By AnnaMaria Andriotis and Lauren Weber

Across America, corporate diversity initiatives are in the crosshairs of legal activists and a Trump administration set on wiping them out. At Morgan Stanley, the backlash bubbled up from within.

After George Floyd's murder in 2020, the investment bank's then-CEO James Gorman called out "unresolved racial injustice" in society and vowed Morgan Stanley would be part of the solution. The bank created an Institute for Inclusion with external advisers to guide its efforts and pledged to boost the share of racial minorities in its executive ranks, where it trailed rivals.

Today, the bank faces discrimination accusations and lawsuits, including several in recent months, from both white and Black workers, and criticism from staff who say the efforts either fell short or were unduly heavy-handed.

Even a high-profile initiative aimed at hiring more Black employees came under fire after some discovered they were underpaid compared with their peers. An internal review in early 2023 resulted in the firm increasing the employees' salaries and paying them tens of thousands of dollars in extra bonuses.

The workplace tensions at Morgan Stanley have flared as companies scrambled to respond to a national reckoning over race relations -- and then tried to temper the approach once the legal climate shifted.

While outside pressure has been the focus of the growing political and legal war against DEI, employees and executives have also clashed inside offices, as business leaders brought on consultants, training sessions and race-specific hiring targets.

Morgan Stanley is now watering down diversity initiatives it put in place, including after 2020.

The endeavors had added to a divisive culture in which white and Black employees said there were few winners, despite what bank executives said has been a vigorous and well-intended effort to tackle a complex challenge.

A Morgan Stanley spokesman disputed that the bank's policies have created divisiveness or tensions. He pointed to companywide surveys in which most employees gave the bank high scores on its commitment to diversity and inclusiveness and said the bank is a place where they are "treated with dignity and respect."

With 80,000 employees around the world, "there will always be outliers, but the vast majority of our employees of all backgrounds agree that Morgan Stanley is a great place to work," said Wesley McDade, the spokesman.

In interviews with more than two dozen current and former employees and others close to the firm, some Black staffers said they got little support after being recruited through a minority training program launched in 2021. Others said they were poached from competitors, but to lower-level roles than they had previously held or to positions that were eliminated within a year or two.

Anthony Fletcher, who runs a Chicago-area recruiting firm contracted in the effort to bring more Black employees on board, recalled asking one of Morgan Stanley's regional diversity officers why so many of his recruits weren't getting bigger jobs.

The reply: White financial advisers wouldn't respect them, and it would be problematic for the firm, said Fletcher, who sent a letter to Gorman and the board outlining his concerns, and then sued Morgan Stanley for discrimination and unpaid fees in 2023.

McDade, the spokesman, said the bank rejects Fletcher's allegations of racism and his contractual claim, and said Fletcher was an external recruiter whose contract was terminated.

Several white executives, meanwhile, said they felt pushed to hire nonwhite candidates, even without the right experience, or to refrain from ousting underperforming ones. One, Kevin Meyersburg, a former managing director in the wealth-management division, said in his own 2023 lawsuit against the firm about his termination that HR blocked him from laying off some of his lowest performers because they were women or minority employees. The case is now in arbitration.

McDade said Meyersburg was terminated in a round of layoffs that included employees of every demographic, adding "We strongly refute the allegations made in his claim." He said the bank adheres to federal employment guidelines when it conducts layoffs.

Black staffers received emails starting in 2021 welcoming them to an online Black leadership program they hadn't asked to be part of. The six-month McKinsey program included discussions on race and presenters teaching strategies such as tackling "common mindset challenges for Black leaders."

In interviews, some invitees said they wondered why employees of other races weren't included and likened the program to "special education" for Black employees. Senior Morgan Stanley executives, on the other hand, said they saw McKinsey's offer to put on the program as an opportunity to support up-and-coming Black employees. Employees of all races have recently been invited to participate.

The bank's diversity efforts are "an ongoing effort, and there is no finish line," said Mandell Crawley, Morgan Stanley's chief client officer, who was the firm's chief human resources officer until the end of last year and is among the most senior Black executives at the firm. "You have to have a lot of humility doing this work."

