Closing Bell: How Tide Turned Against Purcell In Struggle at Morgan
Stanley --- As Departures and Criticism Show No Sign of Abating, CEO Says
He'll Step Aside --- Dissidents Won't Succeed Him
By Ann Davis
2697 words
14 June 2005
The Wall Street Journal
A1
English
(Copyright (c) 2005, Dow Jones & Company, Inc.)
For months, in the face of rising opposition, Philip J. Purcell vowed to
hold onto his job as chief executive of Morgan Stanley. He rebuffed a
public call for his ouster from eight former executives of the storied
investment bank. Morgan Stanley's board of directors dismissed the
challenge and voiced its strong support for Mr. Purcell.
But in recent weeks the tide turned against Mr. Purcell. A verdict from
a Florida jury against the firm awarded financier Ronald Perelman $1.45
billion, in a case in which Morgan Stanley had refused a $20 million
settlement offer. Second-quarter earnings were looming as weak because
of poor market conditions, and yesterday the firm said they would be lower
than expected. Top Morgan Stanley executives and employees continued to
desert, most recently a group of nine who fled to Wachovia Corp., the North
Carolina-based bank.
Yesterday, Mr. Purcell finally announced he would step down, in a decision
Morgan Stanley said was made jointly by him and the board. He said he would
retire as soon as a successor is named, no later than the next annual
meeting in March 2006.
In an interview yesterday, Mr. Purcell said he concluded "you had a jihad
and it wasn't going to stop." To continue to stay in office in the face
of daily acrimonious attacks, he said, was "not the right thing for the
firm."
He said the cumulative impact of numerous negative events rather than any
one moment led to his decision: "It was many, many little waves. It wasn't
one storm." The 61-year-old CEO added that he was going to retire anyway
before long, and that these events merely accelerated that decision. Mr.
Purcell, who earned $22 million last year, will walk away with an estimated
$62.3 million.
The move culminates an extraordinary civil war at a 70-year-old pillar
of American finance. The tension goes back to the 1997 merger of Morgan
Stanley and the company Mr. Purcell used to lead, Dean Witter, Discover
& Co. The deal was meant to blend a Wall Street firm with a blue-chip
corporate clientele and a Main Street stockbroker serving the boom in
individual investing. But the two sides never meshed, and Mr. Purcell made
only sporadic efforts to meld the white-shoe securities division with the
brokerage and credit-card operations. This spring, under pressure, he
promised to spin off Discover, the credit-card business.
The eight former Morgan executives who assailed Mr. Purcell's leadership
in March complained that the firm's stock returns lagged behind its peers'
over several years and that its brokerage and asset-management units were
underperforming. They criticized Mr. Purcell's leadership style and the
board's governance. Later they called for breaking the firm into parts
serving institutional and individual clients, effectively proposing to
undo the merger.
In a statement yesterday, the eight said that as shareholders, "we are
pleased that the board has taken this important and necessary first step.
We support a comprehensive and timely review by the board of all qualified
CEO candidates. We hope that this and future actions will stem the recent
tide of departures from the firm and restore a culture and business
environment capable of attracting and retaining the best professional
talent."
Investors welcomed the end of the struggle between Mr. Purcell and his
critics. The stock rose $1, or 2%, in heavy trading on the New York Stock
Exchange, closing at $50.88.
But Morgan Stanley faces more uncertainty, with its leadership in doubt
for what could be many weeks. In its search for a new CEO, it is ruling
out many high-profile former executives, the people who ran afoul of Mr.
Purcell and left in the past three months.
In recent weeks, as the campaign against him dragged on, the board began
digging deeper into Morgan Stanley's operations. Director Howard Davies,
a former United Kingdom financial regulator, had begun an aggressive
grilling of the firm's officials over their handling of legal matters in
the wake of the Perelman verdict last month in Florida, people familiar
with the matter said. (The firm is challenging the verdict.)
They added that Laura D'Andrea Tyson, a former Clinton administration
economic adviser, made noises about breaking ranks with the board rather
than appear to be among the directors who unanimously agreed to support
Mr. Purcell. Mr. Davies, now director of the London School of Economics
and Political Science, declined to comment. Ms. Tyson, now dean of the
London Business School, has repeatedly declined requests for comment and
didn't respond to requests yesterday.
Other directors started to grow worried that small problems could mushroom
into something starker. Even while Morgan Stanley continued to win key
business, the departures and flagging morale had started to wear on the
normally thriving securities business. Entire teams of traders left, such
as an eight-person group that went to Deutsche Bank AG. Prominent
executives and investment bankers such as Joseph Perella, Terry Meguid
and Ray McGuire left.
