“ANYONE BUT JOHN MACK”
Purcell was on the high seas in the midst of a “perfect storm,” but he was still on board, and the Eight were tapping their feet in frustration. They hired a proxy advisor and agreed that they would let it be known that they were considering challenging Purcell and the entire board in a proxy fight, if he didn't step down. That could cost them $15 to $20 million of their own money. On June 7, Bob Scott, Joe Fogg, and Anson Beard held a conference call with about forty members of the Council of Institutional Investors. When someone on the call asked about a proxy, Fogg, as the M&A expert in the group, took the question. He confirmed that they were exploring the option with a proxy firm. Within hours the directors had heard the news.
Unbeknownst to the Eight, the board was already making final preparations to give them what they wanted. Clients and institutional investors were irate. The [Ronald] Perelman fiasco [Perelman sued Morgan Stanley for fraud for its advice on his Sunbeam/Coleman Lanterns deal] could cost the firm one quarter's profits, and second-quarter earnings per share, which would shortly be announced, were down 24 percent from the same period in 2004. The loss of talent and the threat that more people were considering leaving was leaching energy out of the firm. The directors were under scrutiny by the nonprofit governance watchdog, the Corporate Library, which gave the Morgan Stanley board a grade of D. That could lead to unwelcome attention by regulators whom Purcell and Don Kempf had already antagonized, and to stockholder lawsuits.
No one wanted to be remembered as a loser in a fight that made Wall Street history. Whatever the directors did now, the fight for the soul of Morgan Stanley would be a line in many of their obituaries. It was time to act before regulators decided to investigate whether the board had failed in its fiduciary responsibility.
On a nonexecutive directors conference call in late May, Chuck Knight [a Purcell-appointed board member and chairman emeritus of Emerson, formerly known as Emerson Electric] reported that investors were telling him that he could not stick with Purcell any longer. He had decided Purcell had to go. As someone who was there said, “After that, they didn't waste any time.” Another said, “It was just a matter of what the process should be: if Phil should step down after a certain number of months, if he should step down as CEO and become chairman; and if we were going to go down that road, what it was going to look like.”
Over Memorial Day weekend, Bob Scott [a former Morgan executive and member of the “Group of Eight”] heard that a couple of directors had started discussions with Purcell to begin the disengagement process and discuss what they would have to give Purcell for him to leave. The final negotiations for the divorce continued in the utmost secrecy in Chicago, New York, Utah, and on conference calls. Purcell had demonstrated what an implacable negotiator he was during the Morgan Stanley Dean Witter merger; defeat made him even tougher. The board was eager to finish the process so Morgan Stanley could get back on track, and they could get on with their lives. They made significant concessions and dispensed a large chunk of stockholders' money to complete the process. They agreed to call Purcell's departure “retirement.” If he had been fired, which was being proposed by a number of critics outside the firm, the value of his “platinum parachute” would have been reduced significantly.
Purcell's total package amounted to $113.7 million, including the $34.7 million in restricted stock, approximately $20.1 million in stock options, and a $42.7 million “departure bonus.” The exact amount of the bonus was based on 2005 profits; it would be higher if profits were up, and he would get less if they were down. Ironically, if his successor turned the firm around, Purcell would make even more money. That added up to $97.5 million so far, and he would receive another $11 million in retirement benefits: $250,000 outright per year; a secretary at $115,000 a year, office and administrative expenses, medical benefits, and $250,000 a year in charitable donations, which Morgan Stanley would give in his name to institutions of his choice.
Purcell took care of his loyalists. Steve Crawford, who had been co-president for three months, was promised $16 million a year for two years, or $32 million if he chose to leave before August 3. Someone who was there said the board felt badly because by agreeing that Crawford and Cruz should be co-presidents under a CEO who was fighting for his life, they might have ruined their careers. It was not likely that Purcell's successor would want either of them around; as someone said, Crawford's package was “guilt money.”
Zoe Cruz refused a Crawford- type deal. She continued without a contract while she waited to find out whom she would be working for, and whether she would still have a job under the new CEO. She and Crawford remained on the board during the search.
Other Purcell lieutenants with special pay packages were John Schaefer, head of Retail Brokerage, and Mitchell Merin, Head of Asset Management, the two areas of the firm that had repeatedly been singled out for their poor performance.
CFO David Sidwell was guaranteed a minimum of $10.5 million if he stayed until mid- October. He would get $21 million if he resigned or was fired without cause. (Sidwell remained with the firm, and in November 2005, he agreed to revise his contract. The $21 million clause was canceled and he received a one time special award of $8 million in restricted stock. He left Morgan Stanley in 2007.)
