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Morgan Stanley Shareholders Want Board Shake-Up

Nat Worden

At Morgan Stanley (MS - Cramer's Take - Stockpickr), home to the investment fund that led a failed proxy fight against the New York Times (NYT - Cramer's Take - Stockpickr), the tables have turned.

The investment bank, which lost a quarter of its market cap in 2007 amid $9.4 billion in writedowns on investments related to subprime mortgages, now finds itself in the crosshairs of shareholder activists rallying for change.

CtW Investment Group, which represents pension funds sponsored by a federation of labor unions called Change to Win, sent a letter to Morgan Stanley holders imploring them to vote against directors Howard Davies and Robert Kidder and the bank's chairman and CEO, John Mack, at its annual meeting on April 8.

"As members of the board's audit committee in fall 2005, we believe that directors Davies and Kidder failed to maintain the integrity of Morgan Stanley's risk management, and thus bear central responsibility for the firm's $9.4 billion in subprime-related writedowns in 2007," said Michael Garland, a director of value strategies with CtW. "We believe the circumstances surrounding these risk management failures demonstrate the need for stronger independent leadership at Morgan Stanley."

With regard to Mack, the group said it believed he should not serve as both chairman and CEO at the same time. A spokesman for Morgan Stanley noted that the bank's management and audit committee has met with CtW to hear their proposals.

"As previously disclosed, Morgan Stanley has taken aggressive action in response to last fall's mortgage-related writedowns," said the spokesman. "The interests of Morgan Stanley shareholders are clearly best served by the strong leadership of John Mack as the Firm's Chairman and Bob Kidder and Howard Davies as independent directors."

The letter notes that the funds represented by CtW hold an estimated 6 million shares of Morgan Stanley common stock, or around 0.5% of the total. In addition, public pension funds in which members of CtW unions participate own an estimated 41.4 million shares, or about 3.75%.

The group said that in accordance with high-quality corporate governance practices, Mack should not simultaneously serve as chairman and CEO of Morgan Stanley. Likewise, a Morgan Stanley Investments fund argued last year that Arthur Sulzberger Jr. should not serve as both publisher and chairman of New York Times. It also called for an end to the dual-class share structure, which preserves control over the publishing company in the hands of Sulzberger's family members.

Shares of Morgan Stanley were recently down 30 cents, or 0.7%, to $42.19.

Know What You Own: Morgan Stanley (MS - Cramer's Take - Stockpickr) operates in the financial services industry, and some of the other stocks in its field include Goldman Sachs (GS - Cramer's Take - Stockpickr), Citigroup (C - Cramer's Take - Stockpickr), Merrill Lynch (MER - Cramer's Take - Stockpickr), Bear Stearns (BSC - Cramer's Take - Stockpickr) and Lehman Brothers (LEH - Cramer's Take - Stockpickr). These stocks closed at ($163.01, -0.04%), ($21.21, -1.30%), ($44.92, -1.49%), ($61.58, -2.21%) and ($44.95, -2.94%) respectively. For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.