The palace intrigue at Morgan Stanley continues—to the delight of the New York City-based financial journalism core. For days now, Morgan CEO Philip Purcell’s struggle to keep the helm of Morgan has been splashed across the front pages of the major dailies.
In fact, the minutia on the revolt against Purcell by eight shareholders who own about 1 percent of Morgan outstanding shares have made the front pages of The Wall Street Journal and The New York Times. Today, even, the “Morgan Eight”— the ones who are publishing open letters calling for Purcell’s resignation—have proposed that former Morgan president and CFO Robert Scott, who was recently pushed out by Purcell, be named CEO.
Despite the brouhaha, our money is on Purcell. While Registered Rep. in March questioned why Purcell is still allowed to be in charge—after all, it was he who pioneered a questionable business model of manufacturing mutual funds and then cramming them down the throats of customers via its proprietary sales force (sweetened with better compensation and other incentives for FAs)—don’t forget: The Morgan board fully supports him.
Yes, Purcell has a vice-like grip on the firm’s board of directors: It remains loyal and entirely in Purcell’s corner, no matter how many letters disgruntled former executives write. (The eight revolting shareholders are former Morgan employees. By the way, Scott, the group’s proposed CEO, also ranks as one of the dissident eight.) In a separate action, Morgan was hit again Tuesday when former executive Scott Sipprelle sued the firm for $100 million for bungling the deal to buy camping outfitter Coleman seven years ago because of an accounting scandal.
To some, Purcell’s stacking of the board—many say this is the only thing keeping him at the head of the ship—is one example of his self-interested management style. The other is his 47 percent raise in 2004, despite the drastic underperformance of the company shares.
“It is contrary to all of the exhortations of ethics writers, but utterly in accordance with common practice,” says Bob Monks, a veteran corporate governance activist and author of The New Global Investors: How Shareowners can Unlock Sustainable Prosperity Worldwide “Frankly, there really isn’t any way for shareholders to get their own people on the board. They can’t remove the board, and they can’t nominate directors. They’re helpless.”
Monks, who has crusaded for years for shareholders to have more weight in the selection of corporate boards, says Purcell—who has taken considerable hits for the lagging stock price of the firm and its resistance to sell off units of the old Dean Witter business—is holding on to his job, securely, because he has his advocates on the board. He actually added two more to the board on Monday, appointing Zoe Cruz and Stephen Crawford, the two people he promoted last week.
“It’s a dirty little secret, but this is a very common practice,” Monks says. “Purcell actually picked the head of the nominating committee [Michael Miles, an executive at buyout firm Forstmann Little]. People who have power want to try and keep it. It’s like Congress giving itself term limits or rezoning districts, except Congress is accountable to the voters. The board isn’t.” (For more on Bob Monks, a corporate governance pioneer, see Registered Rep.’s February 2003 issue at http://registeredrep.com/mag/finance_bob_monks_year/index.html.)
Still, Purcell, despite his comfortable status with the board, is making concessions toward the dissenters. In a conference call Monday night, Purcell confirmed that the firm was considering spinning off its Discover card unit, which his critics say has limited growth potential and few synergies with the Morgan.
“Discover will be more properly valued as a stand-alone entity,” Purcell told analysts. Purcell said it was unlikely he would sell the whole credit-card business, citing potentially onerous taxes, but pointed out that, in general, the “time was right” to consider spinning off the unit.
Morgan has also been the subject of considerable consolidation rumors, specifically from HSBC and Bank of America. Richard Bové, an analyst with investment bank and research firm Punk Ziegel, goes so far as to say that he believes the Discover spinoff is just a precursor to a larger sale and that BofA is the prime suspect for courting. Morgan denies all takeover talk.
Actually, Morgan’s being swallowed up by a BofA or some other firm might be the only way to dislodge Purcell from the CEO post. “The people who have the incumbency in a company like this one, like Purcell, have control of a company’s pocket book and control of the company’s lawyers,” Monks says. “They can expend a lot of money that isn’t their own, and their challengers are in an opposite situation. There’s not much they can do.”