The bank has been revising references to underrepresented groups that some of its diversity efforts were geared toward and broadening their eligibility criteria. The moves come after a 2023 Supreme Court ruling banning affirmative action at colleges opened the door to related DEI, or diversity, equity and inclusion, claims. Morgan Stanley began offering a college-freshman training program that was for Black, Hispanic, LGBTQ and other minority students to all freshmen in 2023. An anti-DEI group led by President Trump's now deputy chief of staff, Stephen Miller, had filed a complaint about the program.

Morgan Stanley recently decided it will no longer dole out bonuses to some managers that were based on numbers of women and minorities they hired and their performances.

And among other changes in how it describes its policies and programs, Morgan Stanley's annual report released last month now says its talent development is based on "meritocracy."

CEO Ted Pick, who succeeded Gorman last year, told staff multiple times at a town hall last month that Morgan Stanley stood by the five core values displayed prominently in its offices -- one of which is a commitment to diversity and inclusion that was added in 2020.

Stepped-up efforts

The bank launched a scholarship program for underrepresented college students in 1993 and hired its first diversity chief the next year. But like nearly every other major Wall Street bank, it has faced discrimination allegations over the years as it grew into a global giant.

In 2008, it settled a lawsuit alleging it discriminated against Black and Latino financial advisers for $16 million, while denying the charges, and agreed to spend another $7.5 million on diversity efforts. A similar lawsuit was filed in 2015; some claims ended in settlements and some are ongoing.

In 2020, Marilyn Booker, the executive hired in 1994 to lead the company's diversity programs, also sued, alleging the bank hadn't done enough to promote people of color and that it fired her for pushing it to move faster. Morgan Stanley denied the allegations. In the years before the George Floyd protests, other Black employees also raised concerns about the scarcity of Black executives. Some spoke with Gorman, the longtime CEO, who said he wanted to tackle the issue.

All of those factors contributed to Morgan Stanley's decision to step up its diversity strategy in 2020, according to people familiar with the decision-making. The bank released its first diversity and inclusion report, signed by Gorman. It hosted video calls for employees to share how they were coping with Floyd's murder. That June, more than 5,000 attended a virtual discussion led by then-vice chair Tom Nides on the Black experience in America. In its 2021 report, Morgan Stanley pledged to increase its Black and Hispanic executives and vice presidents in the U.S. by 50% without specifying a deadline.

Gorman and Susan Reid, the firm's global head of talent, tasked the Institute for Inclusion with helping advise on diversity goals and policies. Gorman was enthusiastic and engaged at the quarterly meetings, according to people familiar with the Institute.

Discussions were often about making employees, who had already made it through the screening and selection process to get hired, feel more included, said one person familiar with the Institute.

The bank also launched its Small Business Academy to advise minority-owned and other companies how to better market their businesses and compete. Some employees said they saw the program as an example of how the bank was serious about diversity issues.

But the new push didn't fix problems that had set in earlier. Morgan Stanley had tapped Fletcher, the recruiter, in 2015 to help fix a dearth of Black talent in the bank. Within a year, Fletcher placed around six Black managers in midlevel positions. "You are a rock star," the wealth management diversity chief at the time told him.

Things shifted soon after, he said. He got fewer recruiting assignments, and he said one regional diversity officer told him the bank had met its diversity goals for the time being.

At the firm's multicultural leadership conference in Los Angeles, wealth-management executives told an audience of hundreds of mostly minority employees that work was under way to create more advancement opportunities. Some attendees voiced their doubts to Fletcher. "Once you stopped drinking and laughing with one another, the conversation would become, 'Am I being given the same opportunity as my white counterparts?'" he recounted. "The answer was no."

Fletcher continued to submit Black candidates, including several Ivy League-trained wealth executives from UBS, Merrill Lynch and other rivals. Some lost out to white candidates who he said lacked the same qualifications.

When his candidates did get hired, they often got compensation that amounted to a short-term raise, but were given a lower position than at their previous employer, with the promise of a more senior role in a year or so. That usually failed to materialize, he said.

