Usually when a group of eight “grumpy old men” get together it’s for something as innocuous as a round of golf. But in March 2005, such a group convened for a far more important reason: to publish an open letter to the Morgan Stanley Board of Directors calling for the removal of the firm’s CEO and Chairman, Philip Purcell. Three months after the letter’s publication, Purcell had been replaced by former Morgan Stanley executive John Mack. So how did things get so bad at one of Wall Street’s most storied firms and how did this letter lead to Purcell’s downfall so quickly? That’s what a capacity crowd in Uris 301 came to find out on November 6th.
Professors David Beim, John Coffee and Michael Keehner, with Anson M. Beard Jr., and Brad Hintz
Professor Michael Keehner moderated a panel that consisted of one of the letter’s authors – Anson M. Beard Jr., Advisory Director of Morgan Stanley and self-described grumpy old man, Professor David Beim, Professor John Coffee of the Law School, and Brad Hintz, Equity Research Analyst at Sanford Bernstein & Co. and former Treasurer of Morgan Stanley. The panel’s creation arose out of a recently completed Columbia Business School case by Professor Keehner, which deals with the turmoil following the Morgan Stanley/Dean Witter merger that took place in 1997 and lead to the departure of its CEO in 2005. The event was sponsored by the Bernstein Student Leadership and Ethics Board.
In what was originally thought of as a merger that would successfully combine Morgan Stanley’s array of financial products with Dean Witter’s distribution network, it quickly became apparent that the two firm’s strong cultures were at odds. While Morgan Stanley was a centralized, consensus building organization, much of Dean Witter was spread throughout the country in branch offices. Furthermore, the Morgan Stanley side of the company focused on institutional clients and felt that Dean Witter’s retail clients were of secondary importance. Panelist opinions differed as to what should have been done with these two very distinct cultures. Professor Coffee argued that the two cultures could have been kept separate and that the culture failure was at the board level, while Professor Beim noted that failure to integrate would have been an admission that the merger held no synergies. Ultimately this culture clash and a dilution of the company’s governance functions led to the exodus of many Morgan Stanley employees and the firm’s underperformance.
It was at this point that Beard and seven other retired Morgan Stanley executives (known as the Group of Eight), wrote a private letter to the Board, and after being rebuffed, made the letter public. So why would the Group of Eight choose to make their fight public when they were retired and financially secure and potentially make matters worse? Beard stated that it was not about money, even though the value of the Group’s eleven million shares of Morgan Stanley had been cut in half over the past year, nor was it about gaining control of the company. “It was about leadership,” said Beard. Several members of the Group of Eight had spent their entire careers at Morgan Stanley and built divisions from scratch. They felt their life’s work was being undone, by a CEO and Board that was incompetent and failed to listen. Beard also spoke of another reason the Group of Eight decided to take action – MBA recruiting. Morgan Stanley, traditionally able to pick from the “cream of the crop” of newly minted MBAs, was now having difficulty getting potential hires to show up for interviews, showing just how far Morgan’s star had fallen.
Anson M. Beard Jr. with Professor John Coffee
One of the more interesting aspects of Morgan’s civil war was that the Group of Eight held only 11 million shares of the company, which represented only 1 of the firm’s market cap. Their ability to affect change so quickly, while controlling such a small percentage of shares was unprecedented. “We didn’t play to lose,” said Beard. He added that the Group was willing to spend the $15-20 million necessary to wage a proxy battle. Professor Coffee then remarked that personal services firms, such as Morgan Stanley, are fragile, since they’re employee based. The Group of Eight could influence migration and shine a public spotlight on Purcell and the Board, thereby resolving the dispute quickly.
Near the end of the presentation, Professor Keehner opened up the floor to questions, with one attendee wondering how Morgan Stanley allowed itself to be outmaneuvered by Dean Witter. The panel agreed that hubris on the part of the Morgan Stanley people was partly to blame. Market conditions also played a part, as Brad Hintz pointed out that after the tech bubble Dean Witter’s divisions performed better than the investment banking side, allowing Dean Witter to replace the Morgan Stanley people that left. Professor Beim also felt that Mack, who came from a more collegial, partnership based background in investment banking, underestimated the ruthlessness of Purcell. The panel imparted several pearls of wisdom during the ninety minute event; such as most firms do not put enough time and effort into maintaining their culture and that the inevitable outcome of bad corporate governance is failure. But most importantly – respect your elders.