The firm said yesterday it had named a longtime director, Miles Marsh,
as its "lead director." A former chief executive of paper company Fort
James Corp., he will take the lead in representing the independent or
nonexecutive directors. Mr. Marsh said in an interview that the board
accepted Mr. Purcell's decision to step down after it became clear the
problems confronting the firm wouldn't stop as long as he remained in
power.
"Our sense internally was that eventually it was going to settle down.
But the external part of the equation never settled down," he said. "We
were concerned as to how long we could continue to be in that mode, how
long we could soldier on." Mr. Marsh said Mr. Purcell came to the board
and said he "didn't see an end to this without him continuing to be a
lightning rod. The board finally said, `Look, from the point of view of
the firm, we just can't engage in an endless situation like this, as much
as we feel that some of it was unfair.'" The board made its final decision
Sunday, Mr. Marsh said.
In announcing Mr. Purcell's impending departure, the board left open who
will be the successor -- but talked extensively about who wouldn't be.
The director leading the search, Charles Knight, head of the compensation,
management development and succession committee, told employees in a
morning address that Morgan Stanley wasn't considering any of the five
former management-committee members who recently resigned, nor any of the
eight critics who came forward in March. Known as the Group of Eight, they
had suggested one of their number, former Morgan Stanley President Robert
Scott, as a candidate.
Mr. Knight also said the board had ruled out John Mack, a former Morgan
Stanley president who left in 2001 after clashing with Mr. Purcell. Those
people "are not being considered as candidates for Phil's replacement,"
Mr. Knight said.
People familiar with the events said both Mr. Purcell and his recently
chosen co-presidents, Zoe Cruz and Stephen Crawford, asked the board to
rule out those candidates, and that the board did so in a bid to retain
Ms. Cruz and Mr. Crawford. Messrs. Marsh and Purcell declined comment
yesterday on any such requests. The firm didn't make Ms. Cruz or Mr.
Crawford available for interviews.
Mr. Marsh said that in internal discussions with employees, none of the
five former management-committee members emerged as a consensus choice.
He referred to some as fitting more a profile of "a developmental
candidate," adding: "If you bring in a CEO from outside, you look to
somebody with experience as a CEO."
Some analysts saw the decision to hold the job open and not name a temporary
CEO as a sign Morgan may have intentionally made itself a more attractive
takeover or merger candidate.
Excluding so many executives who are very familiar with operations -- and
whose vision of the firm often clashed with Mr. Purcell's own -- sparked
disapproval from some investors and from the dissident alumni. Jeff
Arricale, an analyst at T. Rowe Price Group Inc., which owned 10.5 million
shares of Morgan as of March 31, criticized the decision to "put the
kibosh" on all the departed executives. He said he believed many employees,
if asked, would support some of them as candidates, such as former
securities chief Vikram Pandit and former equities head John Havens.
Jeffrey Sonnenfeld, associate dean at Yale School of Management, called
it unwise for a board to allow an executive who left under duress too much
input on his successor: "A board should never accommodate a dethroned
leader because they become a wounded animal and can act vindictively,"
he said.
Mr. Purcell said in a call with analysts that he believed the board
wouldn't be keen to go to the departed management-committee members
because directors had already picked the co-presidents, Ms. Cruz and Mr.
Crawford, "over the five that recently departed." He added: "It would be
very unusual that they would consider any of those five ahead of Zoe or
Steve." As for other former Morgan executives Mr. Knight ruled out, Mr.
Purcell said the board already was familiar with their records and
qualifications and was in a position to decide it wanted to look elsewhere.
In speaking to analysts, Mr. Purcell said the continued presence of Ms.
Cruz and Mr. Crawford would be stabilizing. "We've got management in place
that everybody knows and respects, and none of that changes," he said.
"I would hope and expect that people will rally around the leaders that
they have, and that will help stem the defections."
With more than 53,000 employees, Morgan Stanley is among the leading
securities firms. Its investment bank has been a fixture of blue-blood
Wall Street since its founding in 1935, after the Glass-Steagall Act of
1933 forced J.P. Morgan to shed its securities arm. Mr. Purcell took over
as CEO after the merger with Dean Witter.
The institutional securities business that makes up the old Morgan Stanley
has consistently been a leading underwriter and trader in stocks and bonds
and a top adviser in mergers and acquisitions. Dean Witter, the retail
brokerage arm, has around 10,000 brokers. It has struggled to keep up with
peers that exceed it both in profit margin and productivity per broker.
Now, Morgan Stanley faces a number of challenges. One is the slowdown of
Wall Street's business cycle. The firm said it expects its second-quarter
earnings per diluted share to be 15% to 20% below the year-earlier period,
mentioning weakened market conditions the firm previously cited. It is
still unclear how much the recent departure of bankers, traders and other
executives will hurt the pipeline of business.
