audit
services (including the fees and terms thereof) to be performed for
the Company by its independent auditor, subject to the de minimis
exception for non-audit services described in Section 10A(i)(1)(B)
of the Exchange Act that are approved by the Committee prior to the
completion of the audit. The Committee may form and delegate authority
to subcommittees consisting of one or more members the authority to
grant preapprovals of audit and permitted non-audit services, provided
that decisions of such subcommittee to grant preapprovals shall be
presented to the full Committee at its next scheduled meeting. |
|
| 3. | Review and evaluate annually the qualifications, performance and
independence of the lead partner of the independent auditor and assure
regular rotation of the lead audit partner, reviewing partner and
other audit engagement team partners of the independent auditor as
required by law. Annually evaluate the appropriateness of rotating
the independent audit firm. Evaluate annually the qualifications and
performance of the independent auditor. Provide its conclusions to
the Board. |
|
| 4. | Evaluate the independence of the independent auditor by, among other
things, ensuring that the independent auditor periodically, and at
least annually, submits to the Committee a formal written statement
delineating all relationships between the independent auditor and
the Company, including any non-audit service permitted under the Exchange
Act provided to the Company and the matters set forth in Independence
Standards Board Standard No. 1. Engage in a dialogue with the independent
auditor with respect to any disclosed relationships or services that
may impact their objectivity and independence. Provide its conclusions
to the Board. |
|
| 5. | Obtain, review and evaluate, at least annually, a report by the
independent auditor describing the independent auditor’s internal
quality-control procedures, any material issues raised by the most
recent internal quality-control review, or peer review, of the independent
auditor, or by any inquiry or investigation by governmental or professional
authorities, within the preceding five years, respecting one or more
independent audits carried out by the independent auditor, and any
steps taken in response to any such issues. Provide its conclusions
to the Board. |
|
| 6. | Set the Company’s policies for the hiring of current and former employees of the independent auditor. |
| Oversight of the Company’s Internal Auditor and Internal Controls |
| 7. | Approve the appointment and, when and if appropriate, replacement
of the Company’s senior internal auditing executive, who shall report
directly to the Committee. Review the qualifications and performance
of the senior internal auditing executive. |
| B-2 | |
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| 8. | Review the significant reports to management prepared by the internal
auditing department and management’s responses. |
|
| 9. | Discuss, as appropriate, the adequacy of the Company’s internal
controls with the internal and independent auditors and management,
including without limitation reports from the Chief Executive Officer
or the Chief Financial Officer regarding significant deficiencies
and material weaknesses in the design or operation of internal controls
over financial reporting or any fraud, whether or not material, that
involves management or other employees who have a significant role
in the Company’s internal controls. Review and discuss, as appropriate,
any major issues as to the adequacy of the Company’s internal controls
and any special audit steps adopted in light of material control deficiencies.
Review the Chief Executive Officer and Chief Financial Officer certification
process and the role of the Disclosure Committee. |
|
| 10. | Review and discuss with management and the internal and independent
auditors management’s annual report on the Company’s internal control
over financial reporting and the independent auditor’s attestation
report regarding management’s report. Receive reports from management
regarding management’s quarterly evaluations of changes in internal
controls over financial reporting and discuss with management and
the independent auditor as appropriate. |
|
| 11. | Review the annual plan and scope of work of the internal auditor. |
| Oversight of the Financial Statements, Audit and Disclosure |
| 12. | Review the results of internal and independent audits and discuss
with management and the independent auditor the Company’s annual audited
consolidated financial statements and condensed consolidated quarterly
and year-to-date financial statements, including the Company’s disclosures
under “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” and other matters required by professional
auditing standards or under applicable legal, regulatory or NYSE requirements. |
|
| 13. | Regularly review with the independent auditor significant issues
regarding accounting principles and financial statement presentations,
including (i) any significant changes in the Company’s selection or
application of accounting principles; (ii) analyses prepared by management
and/or the independent auditor setting forth significant financial
reporting issues and judgments made in connection with the preparation
of the financial statements, including analyses of the effects of
