Morgan Stanley Chairman Mack to retire at year-end

By Lauren Tara LaCapra

(Reuters) - Morgan Stanley Chairman John Mack, whose sharp elbows and aggressive cost-cutting tactics earned him the nickname "Mack The Knife," will step down at the end of the year, fully handing the reins to Chief Executive James Gorman.

The move solidifies Gorman's position at the top of the second-largest U.S. investment bank, whose business model he has been overhauling since becoming CEO and taking over day-to-day operations from Mack at the start of 2010.

"Giving the CEO both positions is a vote of confidence," said Douglas Park, principal of DYP Advisors, a corporate governance advisory firm in Palo Alto, California.

"The board is saying it has confidence in Mr. Gorman's leadership and the direction that he's taking the firm."

Morgan Stanley shares surged on the news, closing 7.2 percent higher at $16.59.

Gorman, 53, has been scaling back much of Morgan Stanley's risk-taking in trading and relying more heavily on wealth management to generate stable income.

Schooled as a lawyer and trained as a McKinsey & Co financial services consultant, Gorman joined Merrill Lynch & Co in 1999 as chief marketing officer. Within a few years, he moved into the retail brokerage business, which was a central pillar of Merrill's power on Wall Street.

In what was then a controversial move, he pushed less-wealthy clients to call centers where they received less-personalized treatment.

Gorman is now overseeing the integration of Citigroup Inc's Smith Barney unit into Morgan Stanley's existing brokerage business in a multi-phase acquisition through 2014. He hopes to eventually achieve a return on equity level of 20 percent in that business, double its current level.

ALIGNED WITH SHAREHOLDERS

Shareholders have been frustrated by the slow progress at Morgan Stanley Smith Barney, and Morgan Stanley's stock has been trading below tangible book value since April, a sign that investors see limited profits and possibly big writedowns for the company.

Sanford Bernstein banking analyst Brad Hintz, who has an "outperform" rating on Morgan Stanley shares, believes that Gorman will boost profitability at Morgan Stanley's wealth management business. He said Gorman, who recently bought $2 million worth of his company's stock, has his incentives aligned with shareholders.

"Admittedly Morgan Stanley has been a value trap for investors," Hintz said. "But for this stock to rebound all we have to believe is that management will work to boost their own net worth and the Merrill model of wealth management can be brought to MSSB."

Hintz is a former Morgan Stanley treasurer.

Mack, 66, first joined Morgan Stanley in 1972 as a bond salesman and worked his way up through the ranks to become president and chief operating officer of Morgan Stanley Dean Witter in 1997.

He left in 2001 after losing to Philip Purcell in a battle for the CEO spot. Over the next few years, Morgan Stanley's performance lagged that of its Wall Street peers and investors and former executives criticized Purcell's strategy and management style. A series of high profile executives left, including Citigroup Inc's current CEO Vikram Pandit, Citi President John Havens and M&A banker Joseph Perella, who launched his own advisory firm, Perella Weinberg Partners.

In 2005, Purcell resigned under board pressure and Mack became CEO.

When Mack returned to the bank, he received a standing ovation on the trading floor. He worked to strengthen Morgan Stanley's trading department, but also piled on risk, a move that generated a big profit in 2006, but hurt Morgan Stanley leading into the financial crisis of 2007 to 2009.

"Working with the remarkable people of Morgan Stanley has enriched my life for more than three decades and helping to lead this great firm, most recently as chairman, was the greatest honor of my career," Mack said in a statement.

"However, I made clear back in 2009 that I would serve in the Chairman role for two years and then move on. Now that time has come."

Many corporate governance experts argue that splitting the roles of chairman and CEO is beneficial to shareholders, because a CEO who is also chairman can have undue influence over the board, with inadequate checks and balances.

Some large financial firms, including Bank of America Corp, Citigroup Inc and American International Group Inc, have split the roles in the wake of the financial crisis, but others have not.

Goldman Sachs Group Inc and JPMorgan Chase & Co combine the roles, as does Wells Fargo & Co, which transitioned out former Chairman and CEO Richard Kovacevich in a similar fashion to Morgan Stanley's Mack.

Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, advocates splitting the role. He said studies by firms such as Bain & Co have shown that stock performance is better under the fragmented structure.

"It's considered a best practice," Elson said.

(Reporting by Lauren Tara LaCapra in New York; editing by Lisa Von Ahn and Andre Grenon)