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

By Joseph A. Giannone

NEW YORK (Reuters) - Influential shareholder adviser ISS gave Morgan Stanley's (MS.N: Quote, Profile, Research, Stock Buzz) 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."