John Mack: Chairman and CEO, Morgan Stanley

A I look at the economy on a global basis — the U.S. and Europe may be facing a slowdown right now, but I don’t think we face the risk of recession, and Americans can benefit from growth elsewhere. There is significant growth in emerging markets like China and India and Russia and the Middle East. China is growing in the 9 percent to 10 percent range. Russia is growing in the 8-percent range. You’ve got strong growth in India and Brazil and elsewhere. Will it be cyclical? I’m sure it will. There’s obviously been a run-up in commodity prices and interest rates over the last couple of months, and there’s been a sell-off in equity markets around the globe. But the bottom line is that global fundamentals are strong, and I think growth will be driven by emerging markets.

Q What are your economic prognostications for the coming 12 months?

A I think we’ve been in a great business environment. There are obviously concerns about high energy prices, a slowing housing market and whether the Feds will raise rates further. And trading conditions in both the equities and fixed-income markets are more difficult than they were earlier in the year. But corporate confidence remains high. And with all the money in the system and all the liquidity out there, I don’t see anything derailing that strong business environment in the short term. Now, history has shown that these stronger markets won’t last forever. Markets are cyclical, and the financial markets will ultimately turn, but I’m optimistic about the growth of our business over the next 12 months.

Q Globalization: How will it affect our economy in the coming 12 months? What are your thoughts on how it will affect your business sector?

A I think globalization — and the rise of emerging markets — are the biggest factors shaping the global economy today. And firms like Morgan Stanley are playing an increasingly important role as intermediaries in markets across the globe, helping allocate capital, resources and people in North America, Europe, Asia and the emerging markets. In 2005, about 60 percent of our net income came from the U.S., about 25 percent came from Europe, and about 15 percent came from Asia. But I think that’s going to change over time with regions like Asia and the emerging markets becoming even greater contributors to global businesses like ours. The growth in those markets is much faster than in the U.S. and Europe. So, we’re going to continue investing in those areas that we believe will yield the greatest returns, like Russia, China, India, Turkey, Brazil, South Korea, Mexico and the Middle East.

Q How does the American image internationally affect this country? Your business sector?

A America’s image abroad can have a real impact on trade and investment flows between the U.S. and key markets like China and the Middle East. Look at the Dubai Ports World controversy earlier this year. The backlash against the proposed acquisition of U.K. ports group P&O by Dubai Ports will certainly make some foreign companies more nervous about investing in the U.S. Improving America’s image abroad has to start with American leaders understanding what’s happening elsewhere in the world. I think it’s incredibly important for American political and business leaders to spend more time visiting these markets in person and seeing the great changes that are taking place there.

Q How will the value of the dollar affect us? Affect your business sector?

A If the value of the dollar continues to drop, it could obviously lead the Fed to raise interest rates at a time when other domestic issues, like the housing slowdown, would otherwise suggest holding rates steady. Such a move would have a real impact on the debt and equity markets. A fast decline in the dollar could also catch investors off guard, especially if they aren’t hedged against it. All of this would obviously impact the markets and our own business, but we’re extremely aggressive about managing our risk and our exposure to this type of volatility. And I’m pretty comfortable with the direction of our business regardless of which way the dollar heads.

Q How do you define the nature of your business? Do recent economic trends require you to rethink that definition?

A At Morgan Stanley, our business is fundamentally about connecting providers of capital — both institutional and retail investors — with people who need capital. We try to bring our clients the best possible thinking, products and services to help them meet their financial objectives. Looking at the trends shaping our business, it certainly is being impacted by the increasing globalization of the financial markets, the rise of new emerging markets like China and Russia, as well as an increased focus on risk-taking and risk management amidst all of the volatility we’re seeing. But I think that huge megatrend of connecting providers of capital with users of capital is where all the money is going to be made in the global markets. Regardless of the changes in the markets or other economic trends that might come and go, the one thing that won’t change is Morgan Stanley’s commitment to always putting the interests of our clients first. That’s something that’s really important to us. And I think the way to do that is to be smart, to be honest, to build trust, and to leverage all of the resources and expertise of our global franchise for our clients.

Q What is the most important resolution you have made about your business as we go ahead into fall?

A The most important resolution we’ve made at Morgan Stanley is to focus on our people — and on talent management. In our business, people are our most critical resource, and the firm’s long-term success depends on how well we train and develop and support them. If you look at a lot of the surveys that have been written about why people stay at a company, money is not the first reason. It has a lot more to do with the fact that they want to work for the best, they want to continue to learn and grow, they want to be empowered. And, of course, they want to be paid fairly. So we’re focused on doing a lot more to educate and train and mentor our people — and to help them realize their full potential. We’re focused on bringing the best and the brightest in here to support our already deep bench of talent, and giving our people exciting opportunities to move around to new regions and businesses. We recently appointed a new chief talent officer who is dedicated to making sure we do that — but this isn’t something that senior management can delegate. It’s an important focus for me and the entire senior management team.

Q Tort reform: How much does the present tort law add to your business or business sector costs each year? What needs reforming first?

A Excessive litigation impacts almost every industry in the U.S. and has had a dramatic effect on the financial services sector. Among other things, it significantly increases the cost of doing business, reduces the rate of economic growth and impedes competitiveness. Some of the tort reforms we’ve seen in recent years have helped, but many foreign companies are still concerned about the cost of frivolous litigation in the U.S. And this continues to hamper American competitiveness. For instance, we’re seeing more and more global companies — that once would have come to the U.S. to raise capital — now going to financial markets in the U.K. or Hong Kong instead. Last year, not a single one of the 10 largest [initial public offerings] by non-U.S. companies were listed in New York, compared with nine of the top 10 global IPOs just six years ago. That’s a disturbing trend, because even a relatively modest shift of business to other world financial centers represents a setback to U.S. financial leadership. We need further tort reform to help ensure that the U.S can compete on a level playing field in the global financial marketplace.

