John Mack’s leadership of Morgan Stanley will be challenged at next month’s annual meeting by a group of activist funds which are calling on investors to vote against his re-election to the board.

CtW Investment Group, a union-backed coalition of investment funds, accused Mr Mack and directors Robert Kidder and Howard Davies of “risk management failures” that led to $9.4bn in mortgage-related writedowns.

The group said Mr Mack should not serve as chairman and chief executive and called on Morgan Stanley to elect a separate chairman to provide “an independent check” on his “hard-charging, risk-taking” strategies.

In a statement, Morgan Stanley said it had taken “aggressive action in response to last fall’s mortgage-related writedowns”.

“The interests of Morgan Stanley shareholders are clearly best served by the strong leadership of John Mack as the firm’s chairman and Bob Kidder and Howard Davies as independent directors,” it said.

CtW-affiliated funds own about 0.5 per cent of Morgan Stanley’s shares and are unlikely to gain enough support to oust Mr Mack at the company’s annual shareholder meeting on April 8.

However, the move could spur other investors to show their unhappiness at Mr Mack’s decision to increase Morgan Stanley’s exposure to higher-risk, higher returns products upon taking the helm in 2005.

Among possible successors being discussed on Wall Street are Robert Steel, the former Goldman Sachs executive who is under-secretary for domestic finance at the US Treasury, and Brady Dougan, chief executive of Credit Suisse. However, it is unclear whether either of them would be interested in the job.

Morgan Stanley’s shares have lost more than 40 per cent of their value over the past year.

In December, Morgan Stanley sold a 9.9 per cent stake to China Investment Corporation – a Beijing-controlled investment fund – for $5bn in an effort to shore up its balance sheet.

On Wednesday, Morgan Stanley’s shares closed down 3.48 per cent in New York at $41.01.

CtW accuses Mr Mack of weakening Morgan Stanley’s risk management procedures by changing lines of reporting for the chief risk officer. CtW, whose affiliated pension funds control $200bn in assets, is spearheading a campaign against several Wall Street banks – including Citigroup, Merrill Lynch and Bank of America – that have been hit by subprime-related losses.

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