The agreements, which were made before the new chairman and CEO was hired, would be part of Purcell's legacy.
Marty Lipton, who had advised the board to stonewall the Group of Eight and back Purcell, and was still advising the board when they determined the severance pay for Purcell and the others, charged Morgan Stanley a fee said to be in the $25 million range.
Purcell held out for revenge, or perhaps he thought of it as justification.
He was adamant that the board should not replace him with any member of the Group of Eight; anyone who left during the fight, including Pandit, Havens, Newhouse, Perella, and Meguid; or John Mack. He could not get successor exclusions in writing, but Chuck Knight, Head of the Compensation, Management Development, and Succession Committee, wanted to announce the names of people who would not be considered.
Other directors told Knight that making that kind of public announcement would be counterproductive, narrow the pool, and prolong the fight, and exhorted him not to do it. The Morgan Stanley board needed to look dignified and in control, not petty and vengeful.
By that time, they were openly divided. The early-warning group was represented by Laura Tyson, who had proposed that they perform some serious due diligence six months earlier, and had been outspoken all along, despite being shouted down when the discussions got heated. [Tyson is a professor at University of California, Berkeley, who once served as Chair of the President's Council of Economic Advisers.] [Board member] Sir Howard Davies was another warning voice. Some of the former CEOs of industrial and manufacturing companies, who came out of more autocratic systems, in particular Chuck Knight and Mike Miles, were angry that they had been cornered. Bob Kidder and Miles Marsh had moved toward the center.
Purcell continued to try to influence the decision about his successor. Jeffrey Sonnenfeld, associate dean at Yale School of Management, said, “A board should never accommodate a dethroned leader because they become a wounded animal and can act vindictively.”
As all of this was still happening behind the scenes, the Group of Eight believed that the fight was still on. Then, toward the end of the second week in June, Bob Scott was getting urgent “calls and whispers” that the date of execution was close. He heard that, on Thursday or Friday, June 9 or 10, [Purcell lieutenants] Zoe Cruz and Steve Crawford were told to drop whatever they were doing and were flown to an urgent unscheduled meeting in Chicago on one of the Morgan Stanley planes. That weekend, Scott, who was at his house in Vermont, heard that the board was “preparing to shoot Phil,” and made calls to other members of the group to alert them.
On Sunday, June 12, the Morgan Stanley directors met in New York and agreed to accept Purcell's decision to retire, on his terms.
At six-thirty in the morning, on Monday, June 13, CNBC's Maria Bartiromo scooped the financial media and reported that Philip Purcell would announce his plan to retire later that day.
Anson Beard was the first of the Eight to hear the news. His assistant, Farah Santoro, who had maintained her sanity and good nature through a board fight and plans for Beard's imminent wedding, heard Bartiromo's scoop and called him at home. Beard says, “I'd heard that he was working on the second quarter earnings release and that Zoe and Crawford had been flown out to Chicago on short notice. We didn't know what it was about, and you never know when the board was going to break, but we were relentless.”
Parker and Gail Gilbert were in Bilbao, Spain, where they had gone to see the Frank Gehry-designed Guggenheim Museum of Art. They were in a restaurant having lunch with another couple when Gilbert got a call on his friend's cell phone. Bob Greenhill's assistant had tracked him down. “Congratulations!” she said. “You've done it!”
Gilbert says, “I was surprised. I was absolutely thrilled. It was a defining moment. You had to feel good about the way it was working out.”
Bob Scott was driving back to New York when he heard on his car radio that the deed was done. “After the calls over the weekend, I wasn't surprised,” he says, “but I was gratified, and obviously I was happy that, through applying this pressure, the board had finally done the right thing. I had the feeling, Phil is gone, but that doesn't necessarily solve the problem, it depends on what the board does in choosing a new CEO.”
At 1585 Broadway, Steve Roach was preparing to hold his regular early-morning Monday Strategy Forum when he was alerted that there would be a change in the format. About one hundred managing directors were settling on the chairs in the sixth-floor auditorium when Roach came in and sat at one end of the long dark-wood table on the dais that stretched along the front of the room. Two large electronic screens with charts were mounted behind him on a “Morgan Stanley blue” wall, patterned with the firm's logo and the little triangle. Purcell, Cruz, and Crawford filed in, seated themselves, and looked out over row after row of white shirts. The conversations subsided when they sat down; everyone had heard Maria Bartiromo's scoop.
