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BEECHTREE CAPITAL PARTNERS, INC.41 East 57th Street New York, N.Y. 10022Tel: 212-935-6262 Fax: 212-935-6998
June 21, 2005
To The Board of Directors of Morgan Stanley:
Re: Choosing a Chief Executive
I am writing to share with you my thoughts on selecting a new Chief Executive, now that Philip Purcell, under intense pressure, has announced his retirement. As a significant individual shareholder(1) and former Managing Director who spent a career at the Firm, I have a vital interest in this crucial matter.
Given the circumstances of Purcell’s pending departure, the responsibility for choosing the new CEO rests squarely with the Board, and not with management. Surely, the Board must now appreciate the securities business is a people business, made up of talented and highly motivated professionals. They are what make things tick; they are what make an investment bank. If a CEO is chosen with strong leadership skills, who can motivate – and will be accepted by – the professionals in the organization, then the future will be bright. Such a person will almost certainly have an extensive background in the securities business. With the morale of the Firm bruised as it is, the Board cannot afford to stumble. A mistake will quickly, and perhaps irrevocably, damage the Firm’s franchise and its value.
The Board’s selection will be made against a somber background. Morgan Stanley’s stock performance has been at the bottom of its peer group. Purcell’s management reorganization, announced in March, has triggered an alarming, and ongoing, loss of many of its most valuable performers. The second quarter results will be disappointing. In the third quarter, the loss of talent will begin to have a significant adverse impact on the Firm’s results, as earlier pipelines of business dry up.
Very likely, this will be the most important decision the Board makes during its tenure.
THE PROCESS
Here are my thoughts on the process:
Independent Directors Assume Sole Responsibility. Selecting the new CEO is the job of the independent directors. With Purcell retiring under strained circumstances, he should have absolutely no involvement in choosing his successor. The emotional baggage he must now be carrying and the tension attributable to the dissident opposition virtually assures his judgment cannot be relied upon.
During Purcell’s retirement announcement to the Firm, some of the most qualified candidates among former Morgan Stanley executives were excluded from consideration. It is widely felt this was at the behest of Purcell, Crawford and Cruz. It has left the impression Purcell will be actively involved in the selection decision, having already vetoed a number of candidates. If allowed to persist, this would have the most troubling consequences for the process and would subject the Board to criticism it is not in charge and is not exercising its fiduciary duty.
Time of the Essence. With the Firm still in turmoil and Purcell remaining as a lame duck CEO, it is vital the Board move with dispatch. Labor Day should be set as an absolute deadline for completing the search.
Integrated Securities Firm. I believe Morgan Stanley should remain a fully integrated securities firm and that its performance issues can be solved if the right leadership is put in place. I do not favor structural solutions involving the split-up of the business, as some have suggested(2). I understand this is consistent with the Board’s position, with the exception that I would retain the Discover card business. The split-up concept has not gained any meaningful traction with institutional investors and has definitely receded into the background now that Purcell has announced his retirement.
The new CEO should be comfortable with the vision of a fully integrated securities business, subject, of course, to review if conditions change in the future.
Securities Industry Experience. The history of securities firms is that almost all of them, with rare exceptions, have been run by people who have grown up in the industry. There is good reason why this is so. They are complex, highly charged people businesses where respect goes to those with experience in the business. A person from outside is almost doomed to face insurmountable problems. Securities industry experience is absolutely essential.
Candidates with a commercial banking background should be avoided. Commercial banks are vertical, hierarchical organizations with a totally different management style from securities firms with their more horizontal, hands on structure. This would rule out candidates such as Robert Willumstad the President of Citigroup or David Coulter, the former CEO of Bank of America now at JPM.
My fear is that the Board members, some successful former CEOs of diverse businesses, might adopt the view that CEO skills are transferable from other industries to the securities business. It’s just not going to work.
Leadership Qualities – the Core Criterion. Leadership comes in many forms. It can be built on charisma; it can be built on reputation and experience; or it can be built on personal integrity and commitment to the goals of an organization. Illusive to define, we know it when we see it.
To restore the morale and effectiveness of the organization, for Morgan Stanley, today, leadership that will win the respect and loyalty of the organization is absolutely essential for a CEO. We need someone with good “emotional” intelligence, not just intellectual intelligence. This is a person who can relate easily with the organization and sets a personal standard that motivates, attracts and retains a professional cadre that is the best and the brightest.
Prior CEO Experience – Relaxing the Standard. Miles Marsh has stated the Board’s search will focus on executives with prior CEO experience. This is an entirely understandable objective, but don’t let it stand in the way of choosing the best person for the job. There will be meritorious exceptions to this golden rule. John Thain is a recent example. He was chosen as Chief Executive of the New York Stock Exchange, having formerly been President of Goldman Sachs. Industry experience and the leadership qualities described above are the paramount standards.
