In this episode of the Inside the Strategy Room podcast, James Gorman, chair and CEO of Morgan Stanley and a former McKinsey senior partner, shares lessons from his 12 years leading the global financial services firm. He spoke with Vik Malhotra and Asheet Mehta, senior partners in McKinsey’s New York office, about reshaping Morgan Stanley’s strategy, why a company’s culture needs a stable foundation, and how being an expert poker player helps him think through resource allocation. This is an edited transcript of the discussion. For more conversations on the strategy issues that matter, follow the series on your preferred podcast platform.
Vik Malhotra: Morgan Stanley is a vastly different organization today than it was when you become CEO. How did you approach that change?
James Gorman: Several things helped frame it. The most obvious was the current condition, because you can have the boldest strategy in the world, but if you’re struggling to survive, nobody will invest behind it. We had just come out of the financial crisis, so that created a compelling need to “do stuff.”
I had the view that wealth management businesses were vastly underappreciated, largely because they had not been well managed, and that if you could professionally manage them, there were jewels to be polished. I also felt that institutional businesses—trading, supporting transactions, underwriting deals—while attractive and glamorous, were so volatile that they became at times uninvestable.
The financial crisis proved that. The vast majority of pure institutional firms disappeared. Some of the so-called survivors—us, Goldman Sachs—are here but in a very different form. We became banks. My feeling around strategy was, first, let’s take stock of how bad this really is. We survived, but what would tip us again into catastrophic circumstances?
Second, I viewed Morgan Stanley as an aircraft carrier. We needed to be okay when the seas got ugly, and for that we needed to have ballast. That ballast was wealth and asset management and these businesses had to be big enough to steady the ship. My third belief was that if we allowed the businesses that involve intensive credit and liquidity risk to continue without constraint, we might still blow it. So it was a combination of compulsion to act, the need to build the ballast, and control the extremes.
Vik Malhotra: You recently stated that you want Morgan Stanley to go from $6.5 trillion in assets to $10 trillion. How have you balanced investing in the ballast versus other parts of the business?
James Gorman: A lot of people mistook our strategy to be, “We’re going from global investment to global wealth management.” We’re not. We wanted to clean up the investment bank and then have an additive strategy, but for the additive strategy to work, the investment bank also had to be of size.
In my aircraft carrier analogy, when the seas are great, everybody looks great. Others may be faster because they’re not dragging the ballast through the ocean the way we are, but our strategy outperforms when everyone else is underperforming. How big does the ballast have to be? The rough measure is about 50/50. You can get there by shrinking, but it’s better to get there by adding. We had to do some deals to accelerate that, or it would have been a very long journey.
Asheet Mehta: You took over just as the financial crisis hit. How did you find the confidence to make such dramatic changes?
James Gorman: I had no fear because to me, strategy comes from fundamental beliefs about the industry structure, and then you put guiding principles around it. Not everybody got an equal vote. I had plenty of people telling me, “You’re wrong.” I said to one of them, “Okay, if I’m wrong, I’ll fail, and I won’t need to be kicked out; I’ll walk out. And maybe they’ll tap you on the shoulder and you can run the place. Until then, we’re doing it my way.”
I had people telling me, ‘You’re wrong.’ I said to one of them, ‘Okay, if I’m wrong, I’ll fail, and I won’t need to be kicked out; I’ll walk out. Until then, we’re doing it my way.’
First, you form a view about where the industry structure is heading. For example, a lot of people thought the wealth management advisory model was going entirely electronic. I’ve believed, at least since the mid-1990s, that that was wrong, that there would be a multichannel model. For example, Schwab, in the wealth space, built up the IRA [individual retirement account] business. They could see what I could see coming from the opposite direction.
With those fundamental views, I then I tried to step back and say, “Where is the catastrophic risk that could do us in in the next crisis?” In our business, it’s almost all liquidity risk. But take catastrophic risk off the table and where you have natural strengths, get aggressive. It’s like playing poker. I’ve played in poker tournaments and when you’ve got the cards, you’re aggressive. You never know if you’re going to win, but if the odds are way in your favor, you get aggressive. It’s a combination of being extremely conservative managing against catastrophic risk and extremely aggressive when you’ve got the cards.
Once you’ve established that framework, write out your strategy in simple language. Then you test it with the team: If this is the architecture we’re trying to pursue, what could we use to get there? Let’s put option risk against each initiative. Let’s put payoff against time and execution.
How do you build your team and nurture talent?
I’d separate corporate strategy from business unit strategy, too. I always think about corporate strategy on its own. On the other hand, there are a lot of business unit strategy questions too. Do we become a digital bank or not, and if yes, how much do we invest in it versus buying it? Should we be in the mid-market M&A space? There are a hundred questions like that and all are business unit strategies that require deep analysis and a rich understanding of capital resource allocation and talent.
