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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In April 2005, the 'Group of Eight' published a full page advertisement in The Wall Street Journal stating that Morgan Stanley had fallen into the worst kind of crisis under Purcell. In June 2005, Morgan Stanley issued a profit warning that the second quarter profits would be 15-20% lower compared to the second quarter of the previous year⁸.

According to analysts, Purcell was under tremendous pressure from Wall Street to quit due to the poor financial performance of Morgan Stanley, and also due to the fall in the stock price (it fell by 39% between 2000 and 2005) (Refer Exhibit II for the details). Analysts expressed that Purcell's departure would be beneficial for Morgan Stanley.

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

According to Jeffery Harte, analyst with Sandler O'Neill & Partners, "No doubt Purcell has been under a lot of pressure as the stock has underperformed and the company has underperformed its peers."⁹

Background Note

Morgan Stanley was established in 1935 as an investment bank by former employees of JP Morgan¹⁰. The firm was reorganized as a partnership firm in 1941. In 1970, the firm employed 250 people. By 1979, it employed around 1700 people. In 1997, Morgan Stanley, by then, one of the leading investment banks, merged with Dean Witter, Discover & Company, a brokerage, mutual fund and credit card company based at Chicago. The merged entity was called Morgan Stanley Dean Witter, and Purcell became its CEO (Refer Exhibit III for developments in Morgan Stanley and Dean Witter, pre and post merger)...

Excerpts >>

8] The second quarter results were announced in June 2005.For the quarter ending May 2005, Morgan Stanley showed earnings of $928 million as against $1.22 billion during the second quarter of 2004. The net revenues reduced from $6.8 billion to $6 billion during the same period.

9] Morgan Stanley CEO Surrenders, CNN Money, June 13, 2005.

10] Incorporated in 1800s by Janius S. Morgan, a merchant banker, JP Morgan is one of the leading banks in the US. In 2001, JP Morgan merged with Chase Manhattan to create second largest bank in the US. In July 2004, JP Morgan bought Bank One Corporation, which created an entity with combined assets of US$ 1.1 trillion. For the fiscal ending December 2004, the revenues of the merged entity stood at US$ 52541 million and net income at US$ 6544 million.