Bury the Hatchet. It is now time for the Board to bury the hatchet, as difficult as this may be, and start a dialogue with the Group of Eight. With their knowledge and perspective of the securities industry, they can help the Board reach the best decision. Parker Gilbert is a thoughtful person and would be an excellent contact. Let’s put the past behind and look to the future.
Furthermore, it is quite likely any CEO candidate will want to meet with the Group of Eight before accepting a position.
THE CANDIDATES
Over the past few days, I have had a number of conversations with people, whose views I respect, regarding the best CEO choices for the Firm. Some of these conversations have been with key executives at Morgan Stanley, some with major institutional shareholders and some with informed participants in the investment community. So, here are my recommendations:
First Choice – John Mack or Vikram Pandit. Virtually everyone I spoke with at Morgan Stanley strongly supports one of these two former executives as the Firm’s next CEO. By a considerable margin, they are my first choices as well. Both have a wealth of experience at the Firm. They know the territory, and that counts for a lot.
Mack has a charisma and personal energy badly needed at this time. He has personal integrity, a proven management record, has dealt at the top and is recognized as an industry leader.
Pandit is highly intelligent, has a breadth of knowledge across the Firm, was key to understanding the importance of hedge funds in the early 1990s and was then instrumental in building the Firm’s prime brokerage business. He is a dedicated and thoughtful person of great personal integrity who consistently places the Firm’s interests above personal considerations. In short, he is the role model for what Morgan Stanley is all about.
I know both these men have had problems in the Boardroom that make it tough for them to be considered. But, here’s why you should. It would immediately solve the leadership question, restore morale, bring an end to the departure of executive talent and set the stage for getting back some of the talented people who recently departed. There would be a groundswell of support from within the Firm. The risks to the Board are essentially minimal. There is no down side. Whereas, the risks from bringing in an outsider, unfamiliar with the workings of the Firm, are great. A mistake here and Morgan Stanley is in deep trouble.
Second Choice – An Interim CEO. Because there may well be less risk in bringing in an interim CEO than a permanent CEO from outside the Firm, it should be given serious consideration. The right interim CEO could sort out the Firm’s management issues and set the stage for its ongoing leadership.
As mentioned in the media, William Donaldson, the departing Chairman of the SEC is the obvious choice. He would be great. You all know his biography. Remember, he was Chief Executive of Aetna a few years ago in an interim capacity.
An idea I have not seen in the media is Erskine Bowles (age 59), the former White House Chief of Staff under President Clinton. Many people are probably not aware that Bowles started his business career at Morgan Stanley before moving on to found Bowles Hallowell, an M&A advisory firm serving the middle market. Bowles patterned his firm on the business principles he learned at Morgan Stanley. It was the best in its class. Obviously, he has the ability to deal at the top. Handling Congress ain’t easy.
Third Choice – Permanent CEO. Of the many names mentioned in the media, there are two that standout: Robert Diamond, the Chief Executive of Barclays Capital and Laurence Fink, the Chief Executive of Blackrock. People who I spoke with who know these executives give them triple A grades. Diamond, formerly a Morgan Stanley Managing Director, has been very successful building, and turning around, businesses at Barclays. Fink has built a fixed income business from scratch that now has $391 billion in assets and 1,700 employees. He is a fine person and his employees are exceptionally loyal.
Any short list of candidates should undoubtedly include John Thain, CEO of the NYSE and John Thornton, former President of Goldman Sachs. Thain is highly intelligent – his nickname is “Thain the Brain” – and disciplined. Thornton is now a professor at Tsinghua University in Beijing.
Other Candidates. You might also look at John Costas, the head of UBS investment bank. From inside the bank, I was told he is very highly regarded and “hits on all cylinders.” Brad Jack, recently retired from Lehman Brothers, is a high-energy executive, a great leader and inspirational. His background is in fixed income.
Good luck! Daniel B. Strickler, Jr.
CC: Thomas J. Neff, Spencer Stuart
Re: Choosing a Chief Executive
I am writing to share with you my thoughts on selecting a new Chief Executive, now that Philip Purcell, under intense pressure, has announced his retirement. As a significant individual shareholder(1) and former Managing Director who spent a career at the Firm, I have a vital interest in this crucial matter.
Given the circumstances of Purcell’s pending departure, the responsibility for choosing the new CEO rests squarely with the Board, and not with management. Surely, the Board must now appreciate the securities business is a people business, made up of talented and highly motivated professionals. They are what make things tick; they are what make an investment bank. If a CEO is chosen with strong leadership skills, who can motivate – and will be accepted by – the professionals in the organization, then the future will be bright. Such a person will almost certainly have an extensive background in the securities business. With the morale of the Firm bruised as it is, the Board cannot afford to stumble. A mistake will quickly, and perhaps irrevocably, damage the Firm’s franchise and its value.
