RPT-UPDATE 1-ISS urges Morgan Stanley CEO/chairman split

NEW YORK (Reuters) - Influential shareholder adviser ISS gave Morgan Stanley's (MS.N) John Mack a tepid vote of confidence on Thursday as it recommended reelection of the bank's chairman and the board at next month's annual meeting.

Yet in the same report to pensions and other big shareholders, ISS called on the bank to split the roles of chairman and CEO. It also stopped short of praising Mack's performance since taking the helm in June 2005.

Several Morgan directors have been under fire in recent weeks from unions and other proxy advisers, who recommend that shareholders withhold their votes to protest against the bank's disappointing 2007 performance.

Union group Change to Win went further by calling for shareholders to withhold votes from Mack, making him accountable for risk management lapses that led to $9.4 billion in fourth-quarter losses. The loss forced Morgan to sell a $5 billion equity stake to the Chinese government in December.

Earlier this week, another influential proxy group, Glass Lewis, recommended votes against directors Roy Bostock, Donald Nicolaisen, Charles Noski, Charles Philips, Robert Kidder and Howard Davies.

ISS acknowledged these objections in its report, but contended Mack and the other directors deserved to stay.

"While we agree mistakes were made and some warnings signs were ignored, there is no evidence that wholesale lapses in controls were resident at the firm," ISS said in its report.

Morgan Stanley said in a statement: "We believe the ISS recommendation to vote in favor of all Morgan Stanley directors is in the best interest of our shareholders."

LUKEWARM PRAISE

Still, ISS gave a lukewarm endorsement to Mack. Noting the CEOs of Merrill Lynch, UBS and Citigroup lost their jobs after reporting large losses, ISS said strong performance at the rest of the company offset the mortgage trading failures.

"With a CEO as new as Mr. Mack, it is safe to say that the jury is still out on his performance," ISS said.

ISS agreed with CtW that Morgan would benefit from greater board independence and accountability, including a separate chairman to oversee the CEO.

"We urge the board to consider appointing an independent chair," ISS said.

A bank spokesman declined further comment.

For the first time since frustrated investors in 2005 helped oust former CEO Philip Purcell, Mack's leadership and push for taking more risk has drawn criticism.

CtW, which works with pensions sponsored by 6 million union members, earlier this month urged investors to withhold votes from Mack and audit committee member Howard Davies and lead director Robert Kidder. CtW also argued that Morgan Stanley's CEO should not also be the board chairman.

The union is challenging directors at six U.S. banks it argues failed to recognize the dangers of the subprime market and allowed their firms to take undue risks.

Because Morgan completes its fiscal year in November, the annual meeting on April 8 will serve as the first market referendum on the subprime crisis.

Morgan Stanley contends it has already addressed the problem. Co-President Zoe Cruz and other managers were sent packing and risk management was reinforced. Mack himself declined an annual bonus.

These moves, though, did not appease activists who want shareholders to have a vote on executive pay packages.

ISS recommended that pensions and other big investors support a proposal to give shareholders an advisory vote on executive compensation, to enhance accountability.

Last year, this proposal, submitted by AFSCME, received the support of 37 percent of the shares voted. Morgan Stanley asked its shareholders to reject the say-on-pay proposal.

(Editing by John Wallace;/Andre Grenon)