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When Ted Pick takes over Morgan Stanley in January, he will face a problem that a lot of new chief executives would like to have: when the company has been doing this well, what can you do for a next act?
Outgoing CEO James Gorman has racked up an enviable 14-year record. He transformed a wobbly investment bank weakened by the 2008 financial crisis into a financial advisory powerhouse with a series of huge acquisitions. Morgan Stanley now draws more than half of its pre-tax profits from asset and wealth management and trades on a higher multiple of book value than Wall Street rival Goldman Sachs, suggesting investors rate it more highly.
Gorman has also stage-managed what appears to be a happy ending. Though Pick beat two internal rivals, Andy Saperstein and Dan Simkowitz plan to remain after being given expanded responsibilities and $20mn apiece in restricted stock that will vest in 2027. Meanwhile, the outgoing chief will stay on as executive chair, a kind of fairy godfather able to provide benevolent counsel to the newly crowned leader.
But will everyone really live happily ever after? History is full of cautionary tales about the pitfalls that await successful companies after a star CEO departs in a blaze of glory.
When Jack Welch handed off General Electric in 2001, he was known as the “manager of the century” for deal making and financial engineering that had created the world’s most valuable company. By the time GE broke itself up 20 years later, Welch’s model and his anointed successor had been thoroughly discredited. Sir Terry Leahy was widely feted on his 2010 departure from Tesco for quadrupling pre-tax profit and driving global expansion. Four years later, Warren Buffett called his 5 per cent investment in the UK supermarket “a huge mistake”. Last autumn, Bob Iger took back control at Disney, shunting aside Bob Chapek, his chosen heir, after a 33-month stint that saw shares halve from their 2021 peak.
As Leo Tolstoy observed of families, each unhappy transition is unhappy in its own way. But there are lessons to be drawn from these debacles that Morgan Stanley’s board and its investors should keep in mind as Pick settles in.
It is a really bad sign when the departing CEO feels he cannot let go. At Disney, Iger had repeatedly pushed off his retirement, and even when he did move up to executive chair, he kept his huge office and continued to run “creative endeavours” for 22 months.
A one-year stint as executive chair is perfectly appropriate for transition purposes. But if Gorman is still taking such an active role in 18 months or two years “red lights are flashing”, says Georgetown professor Jason Schloetzer, who studies corporate successions.
Protégés who win promotion face particularly difficult choices because they, and the people who surround them, may find it difficult to part ways with a boss they deeply respect.
In retrospect, both Welch and Leahy are widely seen as having jumped ship as tailwinds were fading, but their renown made it hard for their successors to change tack. The financial arm that boosted GE’s 1990s profits brought trouble during the 2008 financial crisis. And Leahy left his successor to cope with a costly US expansion as well as slumping domestic sales.
Pick has already said his appointment is “not a change in strategy”. That may become a promise he cannot keep.
He takes over Morgan Stanley amid growing competition in wealth management and slowing revenue growth that has alarmed investors. Shares are down 25 per cent from a recent peak in late July. Simply staying the course may not be a viable option.
At the same time, Pick should be wary of the temptation to emulate the purchases of ETrade and Eaton Vance that Gorman used to supercharge Morgan Stanley’s wealth-driven strategy in the US. While it would be nice to find another big acquisition to do the same for international expansion, such integrations are hard and most recent large deals in the sector have failed to deliver the promised benefits.
A smart board will give Pick the breathing space to find his own way. “It’s like in a family: comparing siblings never helps,” says Charles Elson, a University of Delaware corporate governance expert.
Gorman seems to recognise the problem. I am told that when Pick started going on last week about the big shoes he had to fill, the outgoing CEO shut him down, saying, in effect: “There are a lot of pairs in the shop. Go find your own shoes.” Better that kind of shopping trip than a foolhardy dash for overpriced acquisitions.
brooke.masters@ft.com
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