Closing Bell: How Tide Turned Against Purcell in Struggle at Morgan Stanley As Departures

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

English

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."