We’re fundamentally guided by another principle I have, which is, “Don’t do strategy by envy,” just because somebody else is doing something. Some of our competitors have clearly taken different paths from us.
Vik Malhotra: How much do you, as CEO, get involved in business unit strategies?
James Gorman: Not overly. I do it through the budget process and quarterly performance reviews, but generally my assumption is that the people running the business know more about it than I do. Full stop. I have a bigger title, but that doesn’t mean I have a bigger brain, or better experience or knowledge. But when I see underperformance, I get more deeply involved.
I have a strong view right now about one of our business units, and I have a solution. When I told the team my solution, their reaction was, “It’s a terrible idea.” I said, “That’s fine, what’s your answer?” They didn’t have one, so I said, “If you don’t have one, we’re doing my answer.” That forces them to more aggressively seek the answer, and with that they’ll come up with something as good as or better than I could. I think presuming you have the answers is a weakness. The problem with being a CEO a long time is everybody tells you that you have all the answers. It’s comforting to your ego but very dangerous.
Asheet Mehta: Has your involvement in business unit strategy changed over the course of your tenure?
James Gorman: I always had the same mindset. In the early days I got tutorials from people running businesses I didn’t understand, but I’ll never be an expert. I have to engage to test emerging market risks, particularly in the more volatile markets, and I can ask a series of questions but then business unit leaders’ expertise kicks it up a notch.
I can help frame it. I can say, “Give me the one, two, or three standard deviations of performance in XYZ country if things go bad.” Okay, we’ve got that. “Give me the number which, if we wake up tomorrow and we’ve done that to our P&L, you will feel sick in the stomach.” Then, “Give me the probability that this number could happen: One in a thousand? One in 42?” You do not want to be the person walking into my office with that second number. Your job is to mitigate it, hedge against it, sell off the position, distribute it. “Now give me the average revenues on that piece of the business for the last three years.” Or, “Give me an assumed return on those revenues.” You can’t even ask those questions if you don’t have basic knowledge, but you never know as much as the experts.
Vik Malhotra: How do you approach resource allocation, whether it’s capital, expenses, or talent?
James Gorman: I first ask the team what they need to be optimally successful, whether capital, balance sheet resources, financial resources, investments in the business, talent. You end up with an answer priced for perfection. The assessment I always try to make is the probability of upside, probability of downside, and the magnitude of upside and downside. Something could have a low probability of upside but a massive payoff or a high probability of downside but limited damage.
Vik Malhotra: That must be tricky when acquisitions come into the mix.
James Gorman: Everybody has a dream list. There are limits to how much the organization can absorb and what the board, regulators, and investors can accept. You can get too grabby. It’s like going to an ice cream store and having three ice creams. They all look great when you’re looking through the window, but you eat all three and don’t feel so good. My job is to manage the digestion issue.
Vik Malhotra: Our research suggests that 72 percent of big-picture strategies tend to fail for execution reasons. How have you made your vision happen? What are the key enablers?
James Gorman: I focus on the slope of the gradient and whether it’s moving in a positive direction: bottom left to top right. Whether the rate is at 6°, or 15°, or 8° can be affected by external environments, bad luck, or trying to do too much or too little. But is it steadily moving in that direction? That’s number one—the strategy has to show progress.
I was focused on pure strategy in the early days. At a meeting of our top 250 executives, a business professor came in to talk about strategy. I was the new CEO, and I knew what our strategy was. After a while I couldn’t stand it. I walked up to the podium and said, “I’m sorry, I have to stop you. You’re fabulous, but we can’t have you leading a groupthink around what our strategy is. I know what our strategy is.” Then, in 72 words, I laid out the strategy, which was essentially to be the conduit of capital between those who have it and those who need it. That’s our job.
What role does culture play in your organization?
Then we took a poll and the result was that 98 percent understood and agreed with the strategy. Clarity of message is key. By putting that message out, it told the audience, “individuals matter.” By positioning us as a conduit, I told them, “We’re not going to invest in proprietary trading with our capital.” There were some deep, coded messages in those 72 words, which are still sitting on my desk.
Then we focused on culture. Having a clear strategy earns you the right to talk about culture. Culture is what guarantees continuing strategic shifts and alignment to the world around you. A key tenet of any good organization is being open to change, and that’s cultural. Having capable leadership, that’s cultural. So I asked our president and our chief legal officer to do a world tour and only speak about culture. We were stable enough, and people would keep their jobs. They weren’t tenants; they were now landlords. I think that shift is critical when you’re coming out of a crisis.
Having a clear strategy earns you the right to talk about culture. Culture is what guarantees continuing strategic shifts, alignment to the world around you, and being open.
Vik Malhotra: Did you set out specific initiatives around culture?
