Can Morgan Stanley revitalise itself and change direction with a new CEO? This New York Times analysis shows that the future looks uncertain for this beleaguered financial giant.
June 14, 2005
Morgan Stanley's Choices: New Direction or Better Execution?
By JENNY ANDERSON
On Wall Street, a world dominated by multibillion-dollar deals, seven-figure bonuses and exotic financial products like weather derivatives, the success of a firm might just rest on the most intangible and least financial element of all: culture.
That is one big lesson from Morgan Stanley, where Philip J. Purcell, the battered chief executive, announced yesterday that he would leave the company after a sustained bout of "personal attacks" from a group of former executives who waged a lengthy campaign to oust him.
The question that Morgan Stanley's directors must now decide is whether the problem was chiefly Mr. Purcell, or his strategy to create a financial supermarket that served customers ranging from retirees living on fixed incomes to multinational corporations. The board's answer will determine what kind of chief executive it chooses as a replacement for Mr. Purcell and what parts, if any, of the sprawling firm it will spin off.
"The retail and institutional models are tricky to bring together and hard to execute," said Guy Moszkowski, a brokerage analyst at Merrill Lynch. "Sometimes culture is everything."
The firm has already decided to shed its Discover credit card. The future of other divisions, especially the Dean Witter brokerage unit, could rest on what a new chief executive believes ails Morgan Stanley.
Another option could be to merge Morgan Stanley with a rival to help it recover its lost footing. Some analysts are suggesting a sale to some financial institution like Bank of America or HSBC.
Miles L. Marsh, Morgan Stanley's new lead director, made clear the board would look for a successor who supported an integrated model. "You need people who are on the same wavelength with employees and the board."
At the core of the debate about Morgan Stanley's future was whether it should continue to be an integrated financial services company, selling stocks and credit cards to individual investors while also serving high-paying institutional clients like hedge funds and corporations. Integral to that question: whether a more charismatic leader could have succeeded where Mr. Purcell failed.
It was Mr. Purcell who, in 1997, sought to bring Main Street to Wall Street when he merged Dean Witter, the retail stock brokerage firm which he oversaw, with Morgan Stanley, the white-shoe investment bank. They were like oil and water, and in the end, Mr. Purcell just could not blend the two.
What seems to have really hurt Morgan Stanley was that Mr. Purcell did not have the charisma to make his vision of an integrated financial services firm function effectively.
"Whether Morgan Stanley can regain its momentum or whether it eventually has to be sold is unclear," said Peter J. Solomon of Solomon & Company and a former chairman of the advisory business at Lehman Brothers in the 1980's.
"I suspect it depends on the leadership they require, whether they can restore that."
So what may be next?
Some of Mr. Purcell's detractors say his strategy of building a full-service financial services company was the fundamental flaw. They say the era of soup-to-nuts financial institutions is now officially over.
"This is the last nail in the coffin on the failed vision of the financial supermarket," said Jeffrey A. Sonnenfeld, associate dean at the Yale School of Management. "Dean Witter and Morgan Stanley, these pieces never fit together and stapling them together wasn't the answer."
To others, however, the problem is not the model but the execution. "What failed here was not the vision or the strategic thrust - it was the execution," said Richard X. Bove, an analyst at Punk, Ziegel & Company. "He spent too much time conceptualizing, too much time ensuring his position and not enough time with his management people and his clients."
Mr. Bove compared that with two more hands-on executives, Sanford I. Weill, who created and ran what became Citigroup for more than 20 years, and Richard Fuld, who has run Lehman for 12 years and has been employed there for 36 years.
"Sandy and Dick can conceptualize, but they are salespeople and they can execute. Purcell can conceptualize but he doesn't execute; he doesn't get his hands dirty."
While Mr. Purcell's immediate legacy will be his inability to marry a group of brokers with the blue-blooded patricians of Morgan Stanley, he did respond early to the shifts by financial companies to a full-service model. But when companies kept evolving toward an open system -with brokers selling a wider array of financial products than just those their firms created, as in Merrill Lynch brokers pitching Fidelity mutual funds - he supported a system favoring Morgan Stanley products.
That system also created a steady stream of enforcement cases because of the inherent conflicts when brokers sell customers investment products that, while they may capture higher fees and earn better commissions, could be inappropriate for some investors.
"He really rethought the brokerage business around a model that was brilliant in the 1980's, the captive sales force selling proprietary product," Mr. Moszkowski said. "In today's regulatory and customer-needs environment, that model doesn't work very well."
His intransigence with regulators was notable in an era when most chief executives embraced the concept of fighting for a reasonable settlement and moving on. He bragged about having avoided the worst of the research analysts' conflicts only to be publicly reprimanded by William H. Donaldson, chairman of the Securities and Exchange Commission.
"The problem being C.E.O. is you are responsible," Mr. Solomon said. "You are responsible for good things you don't do and bad things you don't do."
Mr. Purcell's run was full of surprises. He won a power struggle with the former president, John Mack, in 2001 - a battle that left Mr. Purcell running a company with a board that many saw as sympathetic to him.
But in the end, Mr. Purcell's greatest shortcoming appears to be failing to integrate two different cultures, or finding a way for one to supercede the other. "The C.E.O. has to create a single culture," Mr. Solomon said.
A top Wall Street lawyer who insisted on not being identified said that Mr. Purcell "never really melded the company where there's an us versus them mentality; it was us against us."
It is unclear if Morgan Stanley will be able to lure back the 20 managers who resigned during the last three months of turmoil.
Morgan Stanley, however, still has a deep bench of talent and deep-rooted culture, but will have to pick a new leader and perhaps a new strategic direction. To some, recapturing its glory will not be hard.
"The brand name is still a glistening brand name," said Mr. Sonnenfeld of Yale. "For every one of the superstars who has left, there are five great people."