Governance Problems at Morgan Stanley

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Case Details:

Case Code : CGOV004
Case Length : 20 Pages
Period : 1998 - 2005
Pub Date : 2005
Teaching Note :Not Available
Organization : Morgan Stanley
Industry : Investment Banking
Countries : US

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"The story of Purcell's demise is remarkable for many reasons. It's surprising that an executive who was once hailed for his vision and political skills couldn't spot his own weakness - that he remained too much the insider, even as the company's troubles demanded that he play a much bigger public role."¹

- Charles Gasparino, Newsweek, 2005.

"Mr. Mack's triumphant return would conclude an eight-year Wall Street drama that, with its themes of intrigue, banishment, mutiny and redemption, gave what could have been just another boardroom putsch the feel of a Shakespeare play."²

- Landon Thomas Jr., New York Times, 2005.

Return of John Mack

On June 30, 2005, Morgan Stanley³ (Refer Exhibit I for the details of Morgan Stanley's operations), one of the world's largest diversified financial services company, announced that John Mack (Mack) would rejoin as the CEO of the company replacing Philip J Purcell (Purcell). Purcell had announced his retirement on June 13, 2005, and there was considerable speculation about his successor. There were several names on the shortlist, but Mack was the final choice. On his selection, BusinessWeek said, "Mack's return to Morgan Stanley would mark one of the greatest comebacks in Wall Street history."⁴ Mack's return was expected to stop the mass exodus of top management employees and other key executives at Morgan Stanley.

Corporate Governance | Case Study in Management, Operations, Strategies, Corporate Governance, Case Studies

Many employees left Morgan Stanley after Purcell appointed Stephen Crawford and Zoe Cruz⁵ as co-presidents, in March 2005, forcing out President Stephan Newhouse (Newhouse) and Vikram Pandit (Pandit).

Purcell had appointed his loyalists on the board of Morgan Stanley, so that his misdeeds were never opposed. Since 2001, Morgan Stanley faced many problems including falling share price, decreasing profits, ethical lapses and fines in billions of dollars, the highest of which was US$ 1.45 billion paid to Ronald O. Perelman⁶ (Perelman).

In its 2002 annual report, the legal proceedings against the firm occupied more than five pages. Eight influential former executives of Morgan Stanley, popularly known as the 'Group of Eight'⁷ blamed Purcell for these problems. They launched a media attack on Purcell and wrote open letters challenging him.

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1] Gasparino, Charles, "Out on the Street," Newsweek, June 27, 2005.

2] Thomas Landon Jr, "Morgan Stanley Drama Ending?," New York Times, June 30, 2005.

3] Morgan Stanley operates through 600 offices in 28 countries across the world. Morgan Stanley has several subsidiaries and affiliates and provides services to clients and customers, including, individuals, corporates, financial institutions and also governments. Morgan Stanley operates through four segments viz. Institutional Securities, Individual Investor Group, Investment Management and Credit Services.

4] Thornton, Emily, "Morgan and Mack: Getting Closer," Business Week Online June 27, 2005.

5] Zoe Cruz was ranked 16th on the list of 100 Most Powerful Women, 2005 by Forbes magazine.

6] Born in 1943, Ronald O. Perelman is a wealthy Jewish-American investor and businessman, who appeared 34th on the Forbes 2005 Wealthiest Americans, with an estimated wealth at US$ 6 billion in 2005.

7] The Group of Eight included Anson M Beard Jr., S Parker Gilbert, Lewis W Bernard, Robert G Scott, Richard A Debs, Frederick B Whittemore, Joseph G Fogg III and John H T Wilson. Together, they held 1% of the shares in Morgan Stanley.