In 2022, months after complaining to executives about the hiring decisions and how he was being treated, Fletcher said the bank terminated his contract. In total, he said, he referred more than 200 minority candidates to Morgan Stanley, and the bank hired about 16. Many have since left, he said.

John Lockette, who is Black, worked at Morgan Stanley until 2016 helping oversee its financial-adviser trainee program. He said he often saw white trainees get paired with accomplished financial advisers and put on teams of advisers -- steps critical to succeeding.

He said he rarely saw this occur with Black trainees. Lockette sued Morgan Stanley in 2018 alleging he was terminated in retaliation for reporting racial discrimination by his white bosses and colleagues, including one who said Black people were inherently less capable of passing the Series 7 examination. His case is in arbitration.

McDade said the bank disputes Lockette's claims and said they are without merit.

'Professionals' program

Derek Melvin, a Black longtime senior executive who had voiced frustration about the bank's lack of diversity, conceived of hiring new employees into a two-year Experienced Professionals Program in 2020 as a way to draw more Black professionals into financial services.

Enrollees said the program, which officially began in 2021, helped them pass the license exams needed to work with clients. But some added that they felt out of place once they landed at their desks in fixed income, equities or elsewhere in the firm's institutional securities division, among mostly white employees.

By early 2022, Black recruits discovered that their bonuses were at least 40% smaller than the other associates on their teams. The pay gap was even bigger when the next bonuses were distributed in January 2023.

The issue was flagged to Crawley, the chief human resources officer at the time, and a review was launched. In April 2023, human resources told Black employees their base pay would rise, in some cases by tens of thousands of dollars, and bonuses would also be raised. Three employees in the program said their extra bonus payment was around $50,000 to $65,000.

Those bonuses were based on the median of all associates in each of the Black employees' divisions. Recruits who had received stellar reviews from their bosses determined that didn't reflect their own work. The bank has paid out at least one settlement over the matter.

The recruiting program, which had expanded over the years to include Hispanics and others, is now open to all groups.

Senior Morgan Stanley executives consider the program to be successful and said most of the people they hired from the program's first year in 2021 remain at the firm.

Last month, Berdina Moore-Bonds, a Black former employee in wealth management, filed a lawsuit alleging discrimination. She was regularly denied promotions that went to non-Black employees who often had fewer qualifications than she did, according to the suit. In 2021, more than 30 years after she started working at the firm, she was promoted to a management position overseeing financial-adviser trainers.

Two years later, she became one of three managers in her role -- two of them Black women and the other a white man -- slated to be laid off in a reorganization. Though the bank said she could apply for other spots internally, she said it blocked her from vying for a manager job overseeing some of her previous reports. That position went to the less-experienced white man, while she and the other Black woman lost their jobs, according to the suit.

The Morgan Stanley spokesman said the firm vigorously denies Moore-Bonds's allegations.

At least three other complaints alleging systemic racial discrimination have been filed with the Equal Employment Opportunity Commission since November by current and former Black employees in wealth management, according to people familiar with the matter.

White managers' complaints

The diverse-hiring push also rankled white managers in the wealth-management division. Some of the efforts they objected to, including anti-bias training, reviews of managers' hiring decisions and the addition of diversity criteria to compensation formulas, were changes Morgan Stanley agreed to as part of the court-approved 2008 race-discrimination settlement.

Executive directors overseeing client-facing staff said they attended training sessions on using their social networks to find more diverse pools of potential recruits.

A human-resources manager told one white executive that the executive's LinkedIn and other social-media pages lacked female or minority connections and urged the person to find more to help meet recruiting goals.

Diversity had become one of five criteria that reports would review their bosses on. Managers who received poor reviews on, for example, their recruiting of women and minorities or participation on internal diversity committees, risked getting a smaller bonus or merit raise. The company tracked progress: A slide deck presented at a leadership meeting in Salt Lake City in 2023 showed about 60% of all hires in Utah that year were women and minorities.

Some executive directors and managers in the wealth business said they got pushback when they had minorities on their lists of low performers to let go and were told to pick others instead.

