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Cover Story

Purcell's (Very Public) Predicament

The rumbling of war drums circling Morgan Stanley's Philip Purcell is deafening. Since lackluster stock performance sparked a group of dissident alumni in late March to publicly agitate for corporate change, the embattled chairman and CEO has emerged as a symbol of steely determination-or irrational defiance-depending on which side one favors. But this is no mere corporate-governance skirmish: Purcell is embroiled in the battle of his career, as he tries to stem the hemorrhaging of talent, bolster flagging morale and preserve his firm's tarnished pedigree-all while rivals trawl for his top clients.

Like the legions of CEOs before him and those still to follow, Purcell is at the epicenter of a national tremor of shareholder activism that threatens every chief executive, or at least has them pondering their options. Investors, bolstered by the accounting scandals of 2001 and 2002 and the Sarbanes-Oxley law of 2002-which makes boards directly accountable to shareholders-are silent no more. And yet Purcell remains impervious to the noise on his threshold, carrying on with undeterred confidence as he stacks the board with loyalists who walk in lockstep with him, despite a public relations nightmare that is leaving his firm vulnerable to takeover. Is this leadership or arrogance? "This is the latest in a string of untimely deaths for the imperialist CEOs, and Purcell is threatened now by the same destiny that has struck his fellow imperialists," observes Gregory P. Taxin, CEO of Glass, Lewis & Co., a proxy-advisory firm in San Francisco that advises institutional investors. "Shareholders are asserting themselves more and boards are feeling the pressure."

Purcell may be on the brink of joining a long line of CEOs who have recently exited or were forced out, many not gracefully, including Deutsche Borse's Werner Seifert, Hewlett-Packard's Carly Fiorina, Boeing's Harry Stonecipher, Riggs Bank's Robert Allbritton, Sony's Nobuyuki Idei, Eastern Kodak's Daniel Carp. and AIG's Maurice Greenberg. "Every public company now has to pay attention to shareholder constituencies, especially large institutional shareholders," says Gary Brown, chair of the Business Department at the law firm Baker, Donelson, Bearman, Caldwell and Berkowitz. A key motivation of SOX was "to drive a wedge between what was perceived as a cozy relationship between independent directors and management and to take the power out of the executive management suite and place it directly in the hands of corporate directors."

"There's a general trend in the corporate world, not just limited to banking, that the power of the consumer or the community, if organized, can play a very real and pervasive role, especially if there's an agenda," says NewAlliance Bancshares CEO Peyton Patterson, who declined to comment specifically on the Purcell case. "But for a CEO, it comes with the job description. They're under increasing pressure and heightened vigilance from shareholders. And it's a one-way door." She knows something about quelling unrest: In 2001, she presided over the largest merger-conversion in U.S. banking history. The deal fueled the kind of public rancor unknown in banking, particularly among community activists. She ultimately prevailed-to both sides' liking.

"CEOs do not have the same free rein that they once did," argues Paul Aaronson, a former Morgan Stanley executive who is now CEO of PlusFunds Group, a New York hedge-fund index asset manager. "Directors are scared of the regulatory and legal environment. Lawyers and accountants all have much more significant regulatory obligations than they once did and, therefore, wield different influence or power over CEOs and boards. The dynamic has been altered."

And as CEOs' power erodes, they are left increasingly vulnerable to internal and external threats. "It's clear that shareholders have more means of communication than ever before, given the change in the proxy rules and the Internet," observes Robert Barker, partner in the corporate law division at Atlanta-based law firm Powell Goldstein. "And every so often, you have a crisis of corporate governance that focuses directors mightily." The Corporate Library, a shareholder-governance watchdog, gives Morgan's Board of Directors a D, a grade that hasn't changed since March.

Yet the tumult at Morgan Stanley, the nation's largest securities firm by market value, goes far beyond the power struggle between Purcell loyalists and detractors. With no allegations of fraud or excessive compensation at Morgan, regulators have dismissed it as a mere domestic disturbance. "This is a face of corporatism in America that is rarely exposed," observes Robert A.G. Monks, a corporate-governance activist who founded Institutional Shareholder Services, and served as its president from 1985-1990. "And it's an ugly face."

The House of Purcell began crumbling on March 28, when the group of dissident alumni went public over concerns about what they called Purcell's mismanagement, a move sparked by his demotion of 58-year-old president Stephan Newhouse as part of a management shakeup. A flood of departures followed, including five of 14 members of Morgan Stanley's management committee and six managing directors, including Newhouse. At the core of internal hostility toward Purcell, a former Dean Witter executive, is his acrimonious relationship with former COO John Mack, a widely admired Morgan Stanley holdover. Mack left in 2001.