Governance Problems at Morgan Stanley
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Case Code: CGOV004 Case Length: 20 Pages Period: 1998 - 2005 Pub Date: 2005 Teaching Note: Not Available |
Price: Rs.400 Organization: Morgan Stanley Industry: Investment Banking Countries: US Themes: - |
Abstract Case Intro 1 Case Intro 2 Excerpts
"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."
- 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."
- Landon Thomas Jr., New York Times, 2005.
Return of John Mack
On June 30, 2005, Morgan Stanley (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." Mack's return was expected to stop the mass exodus of top management employees and other key executives at Morgan Stanley.
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. Perelman (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' blamed Purcell for these problems. They launched a media attack on Purcell and wrote open letters challenging him.
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 year. 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.
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