Cruz busied herself setting out her coffee cup and her papers; Crawford was looking down, grave and inward; Purcell, in a gray suit and dark red tie, sat between them, smiling quietly, waiting for Roach to begin. Roach cleared his throat and announced in a matter- of- fact voice, “All right … in lieu of our regularly scheduled program, we have a news special today that”-he cleared his throat again — “will be brought to you by our three top brass.” His face was expressionless. He leaned over toward the center of the table and said, “Phil …” Purcell searched for the controls of the microphone, and Roach said, “Hit the button.
Purcell stood to read his remarks, looking healthier than he had for weeks. As he spoke, he continued to smile; he seemed relieved, and even when his anger broke through, he talked in a steady, even tone.
He began, “The strategy forums that Steve hosts usually address the best investment ideas we have for our clients … Today I want to talk about our firm and specifically what's in the best interests of all of Morgan Stanley.
“Like most of you I look forward to getting to the office early, opening mail, answering client calls, and taking a brief look at the morning papers. But that hasn't been true over the last several months.
“There's been an unrelenting stream of criticism directed at me. And it has negatively affected how Morgan Stanley is seen, and it's clear that this is likely to continue, and it's clear what I should do.
“This morning, I am announcing my intention to retire by the time of our next annual shareholder meeting in March of 2006. I believe this is the best thing I can do for you, our clients, and our shareholders. You have all done an extraordinary job … despite these daily distractions. I feel strongly the attacks are unjustified, but unfortunately they show no signs of abating … people are spending more time reading about the acrimony,” he said, than about the “outstanding work” done at the firm.
“The whole is greater than the sum of its parts, and of any one part,” he said, and he would “retire when my successor is appointed.”
He added that he was sad that, as “the firm's integrated strategy is coming together,” he would not be there to see it. Defending his leadership, he said, “We have gained share in almost every market category … Since the merger our stock price has outperformed the S&P by threefold,” eliding over the fact that Morgan Stanley did not compare itself with 500 firms, but with a handful of its peers, and in that universe, the stock had underperformed since 2001. As for market share, he had just gotten rid of the leaders of the divisions that had gained the most.
“There is no finer firm on Wall Street,” he continued. “The test of a leader is the performance of the institution he leaves behind. Morgan Stanley has great depth of talent … [and] a strong independent board … [that has] recently appointed Miles Marsh lead director.”
He paused briefly, then composed himself, and concluded, “It will not be easy for me to leave … I have enormous faith that the best years of Morgan Stanley will be lived in the days and years ahead.” He wrapped up with, “I have one last thing to say … let's get back to work. We'd be happy to answer questions.”
There was no applause; the audience was quiet, as though they were waiting for him to finish, so they could go back to their desks and try to pick up the pieces.
Purcell broke the tense silence with a little joke. “We need Byron Wien,” he said; Wien could usually be counted on to ask a question. “Where's Byron?”
Roach covered the microphone and made a quick remark, and Purcell laughed. “Steve says he's, uh, talking to the search committee. He's the perfect age for Zoe and Steve.” He was referring to the fact that Wien was over seventy, beyond the age for consideration. “Chuck Knight is here,” Purcell said, looking out over the audience for a friendly face. “I think we should consider Byron.”
With that, he sat down and crossed his arms over his chest. Crawford, sitting on his right, was holding the side of his head in the palm of his hand. Cruz bridged the awkward moment. “Before we open it to questions and answers and before we get back to work, Phil,” she began, “I want to personally thank Phil.”
After the meeting, the traders went downstairs to an atmosphere of barely controlled hysteria and relief. One reported joining a spontaneous sing- along of “Ding Dong! The Wicked Witch Is Dead” while other traders danced a reel.
Purcell e-mailed his message firm wide in a “Letter to My Colleagues,” which was released to the media, and Miles Marsh issued a statement on behalf of the board. He said, “Phil and the board have independently been considering the right course of action. In the last week, Phil came to us with the conclusion that he should remove himself for things to settle down.” In what sounded like a near admission that Purcell had been asked to leave, Marsh told the Wall Street Journal's Ann Davis, “The board finally said, ‘Look, from the point of view of the firm, we just can't engage in an endless situation like this, as much as we feel that some of it was unfair.’”
The media had earned its name; it was the mediator in the fight, and journalists who had been covering the story offered their observations. The postmortem pile-on was so one- sided that one reporter told a friend that he was beginning to feel some sympathy for Purcell. “I kind of like him better now that he's out,” he said.