Q What is your biggest political concern as we go ahead into fall?

A Right now, our country is facing a range of critical public policy issues. There are tough decisions that need to be made about taxes, entitlement spending and national security, among other things. These are complicated problems, with no easy answers, and they require that people work together across political divides. So, my biggest political concern — particularly as we head into the fall elections — is that we not get mired in political gridlock that prevents important decisions from being made. We’ve all seen how counterproductive the bitter divisiveness in American politics can be. And we can’t afford to have it continue. I think we need people in office who are willing to put aside partisanship and work with colleagues on both sides of the aisle to make sure we have an environment in this country that will continue to encourage strong economic growth.

Q Regulatory reform: How big is the regulatory burden on your business or business sector? What would you like to see reformed first?

A After everything Wall Street and corporate America have been through, it’s incredibly important that we have an open, honest and productive relationship with our regulators. The financial services business in particular is built upon trust and integrity, so our clients and our regulators need to have confidence that we’ll deliver on what we say we’ll do. In the last few years, the pendulum has swung quite far in the direction of greater regulation. That has helped, to some extent, in restoring trust in the financial markets. However, we need to avoid swinging so far that U.S. companies are put at a competitive disadvantage. The trend I mentioned earlier of global companies increasingly listing outside the U.S. — only one of the 24 largest global IPOs last year listed in New York — is one example of how foreign companies are reacting to the regulatory and litigation risk we’re seeing in the U.S.

Q Terrorism and security: Will this challenge your business or business sector in the coming year?

A I think we live in a very different world than we did five or six years ago, and terrorism — and even just the fear of it — has a profound impact on businesses worldwide. In 2001, we saw what could happen to the global markets — and global trade — as a result of terrorism. Sept. 11 was devastating to so many people, and it had lasting effects on the markets and on the financial services business. But I also think it will be remembered as a time when the financial community rallied, against the odds and despite overwhelming sadness, to get business up and running again. Today, we’re seeing a lot of volatility in the global markets, and I think a great deal of it is driven by concerns about security and unrest around the world. Unfortunately, it’s a fact of life everywhere in the world — not just in more turbulent regions like the Middle East — and I think it will continue to impact our business and every business for years to come. So anyone working in or investing in the global markets needs to learn to anticipate — and manage — the volatility we’re seeing. That’s something we’re very focused on at Morgan Stanley — and something we’re helping our clients to do as well.

Q What is your advice to the business community on how to survive and profit from the coming 12 months?

A I think the keys to succeeding over the next 12 months are the same as they always have been: Focus on your clients or customers, do business with honesty and integrity, and get everyone in your company to act like an owner so they take personal responsibility for its success. The best bankers and salesmen and portfolio managers that I’ve seen over the course of my 30-plus years on Wall Street — regardless of what the markets were doing — are the ones who are willing to say to their boss or their client, “Don’t do that deal,” if it’s not in the best interest of the client, even if it would bring in a lot of revenue for the firm. You can’t compromise on doing the right thing just to make the numbers over a few quarters.

My forecast of the three best growth businesses over the next decade

1 Emerging markets: There’s no question that the emerging markets are a huge growth opportunity for our industry. China’s an area we really believe in — as well as markets like Russia, India, Brazil, Turkey and the Middle East, among others. We have the capital and the expertise to compete in all of these markets across a wide range of businesses, and we’re making significant investments there.

2 Alternative investments: We’ve seen explosive growth over the last several years in the private equity, hedge fund and hedge fund of funds space. By 2010, hedge funds will have an estimated $2 trillion in assets under management, so there are enormous opportunities in the alternative investment business.

3 Managing risk: The financial markets are becoming more and more global, but that has come with increased volatility and risk. So we’re seeing a lot more demand — from both institutional and individual investors — for the sort of innovation, expertise and sophisticated products that can help efficiently distribute that risk.

The hardest business decision I’ve had to make

“The hardest business decision I’ve ever made was my decision to leave Morgan Stanley back in 2001. It’s a great firm. I grew up here. I spent almost 30 years at Morgan Stanley, and I think this firm has some of the smartest, most talented people in the business. But I decided to leave five years ago because I was frustrated that I just couldn’t do some of the things that I felt needed to be done. When I got to the point that I kept compromising, I said “that’s enough,” and I left. And it was the right thing for me to do. So with all of that history, to get the opportunity to come back home to Morgan Stanley in 2005 — well, I thought, “What a great firm, and what a great chance to fix some things that needed to be fixed.” That’s why I came back. And I think we’re making great progress and have some real positive momentum.

My five tips for young people for success

1 Do what you love. Money isn’t everything. You need to find a job that you enjoy — that excites you.

2 Take risks and make mistakes. And learn from those mistakes. If you don’t do that, you won’t grow. Don’t go through life sitting back and not being a risk-taker.

3 Demand to be managed. Demand that your managers make you better. It’s their challenge to mentor you and teach you. It’s your responsibility to make sure they do that.

4 Tell people what you think. Don’t just sit back or be intimidated. You need to do it tactfully, but tell people what you think.

5 Maintain your reputation. Always do what’s right for your client and your company and your own reputation. Success is built on honesty and integrity. And you should do whatever it takes to maintain your reputation.

Part of Examiner's The American Economy series.