If James Gorman were designing the U.S. banking system, it wouldn't look the way it does today. Instead, it would have mainly megabanks and tiny community banks, ideally with a single branch where the local bankers know the borrowers personally.
"There is a presumption that an extremely fragmented banking system is a good idea," Gorman, the former Morgan Stanley CEO, said. Today, the U.S. has four levels of banks: giant institutions, hybrid investment banks that are also enormous banks like Morgan Stanley, regional banks and community banks. He expects the regional bank layer will consolidate out of existence: "There's a certain industrial logic."
Gorman spoke Tuesday at the Federal Reserve Bank of New York's annual Governance and Cultural Reform conference, having also appeared at the inaugural event 10 years ago. After stepping down in January, he is now executive chairman of the Wall Street firm, after
During his 14 years running Morgan Stanley, the Australian-born executive said he considered some 100 deals to buy another company. Over that period, the bank completed five acquisitions, including Eaton Vance and ETrade. That's given him plenty of opportunity to think about culture and how an organization changes with and without M&A.
"The test of doing a deal is not to buy companies that have a culture that will make you better," but "to buy companies that don't damage you" culture-wise, he said.
The most important cultural issue in an acquisition is whether the target's values align with the acquirer's — everything else is optional, he said. Gorman cited an employee town hall meeting he did by video after buying ETrade. His new workforce came from a company with a much looser dress code, and they wondered if they were now expected to wear traditional business attire daily as Gorman does. So the CEO stood up and showed them that with his suit jacket, dress shirt and tie, he was also wearing jeans. "I said, 'I don't care if you wear jeans; I care what your values are,'" he recalled.
Speaking the day after embattled
"To manage the behavior of individuals is really hard and you need to be constantly looking for outliers, cutting them off and reaffirming your core values," he said.
At Morgan Stanley, he said, "I've tried to build a culture where each group is based around a combination of competence and collaborators." His rule was that new appointees to the firm's operating committee were required to be one of the top three people in the industry in their area of expertise. He also insisted that they be known for their skills in working with others, "which meant they had to be able to walk in a room, have a strongly felt view and express it in a way that didn't upset everybody else."
If a company is governed this way, he said, eventually this orientation seeps throughout the organization. At that point, even if the wrong person gets promoted into a role or the right person gets passed over, the company will generally follow the cultural guide the CEO sets out.
A bank often has to make grand gestures as the CEO tries to instill a sense of culture, which can be expensive in the short term but necessary to maintain morale. For example, Gorman issued an edict in mid-2020 that all Morgan Stanley's employees would keep their jobs through the end of that year (unless they were fired for cause). The following year, when the bank hit record results, he gave every staffer a bonus, which was not the bank's typical practice.
A major part of a bank's culture is determined by who gets hired. Morgan Stanley's succession race involved three potential replacements for Gorman: Pick, Andy Saperstein and Dan Simkowitz, all veterans of the bank, and all men. But Gorman dismissed the idea that the dearth of female bank CEOs — just
At Morgan Stanley, the percentage of women managing directors has gone from 15% when he took over as CEO to more than 25% today. He recalled a visit some dozen years ago to the firm's Paris office, where he discovered that none of the senior officers based there were women. "I said to them, 'I will never come back to this office again until you solve this problem,'" he said. "'And if you don't solve it, I will solve it for you. That will be very bad for you.'" (He said the Parisian bankers were able to promote and bring in senior women.)
Gorman also noted the challenges of inducting newly hired workers into the firm's culture, and the importance of changing with the times. Today's younger bankers, he said, have brought forward useful criticisms about working punishing hours, long a staple of an investment banker's training. This wave of pushback has spurred leaders across Wall Street to stop front-line managers from keeping junior employees until late every night without ever taking vacation days. It's an industrywide cultural change, but one that's necessary, he said. Without rest, "you're not going to be any good at the job," he said. "We need you to refresh yourself and recreate yourself and for that we need your bosses to understand the magnitude of the problem they've created, probably unwittingly."
But Gorman also pointed to recent graduates' demand for constant updates on their job performance.
"The incessant desire for feedback is ludicrous," Gorman said, to laughter from the assembled regulators and bankers in the New York Fed's auditorium. "It's like, do some work, I'll give you some feedback. I don't even know your name, how am I going to give you feedback?"