The bank disputed this, saying poor performers were never retained at the expense of higher performing people in job cuts. The spokesman said the bank weighs multiple factors in layoff decisions, including avoiding targeting a person who had recently returned from disability leave or made a workplace complaint. He said the bank follows EEOC guidelines.

He said when managers refer people for layoffs because of poor performance, the company reviews those employees' records to confirm why they were selected.

Meyersburg, the former wealth-management executive, said that shortly before planned layoffs in the division in 2023, he was asked to create a list of subordinates to let go, according to the lawsuit he filed later that year. His list, based on employee performance scores, included one woman and two staffers from minority backgrounds. Scores for employees on this team included factors such as the number of client referrals, client feedback and successfully fitting in with company culture.

Meyersburg said some on the list were rejected by human resources. Afterward, his boss told him that they weren't being let go because they were diverse employees, according to the suit.

A month later, the boss told Meyersburg over lunch that he was being laid off and replaced by a Black managing director. When Meyersburg pressed for a reason, the boss shrugged his shoulders and said it wasn't about his performance, according to the suit. Then he asked: Would Meyersburg be willing to get his replacement up to speed? The boss worried the replacement lacked experience. Meyersburg declined.

A year earlier, Meyersburg's base salary had been nearly doubled and he was awarded a $400,000 bonus for what the boss said at the time was recognition of his performance. When Meyersburg expressed his confusion about being laid off to another managing director, that person replied that it was because of DEI initiatives, Meyersburg's suit said.

"When you use race and sex as a factor in employment decisions, that is not effective DEI," Meyersburg's lawyer, Louis Pechman, said. "It's just flat-out, unlawful discrimination."

Some managers in wealth said they closely tracked how they stood to benefit from hiring women and minorities. They had access to a company dashboard that would show which of their reports qualified the manager for a diversity bonus. This bonus was doled out separately from their annual bonuses and was based on how many such hires they made and how well diverse employees on their team were performing.

The last of such payments went out early this year. Managers have been told that the bonus will become part of their discretionary compensation and that diversity will count as a factor toward it, rather than the entire thing.

New language

Morgan Stanley continues to trail Goldman Sachs and other large U.S. banks with investment banking and trading operations in its total share of Black and Hispanic executives.

In recent weeks, executives including Chief Legal Officer Eric Grossman and Reid, the talent chief and one of the most senior Black executives at the firm, have been fielding calls from colleagues concerned about the political backlash against DEI and wanting assurances that Morgan Stanley will remain committed to its diversity efforts. They have answered that the bank is committed but is taking actions to stay within the law, following the 2023 Supreme Court decision.

In January, Republican attorneys general from 11 states sent letters to six financial institutions, including Morgan Stanley, warning that diversity-related goals for hiring, board diversity and supplier programs risked violating state or federal laws.

In early 2024, Morgan Stanley told employees it would develop what it called an "Anti-DEI Climate Toolkit" to continue its diversity efforts in ways that are in line with the law. That would include producing online content for employees about the efforts with the tone, "We Can Do This!" according to a company document reviewed by the Journal.

Morgan Stanley has folded its annual diversity and inclusion report into a broader report on its social initiatives. As of last year, it no longer includes language about the goal to increase by 50% its Black and Hispanic officers. The September report instead said the bank would fund more scholarships to students at historically Black colleges and universities. It has been expanding the separate college scholarship program it founded in 1993, meanwhile, to all groups based on factors tied more closely to economic need and other non-DEI factors.

Among other language changes, Morgan Stanley revised its "Multicultural Innovation Lab," which the bank previously described as providing access to capital for startups led by "women and multicultural entrepreneurs." It now talks about providing access to "early-stage innovators." Last month, the lab, which the bank had already renamed once, was combined with an effort overseen by the firm's chief sustainability officer and was renamed "Inclusive and Sustainable Ventures Lab."

Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com and Lauren Weber at Lauren.Weber@wsj.com

(END) Dow Jones Newswires

March 17, 2025 21:00 ET (01:00 GMT)

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