Beverly A. Behan

<p>The recent announcement of resignations of three Morgan Stanley directors sent a clear signal that a major make-over of the Morgan Stanley board is in the works.  But whether this is merely cosmetic surgery or the start of an initiative that will genuinely yield more effective governance at the battered investment bank remains to be seen.</p>

<p>First, let´s give Morgan Stanley credit for stepping up to the often distasteful issue of director resignations.  One of the hallmarks of a highly effective board is a constructive working relationship between the board and the CEO, one that empowers the board without hampering the CEO's ability to lead.  If past politics between a board and a new CEO has the potential to poison that relationship, this breach of trust can have a devastating impact going forward.  The CEO may hold back from complete openness - downplaying even critical issues until the eleventh hour - while the board may make important decisions driven primarily by political allegiances.  Neither serves the best interests of any stakeholders.</p>

<p>This is not a criticism of those who left or a suggestion that such behavior was surfacing in the Morgan Stanley boardroom.  It is a simple acknowledgement that the history at Morgan Stanley had the potential to get in the way of the CEO/board relationship going forward.  And the right thing to do was to give John Mack a level playing field in the boardroom as he tries to bring order from chaos within the company.</p>

<p>Musical chairs in the boardroom, however, are only the beginning if Morgan Stanley's goal is to create a board that is not only an effective overseer but a useful sounding board and valuable resource for the company.  While some have suggested that this boardroom blow-out is merely Mack flexing his muscles and filling his board table with like-minded friends, I´d prefer to give him and his nominating committee the benefit of the doubt.  A highly effective board can be a genuine asset to a CEO navigating troubled corporate waters in the wake of a crisis. </p>

<p>However, creating the phoenix of a high-performing board from the ashes of the Purcell debacle will require a serious effort in board-building.  Fresh faces around the board table can be a useful start - but it is by no means the finish.  In fact, the real intent of this board make-over will only become apparent as we watch what happens next.  If Morgan Stanley´s serious about building a better board, there are several things they´ll need to address in fairly short order to get their new board off to the right start.</p>

<p>As former lead director, Miles Marsh, is among those exiting the Morgan Stanley board, once board composition stabilizes, a new lead director should be appointed as soon as possible.  The choice should be someone that the other directors hold in high regard who can build a relationship with Mack whereby he or she can give him bad news and challenge him as well as acts as a useful sounding board. </p>

<p>Appointing a lead director isn't a corporate governance fad, although it can become one if the person named is clearly a management lapdog and the role created for optics rather than impact.  Effective lead directors both enhance board independence and communication between the board and the CEO.  Mack may well find, as many other CEOs have done, that a capable lead director benefits him as much as it does the other directors, and, arguably shareholders.</p>

<p>The formation of what, in essence, is a "new" board with directors from the predecessor and a host of new recruits provides a great opportunity for this board to stand back and really take stock of how it can maximize its effectiveness going forward.  Understand what, if anything the predecessor board did well and what mistakes are not to be repeated down the road.  Define what the board expects of Morgan Stanley management and what management expects from the board, and of individual directors.  Get a clear sense of alignment around priorities going forward and how they will be addressed so everyone's off on the same foot.  It is simply amazing how most boards are formed by a group of directors coming together, sitting around a table and commencing to run through an agenda without ever laying out the ground rules of how they want to work together and what their focus is going to be in the coming months, so that they make the best use of their limited time.</p>

<p>If they haven´t already done so, work should commence right away on a robust CEO evaluation process that the board can use in assessing Mack´s performance.  In recent years, with ramped-up scrutiny on executive pay, most boards are becoming much more rigorous in the design of their CEO evaluations, incorporating issues of style and leadership as well as financial performance into the mix and using multi-source feedback to broaden their perspective.  Truth is, it´s in Mack's own interest as well as the board´s to define the key objectives for his performance, determine how those will be measured, and agree on what the impact of these will be in terms of both his compensation and his continued leadership of Morgan Stanley. </p>

<p>And an emergency succession plan is also of the essence.  The last thing Morgan Stanley needs now is another leadership struggle.  If this board hasn´t yet talked about what happens if John Mack is hit by a bus, they really need to.  This discussion - which should extend beyond Mack to other critical C-suite roles - will give both new and legacy directors a perspective on the bench strength now in place at Morgan Stanley, always a good exercise following rampant departures from top executive tiers. </p>

<p>Having taken the initiative to repopulate its board, let´s hope Morgan Stanley doesn´t make the mistake of thinking the job of board rebuilding is done.  The work is only just beginning - and time will tell whether something of real value is being created here.</p>

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<p><b>Beverly Behan</b> is the co-author (with David and Mark Nadler) of "Building Better Boards" and a partner in the corporate governance practice of Mercer Delta Consulting.  She served as an expert advisor to the 2004 NACD Blue Ribbon Commission on Board Leadership<i>.</i></p>