alternative GAAP methods on the financial statements; and (iii) any
significant communications between the independent audit team and
the independent audit firm’s national office respecting auditing or
accounting issues presented by the engagement. |
|
| 14. | Review and discuss with the independent auditor and, to the extent
appropriate, management, in connection with the Company’s Annual Report
on Form 10-K, and otherwise, as appropriate, any reports of the independent
auditor required by law or professional auditing standards, including
reports on: (i) critical accounting policies and practices used in
preparing the financial statements; (ii) alternative treatments under
GAAP for policies and procedures related to material items discussed
with management, ramifications of the use of such alternative disclosures
and treatments, and the treatment preferred by the independent auditor;
and (iii) other material written communications between the independent
auditor and management of the Company, such as any management letter
issued or proposed to be issued, and a schedule of unadjusted differences,
if any. |
|
| 15. | Discuss with the independent auditor the matters required to be
discussed by Statement on Auditing Standards No. 61 relating to the
conduct of the audit, including difficulties encountered in the course
of the audit work, restrictions on the scope of activities or access
to requested information, significant disagreements with management,
and management’s response. |
|
| 16. | Discuss with management and the independent and internal auditors,
the independent auditor’s judgment about the quality, not just acceptability,
of the accounting principles as applied in the Company’s financial
statements. |
|
| 17. | Review the annual plan and scope of work of the independent auditor. |
|
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| 18. | Obtain a statement from the independent auditor that the audit was
conducted in a manner consistent with applicable portions of Section
10A of the Exchange Act. |
|
| 19. | After review, recommend to the Board the acceptance and inclusion
of the annual audited consolidated financial statements in the Company’s
Annual Report on Form 10-K. |
|
| 20. | Review or discuss, as and when appropriate: (i) the types of information
to be disclosed and the type of presentation to be made in earnings
press releases, including the use of “pro forma” or “adjusted” non-
GAAP information and any reconciliation to GAAP information, that
have been, or will be, issued by the Company, as well as financial
information and earnings guidance that have been provided to analysts
and rating agencies; and (ii) the effect of regulatory and accounting
initiatives and off-balance sheet structures on the Company’s consolidated
financial statements. |
|
| 21. | Be responsible for resolution of disagreements between management
and the independent auditor regarding financial reporting. |
| Oversight of Compliance with Legal and Regulatory Requirements |
| 22. | When deemed appropriate, review with the Company’s Chief Legal Officer,
or appropriate delegates, legal, disclosure or other matters that
may have a material impact on the Company’s consolidated financial
statements or on the Company’s compliance policies. |
|
| 23. | Obtain, review and evaluate reports from management with respect
to the Company’s policies and procedures regarding compliance with
applicable legal and regulatory requirements, and the Company’s Code
of Ethics and Business Conduct. |
|
| 24. | Establish procedures for: (i) the receipt, retention, and treatment
of complaints received by the Company regarding accounting, internal
accounting controls, or auditing matters; and (ii) the confidential,
anonymous submission by Company employees of concerns regarding questionable
accounting or auditing matters. |
|
| 25. | Discuss with management and the independent auditor any correspondence
with regulators or governmental agencies and any external or employee
complaints or published reports that raise material issues regarding
the Company’s financial statements or accounting policies. |
|
| 26. | Review and discuss, as and when appropriate, the internal auditor’s
review of perquisites, expenses and conflicts of interest, if any,
of, members of the Management Committee and senior management of the
business units. Review disclosures of insider and affiliated party
transactions. |
|
| 27. | Provide the report of the Committee as required by the SEC in the
Company’s annual proxy statement. |
| Oversight of the Company’s Risk Management |
| 28. | Review or discuss, as and when appropriate, with management, the
Company’s guidelines, policies and procedures for risk assessment
and management. Review the major risk exposures of the Company and
its business units, including market, credit, financial, legal and
other operational risk, and the steps management has taken to monitor
and control such exposures. Provide its conclusions to the Board. |
| Other Authority |
| 29. | Make such recommendations with respect to any of the above and other
matters as the Committee deems necessary or appropriate. |
|
| 30. | Have such other authority, duties and responsibilities as may be
delegated to the Committee by the Board. |
| |
| B-4 | |
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