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.”

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.

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.