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You could almost forgive Phil Purcell for thinking he had more than nine lives. Morgan Stanley's chief executive since 1997 had been blamed for its slumping stock, declining profits and an exodus of key personnel, not to mention a laundry list of ethical lapses that had cost the firm tens of millions of dollars in fines and judgments. Then there was the brutal public attack by the "Group of Eight"--a coterie of influential former Morgan execs who said Purcell was responsible for the decline of a once great banking franchise that traces its roots to legendary financier J. Pierpont Morgan. Purcell, who ran the Dean Witter brokerage firm and took over the top job following its 1997 merger with Morgan, responded by doing what he did best--working behind the scenes to force out anyone who challenged his rule. Indeed, the board reaffirmed its support for Purcell at a meeting in early May, though, according to senior Morgan officials still at the company, it also signaled it was growing impatient. Purcell would have to turn things around.
It was at that point, NEWSWEEK has learned, that Purcell sought advice from a consultant on how to remake his battered image. The message, according to a senior Morgan official who asked not to be identified: go public with your plan to improve the firm's finances. The suggestions included writing an op-ed for a paper like The Wall Street Journal, or agreeing to be interviewed on a business channel like CNBC, where representatives of the Group of Eight had appeared to make their case. Purcell never fully acted on the advice, though he did meet with some clients and investors who were considering taking their business elsewhere. But it was too little, too late. Mike Madden, a veteran investment banker who runs a private equity firm, said two hedge-fund executives who were big Morgan clients recently told him that they were amazed that Purcell, unlike other CEOs on Wall Street, had never called any of them during the previous eight years--that is, until about a month ago, when his job was on the line. "He was the most aloof CEO in the business," Madden said.
And now that detachment is complete. Last week, following a series of meetings with his once loyal board, Purcell, 61, resigned as chairman and CEO, but will stay on until a successor is found, probably in the next few months. In a statement, he blamed his departure on the "continuing personal attacks on me, and the unprecedented level of negative attention on our firm." But the board undoubtedly had a say, since more bad news for the company was on the way. Morgan was bracing for another bad financial quarter, and was forced to issue a profit warning last week. The brain drain showed no sign of letting up, either--nine executives in its derivatives unit had just bolted for a midsize firm, Wachovia, following out the door many other top performers who objected to Purcell's heavy-handed leadership.
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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. That reluctance to step into the spotlight goes a long way toward explaining why he never publicly fought back against the eight disgruntled former Morgan executives, who, by all accounts, didn't have a better plan themselves for running the firm. (Purcell had no comment.) "You may not like the message, but you want a clear message," said veteran Wall Street executive Michael Holland, who runs his own money-management firm. "And the big problem here was that there was no message from the top."
Purcell once had a clear message for Morgan. The former management consultant built Dean Witter from a backwater firm in the 1980s (it used to sell stocks out of Sears Roebuck retail stores) into one of the most profitable brokerage firms on Wall Street. It was so profitable that when it merged with Morgan Stanley in 1997, top executives at Morgan like John Mack agreed to make Purcell the CEO. Purcell was also one of the first people on Wall Street to see the potential of a financial supermarket that combined investment banking with a brokerage to sell shares to Middle America.
As Morgan's profits soared during the bull market of the late 1990s, Purcell's power was unmatched inside the firm. He blew out rivals like Mack who did business the old-fashioned way, flying around the world wooing clients. Purcell, meanwhile, focused on placating Morgan's directors, often entertaining them at his vacation home in Park City, Utah. He surrounded himself with a handful of loyalists and steered clear of the press--he declined many interview requests, and avoided making speeches that might draw coverage in the media. At one point a press aide suggested to her boss that he should raise his public profile. "I don't care about the press," Purcell responded, according to the spokeswoman, who asked not to be identified. "Make it work around me."
The media did work around him, for a time. Purcell, after all, was part of Wall Street's ruling triumvirate, known for years as MGM, which stood for Morgan Stanley, Goldman Sachs and Merrill Lynch. But those days are over. In the wake of the market bubble's bursting, Morgan and other firms became the target of shareholder lawsuits and regulatory action. Morgan's stock fell, and many of its best and brightest left in search of bigger paychecks at hedge funds and private equity firms. Purcell was paid $22 million in 2004, a handsome reward despite Morgan's stock lagging behind Goldman's and Merrill's, and it added to his growing list of critics. At the top of that list was Bob Scott, who was the second in command until Purcell demoted him abruptly in 2003. At the funeral for a former top Morgan exec earlier this year that was attended by many other Morgan alums, he talked seven others into trying to use their collective clout--together they own 1 percent of Morgan's stock--to get Purcell.
Rather than following the advice to fight back in public, Purcell met frequently with board members. Meanwhile, the board was getting its own advice. Marty Lipton, a seasoned Wall Street lawyer, was brought in to help the board deal with the issue. His warning, according to a senior Wall Street executive with knowledge of the matter: either keep Purcell or get rid of him, but do it unanimously. A fractured vote, if it became public, might lead to lawsuits and further problems down the road. (Lipton didn't return a call for comment.) The board was clearly feeling the pressure for action, and the next to go wasn't Purcell, but one of his closest friends at the company, general counsel Donald Kempf. Kempf is a former Marine who rubbed regulators the wrong way with his hardball legal tactics, but had adroitly defended the firm's Internet analyst, Mary Meeker, from regulatory charges over her research on Internet companies. He has made no secret of his disappointment over the move, and had hoped to retire from the firm at the end of the year, or at least hang on until Purcell was gone.
That day came soon. Word started leaking out two weekends ago to former Morgan executives that something was going to happen to Purcell. On Monday morning, Morgan announced Purcell's resignation. Officially, Purcell can stay until next March if the company hasn't found a successor by then. But clearly there's a sense of urgency within Morgan to find a replacement. And Wall Street spent the better part of last week playing the short-list game. Many consider the leading candidate to be Laurence Fink, the founder and CEO of Blackrock, a money-management firm. Mack is an obvious candidate, too, but one of the first things Morgan did after announcing Purcell's departure was to say that Mack wouldn't be considered. A spokesman for Morgan wouldn't comment on why, but Mack has told one Wall Street executive that he believes that many directors continue to hold a grudge over his acrimonious departure in 2001. The board has been criticized for disqualifying Mack before the search began, and since then some directors may have softened their resistance, according to an executive with knowledge of the board's deliberations.
Finding a capable executive who wants the job may not be so easy, given all the recent turmoil. Two friends of Fink's told NEWSWEEK that he may not want the position, and will decide within the next week what to do. There will be no honeymoon for the new CEO, who will face pressure to decide broad questions about the company's future. Should the 1997 merger be undone by splitting up the Morgan Stanley investment bank and the old Dean Witter brokerage arm? Should the entire firm be sold off to a big bank? With so much at stake, Purcell's successor may need nine lives as well.
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