James Gorman: No. We went all in. We put our values on the front of every building. We changed our performance and recruiting reviews. I’d ask every candidate, “Give me five adjectives that describe you, that if I talked to your next-door neighbor, your kids, the caddy at your golf course, that’s what they would say. And you don’t get to think about it; go immediately.” We wanted real conversations. “Don’t give us long performance reviews. Tell us one thing you admire about this individual’s performance and one thing they should work on.”
One of the words I’ve used in cultural discussions is “belonging.” When we had a record year, we paid every single person a bonus. Why? The firm had done great and maybe they had something to do with it. You back your culture up like that. During COVID, we guaranteed everybody their job when it was not obvious how things would evolve. At the time, I said our usual three-legged stool of shareholders, employees, and clients now just has one leg: our employees. If shareholders take a hit because we’re paying out this comp, too bad. Clients won’t be doing well if the employees aren’t here.
Vik Malhotra: Tell us more about your views on talent, especially in this context of belonging. How much time do you dedicate to talent and at which levels of the organization?
James Gorman: It evolves. In the beginning, I had inherited a team, and we had a crisis on our hands. In the middle of your tenure, you try to make the engine better at every level, and toward the end of your career, which presumably I’m nearing, you should focus on the future. I’m trying to develop four senior executives here so one of them can replace me eventually. But I also put on my to-do list for this year: “Develop the ten most-promising next-generation executives.” Only two of the ten report to me—our new CFO and the chief HR officer—but I now speak with them all.
Vik Malhotra: What about processes? As CEO, do you tend to lean on some more than others in influencing the organization?
James Gorman: First, you have limited time, so you have to pick your shots, selecting those with the highest return for the company. Second, I think of us as being like a military organization. Because we’re so big and global, communication really matters. Where do I insert myself? Executive committee once a week, operating committee once every three weeks, management committee once every six weeks, top 250 executives once every 18 months, and the whole firm once a year.
Another process I insert myself into is risk management. We didn’t have a global risk committee for the whole company, so I started one and chair it. I chaired the Sustainability Institute from 2013 until the end of last year. I’m trying to send a message to the organization through where my time is spent. The job of the CEO is to manage the core budget, promotion, planning, executive committee, risk, audit function—pick a few thematic things you’re trying to move the organization on, then insert yourself when it feels right. If there’s one word I’d use to describe myself, it’s “intentional”: I do things by specific design to achieve outcomes of change. You try to punch at the level where you can have impact.
If there’s one word I’d use to describe myself, it’s ‘intentional’: I do things by specific design to achieve outcomes of change. You try to punch at the level where you can have impact.
Vik Malhotra: How do you foster alignment among your top team?
James Gorman: I think about it in terms of the two “Cs” of competence and collegiality. The competence idea is that if our main competitors were looking for a person to fill a role, would you be one of the top three people on their list? If you’re not a top three risk manager, CFO, or head of wealth, you’re not on our team. That’s table stakes.
As for collegiality, you may have strongly held views, but you need to be open to others and listen with respect. You need to be able to engage in contentious debate without people walking out of the room feeling burned. There needs to be balance between your motivation for self and for the institution. If you don’t have a strong sense of self, you will not deal with adversity and setbacks. On the other hand, if you only believe in yourself, go and set up as James Gorman Securities across the street. The name of this place is Morgan Stanley for a reason. We want a strong drive, call it ego, ability to withstand pressure, but at the same time people know they’re coming to work for us.
Vik Malhotra: What about your board? How do you think about getting the most out of your directors?
James Gorman: Number one is competence and cohesiveness. When there’s an issue that comes into the room, say we’re getting a cyberattack, I want the board to look at one director as the logical person to step up to the plate, and we happen to have the former CIA head of operations. I see the board as a tapestry: the perfect director would be all the parts of the tapestry, but nobody has that, so I fill in the pieces. Everybody has a major and a minor, in the academic sense. The majors are their subject-matter expertise, and the minor is get-along ability.
Also, I hate the idea of inside boards and outside boards, or greater-than-equal boards, so we turn over heads of committee and lead directors every five years. I said, “Let’s sit at a round table so there’s no seating preference.” Only at the annual dinner does a retiring director and a new director sit next to me; otherwise, it’s completely random. It’s symbolic of the sense that you’re all equal.
Vik Malhotra: Let’s talk about external stakeholders—regulators, investors, analysts, and clients. How do you think about your role in relation to them?
James Gorman: As CEO, I’m the external face of the firm. I was on the Federal Reserve Board for six years and on the Federal Advisory Council, which is very time-consuming. As for investors, in the early years I carried the water. The past two years I’ve stepped back because the team is the future. I want investors to know that.
The cadence of meetings changes. In the early years, there was much less client interaction, and now there’s a huge amount of it. But my chief of staff team tracks all my meetings and communications, and the record goes back many years. At the end of the year, I share it with the board. I don’t know what it’s going to show; I just say to the board, “Here’s what I’ve done. You should know what the CEO spends his time on.”