Another pressing issue: figuring out how and when to spin off the Discover
credit-card operation as a public company, a move announced in early April
as the shareholder revolt against Mr. Purcell got under way. Some analysts
said the company would be a better takeover candidate if it doesn't break
up its business. Morgan Stanley, as is its custom, declined to comment
on takeover speculation.
Mr. Purcell said leadership shifts won't change the plan to spin off
Discover in a few months. Chief Financial Officer David Sidwell said he
would provide an update on timing after another board meeting around next
week's earnings release.
Mr. Purcell, who has commuted to New York from Chicago by corporate jet
during his entire time at the helm, has drawn criticism for his detached
management style, even as it was unclear how much it really hurt Morgan's
business. Hoping to make up for lost time, in the past three months he
sought to do more to develop relationships with investors and clients with
whom he hadn't had as much contact before.
In May, Mr. Purcell called Stephen Schwarzman, CEO of the Blackstone Group,
and suggested they get together, according to several people familiar with
the matter, who add that Mr. Schwarzman was surprised. As head of
Blackstone, a huge private-equity firm, he meets regularly with the chiefs
of Goldman Sachs, Lehman Brothers, Bank of America and Citigroup, to name
a few. But this was the first time Mr. Purcell had called or sought to
visit, say people familiar with the matter. Mr. Schwarzman's firm is one
of the biggest fee-payers on Wall Street and a large Morgan Stanley client,
and situated about seven blocks from Morgan's headquarters.
According to three people with knowledge of their conversation, Mr.
Schwarzman told Mr. Purcell, in effect, "I started my firm 20 years ago
and this is the first time you're calling me?" Mr. Purcell did pay a visit,
those people say, but word quickly spread that it was his first since he
became head of Morgan Stanley eight years ago.
Morgan Stanley declined to comment. A Blackstone spokesman said the firm
has been "very well-served by Morgan Stanley over the years, and the firm
continues to have excellent relationships at all levels within Morgan
Stanley. Blackstone does not comment on the personal relationships of its
senior executives."
In the end, Mr. Purcell may have grown tired of trying to remake his image.
In a letter to employees yesterday, he said, "It has become clear that
in light of the continuing personal attacks on me, and the unprecedented
level of negative attention our firm -- and each of you -- has had to endure,
that this is the best thing I can do for you, our clients and our
shareholders."
He added: "I feel strongly that the attacks are unjustified, but
unfortunately, they show no signs of abating. A simple reality check tells
us that people are spending more time reading about the acrimony and not
enough time reading about the outstanding work that is being accomplished
by our firm."
--Question of the Day: Morgan Stanley's Purcell plans to retire by March.
Is that timing appropriate? Visit WSJ.com/Question to vote. Plus, WSJ.com
subscribers can see a Who's Who in the Morgan Stanley saga, the
conference-call transcript and a video report, at WSJ.com/JournalLinks.
--A Look Back
Some of the challenges to Philip J. Purcell's leadership of Morgan
Stanley
since his arrival in 1997.
-- Feb. 5, 1997: Morgan Stanley Group Inc. and Dean Witter, Discover
& Co.
announce a merger; Dean Witter Chairman and CEO Purcell becomes chairman
and
CEO; Morgan Stanley President John Mack becomes president and chief
operating officer.
-- Jan. 24, 2001: Mack resigns after losing power struggle with Purcell.
-- Oct. 13, 2003: In a management shake-up orchestrated by Purcell,
Stephan
Newhouse is named president, succeeding Robert Scott.
-- Dec. 9, 2004: In a letter to the board, former Morgan Stanley
executive
Scott Sipprelle labels merger a failure and calls for a breakup.
-- Jan. 28, 2005: Purcell says Morgan Stanley may sell the Discover unit
if
it fails to grow over the next two to three years.
-- March 3: Eight shareholders and former senior managers at the company
write a letter to the board criticizing Purcell's performance.
-- March 28: Purcell names Stephen Crawford and Zoe Cruz as
co-presidents,
succeeding Newhouse. The heads of the institutional securities business
and
the institutional equities business quit in protest.
-- April 4: Firm says it is looking to spin off Discover.
-- April 13: Joseph Perella, a vice chairman, and Terry Meguid, head
of
investment-banking division, resign.
-- May 1: Giving Purcell a vote of confidence, Morgan Stanley board
members
revamp the company's bylaws that originally held that a 75% majority was
needed to oust the chief executive.
-- June 10: Nine people in the key equities derivatives unit defect to
Wachovia Corp.
-- June 13: Morgan Stanley issues a profit warning for its second
quarter.
Purcell announces his intent to retire.
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