Morgan Stanley’s embattled CEO Philip Purcell tried to shore up shareholder support and squelch the almost daily flood of media speculation over the firm’s future Tuesday with his first public address since the controversy over his leadership broke.
The appearance came even as Purcell’s support from the board of directors seems to be waning. “Each decision they have made in the last few weeks has weakened his position,” said Punk Ziegel analyst Richard Bové. “The fact is that 51 percent of the board can boot the CEO, that they’re going to create a lead director, that they’re going to put more independent directors on the board, that the directors are out there interviewing investors and customers...The board may support Phil Purcell, but it’s nowhere near where it was two months ago.”
Speaking at UBS AG’s financial services conference in New York, Purcell defended recent business decisions, like the appointments of Zoe Cruz and Stephen Crawford as co-presidents and the firm’s plans to spin off the Discover credit-card unit. These moves, the ensuing media coverage and continued opposition to Purcell’s leadership from dissident shareholders, have helped spur a series of high-profile defections at the company.
Five members of Morgan Stanley’s management committee, and at least six managing directors have left since Purcell replaced Stephan Newhouse as president with Cruz and Crawford in March. Eight former Morgan Stanley executives have been pushing for Purcell’s resignation, citing what they call poor performance in the retail division as proof that Purcell botched the 1997 merger between Morgan Stanley and Dean Witter. That business had margins of 15 percent in the fourth quarter, versus 20 percent at most of Morgan Stanley’s peers, according to the company.
“By definition when you choose some people in a new management structure, you don’t choose others,” Purcell said, referring to Cruz and Crawford. “And in the process we lost some valued members of our management team. We are very happy with the choices we have made, which we believe align management structure with our integrated securities model.”
The company is working hard to prevent further loss of talent, said Purcell. He claimed that morale among brokers is much improved after the company made it clear that the retail business would not be sold. Additional defections from the investment banking business remain a bigger concern for the company. “Investment banking—I would say that is the area of key focus right now for us in terms of people. Being in the paper every day doesn’t help morale in investment banking. We want to be out of the paper every day,” he said.
Purcell, who was joined in speaking by Cruz and Crawford, noted that a spinoff of Discover could eat into the firm’s earnings, capital and returns, but said that wouldn’t prevent the company from generating premium returns, something it has done in the past but has lately failed to deliver to shareholders. “This was not a rushed, reactionary decision,” he said. “It came after long and studied consideration. And it’s a promising time to spin it off.” It will be free to compete on level playing field in terms of capital, he explained.
As for the retail division, Purcell noted that more work needs to be done on both costs and revenue. An ongoing push to win more high-net-worth clients should help by boosting assets per financial advisor, said Crawford.
Purcell said he wanted to put the controversy behind him and get back to business. “We are the first to admit that the media frenzy of recent events has been disruptive to all three of our key constituencies. And the sooner we can move on and return our entire focus to the business the better,” Purcell said.
Were shareholders convinced? It remains to be seen. But Bové said Purcell’s presentation was weak on at least a few points. “A solution to the problems in the retail sales division was not clearly articulated,” he said. Plus, it emerged that there’s no defined responsibilities for the co-presidents of the firm. “But these are not overwhelming negatives compared to the fact that the company is going to make a lot of money this year,” he said. More importantly, in speaking with investors over the course of the day, he felt that the vast majority just don’t think he’s the right fit for the company. “What everybody cares about is they don’t like Purcell, they don’t want him in the company. The only solution to the problem at this juncture is to sell the company,” Bové said. “The whole company.”