An unsigned editorial on the New York Times Web site titled “In Business, Tough Guys Finish Last” summed up the criticisms. The Times called Purcell “ruthless, autocratic and remote. He had no tolerance for dissent or even argument. He pushed away strong executives and surrounded himself with yes men and women. He demanded loyalty to himself over the organization. He played power games. He had little contact with rank and file … Is it a surprise that he was loathed by many executives, especially those on the Morgan Stanley side of the divide? Or that they finally took their revenge?” The story ended by noting that Purcell had no “reservoir of good will … [to] draw upon … That's what killed him.”
Forbes's David Andelman wrote, “The saddest part … is that even in defeat, Purcell himself was unable or unwilling to admit his own very personal role in his slow rise and precipitous fall. He laid his ‘decision’ to step down directly at the feet of ‘the continuing personal attacks on me …’ To translate: Purcell's demise should in no sense be attributed to his extraordinary hubris, nor to his efforts to place his personal stamp on an institution where the individual had always been subordinate to the greater good and where performance or brilliance invariably trumped personal loyalty.”
Purcell told the Financial Times that the Group of Eight was at the root of his troubles. “If it's good they make it look bad and if it's bad they make it look worse,” he said. As the FT noted, Purcell's letter “oozes wounded pride.”
Ann Davis's summary in the Wall Street Journal was titled “Closing Bell.” Purcell told her “you had a jihad and it wasn't going to stop,” and that “he was going to retire anyway before long.”
Chuck Knight prevailed over the directors who did not want him to make a public statement ruling out certain possible successors. Knight announced, “Members of the Group of Eight, the five recently departed management committee members, and John Mack are not being considered as candidates for Phil's replacement.”
Purcell and CFO David Sidwell held a conference call at ten-thirty that morning, attended by analysts from UBS, J. P. Morgan, Merrill Lynch, Lehman Brothers, and CIBC World Markets. No member of the board joined the call. Purcell repeated that the crisis had been precipitated because “way too much attention is being paid to acrimony and criticisms, most of it directed at me. It is not good for Morgan Stanley, so the best thing for me to do is … to retire, and it is best for all our people.” When one of the analysts asked whether the firm would be “more vulnerable to further defections” because his plan to leave had been announced before a successor was named, Purcell argued that attrition was not any higher than usual. “The big difference is that this year every person that leaves is in the newspaper,” he said bitterly.
Merrill Lynch's Guy Moszkowski asked Purcell to comment on Knight's announcement about the people who wouldn't be considered for his job. Purcell replied, “I would speculate that the board just made a decision three months ago to have Zoe and Steve be co-presidents … And if they pick them over the five that recently departed, it would be very unusual that they would consider any of those five ahead of Zoe or Steve. On the other ones [John Mack and the members of the Group of Eight] I just think it is the board is very familiar with them, worked with them for many years, knows their qualifications, knows the qualifications that they are looking for in leadership for this phenomenal firm, a great franchise. And obviously, from what Chuck said, they have decided they don't make the cut.”
By coincidence, the National Press Club in Washington, D.C., was holding a panel discussion that day, titled “The End of the Imperial CEO.”
Marty Lipton was batting zero- for-two in the highest-profile non-criminal CEO stories of the year, the Richard Grasso pay debacle at the New York Stock Exchange and the Purcell defense. The day Purcell resigned, Lipton paid a visit to Goldman Sachs CEO Henry Paulson, one of the NYSE directors who had been most incensed by the Grasso pay package. A person to whom Paulson mentioned the visit later that day said he had the impression that Lipton wanted to explain how the “Eight Grumpy Old Men” got the better of him.
The Eight issued a brief statement: “As shareholders of Morgan Stanley, we are pleased that the board has taken this important and necessary first step. We hope that this and future actions will stem the recent tide of departures from the firm and restore a culture and business environment capable of attracting and retaining the best professional talent to Morgan Stanley.”
The Eight were jubilant, but wary. They hoped they would be consulted about the choice of the new chairman and CEO, but they did not expect that the board they had opposed, and which had stonewalled them for three months, would be eager to talk with them. They agreed to stay out of the press, but they let it be known that the threat of a proxy fight wasn't dead. If the directors didn't bring in a first-class chairman and CEO, and if some of the more obdurate Purcell supporters didn't resign, they would be back.
As Parker Gilbert says ruefully, “It was over. There wasn't anything else for us to do.” It was a triumph and a letdown.
From the book BLUE BLOOD AND MUTINY: The Fight for the Soul of Morgan Stanley by Patricia Beard. Copyright © 2007 by Patricia Beard. Reprinted with permission of William Morrow, an imprint of HarperCollins Publishers.