The Board’s selection will be made against a somber background. Morgan Stanley’s stock performance has been at the bottom of its peer group. Purcell’s management reorganization, announced in March, has triggered an alarming, and ongoing, loss of many of its most valuable performers. The second quarter results will be disappointing. In the third quarter, the loss of talent will begin to have a significant adverse impact on the Firm’s results, as earlier pipelines of business dry up.
Very likely, this will be the most important decision the Board makes during its tenure.
THE PROCESS
Here are my thoughts on the process:
Independent Directors Assume Sole Responsibility. Selecting the new CEO is the job of the independent directors. With Purcell retiring under strained circumstances, he should have absolutely no involvement in choosing his successor. The emotional baggage he must now be carrying and the tension attributable to the dissident opposition virtually assures his judgment cannot be relied upon.
During Purcell’s retirement announcement to the Firm, some of the most qualified candidates among former Morgan Stanley executives were excluded from consideration. It is widely felt this was at the behest of Purcell, Crawford and Cruz. It has left the impression Purcell will be actively involved in the selection decision, having already vetoed a number of candidates. If allowed to persist, this would have the most troubling consequences for the process and would subject the Board to criticism it is not in charge and is not exercising its fiduciary duty.
Time of the Essence. With the Firm still in turmoil and Purcell remaining as a lame duck CEO, it is vital the Board move with dispatch. Labor Day should be set as an absolute deadline for completing the search.
Integrated Securities Firm. I believe Morgan Stanley should remain a fully integrated securities firm and that its performance issues can be solved if the right leadership is put in place. I do not favor structural solutions involving the split-up of the business, as some have suggested(2). I understand this is consistent with the Board’s position, with the exception that I would retain the Discover card business. The split-up concept has not gained any meaningful traction with institutional investors and has definitely receded into the background now that Purcell has announced his retirement.
The new CEO should be comfortable with the vision of a fully integrated securities business, subject, of course, to review if conditions change in the future.
Securities Industry Experience. The history of securities firms is that almost all of them, with rare exceptions, have been run by people who have grown up in the industry. There is good reason why this is so. They are complex, highly charged people businesses where respect goes to those with experience in the business. A person from outside is almost doomed to face insurmountable problems. Securities industry experience is absolutely essential.
Candidates with a commercial banking background should be avoided. Commercial banks are vertical, hierarchical organizations with a totally different management style from securities firms with their more horizontal, hands on structure. This would rule out candidates such as Robert Willumstad the President of Citigroup or David Coulter, the former CEO of Bank of America now at JPM.
My fear is that the Board members, some successful former CEOs of diverse businesses, might adopt the view that CEO skills are transferable from other industries to the securities business. It’s just not going to work.
Leadership Qualities – the Core Criterion. Leadership comes in many forms. It can be built on charisma; it can be built on reputation and experience; or it can be built on personal integrity and commitment to the goals of an organization. Illusive to define, we know it when we see it.
To restore the morale and effectiveness of the organization, for Morgan Stanley, today, leadership that will win the respect and loyalty of the organization is absolutely essential for a CEO. We need someone with good “emotional” intelligence, not just intellectual intelligence. This is a person who can relate easily with the organization and sets a personal standard that motivates, attracts and retains a professional cadre that is the best and the brightest.
Prior CEO Experience – Relaxing the Standard. Miles Marsh has stated the Board’s search will focus on executives with prior CEO experience. This is an entirely understandable objective, but don’t let it stand in the way of choosing the best person for the job. There will be meritorious exceptions to this golden rule. John Thain is a recent example. He was chosen as Chief Executive of the New York Stock Exchange, having formerly been President of Goldman Sachs. Industry experience and the leadership qualities described above are the paramount standards.
Bury the Hatchet. It is now time for the Board to bury the hatchet, as difficult as this may be, and start a dialogue with the Group of Eight. With their knowledge and perspective of the securities industry, they can help the Board reach the best decision. Parker Gilbert is a thoughtful person and would be an excellent contact. Let’s put the past behind and look to the future.
Furthermore, it is quite likely any CEO candidate will want to meet with the Group of Eight before accepting a position.
THE CANDIDATES
Over the past few days, I have had a number of conversations with people, whose views I respect, regarding the best CEO choices for the Firm. Some of these conversations have been with key executives at Morgan Stanley, some with major institutional shareholders and some with informed participants in the investment community. So, here are my recommendations:
First Choice – John Mack or Vikram Pandit. Virtually everyone I spoke with at Morgan Stanley strongly supports one of these two former executives as the Firm’s next CEO. By a considerable margin, they are my first choices as well. Both have a wealth of experience at the Firm. They know the territory, and that counts for a lot.
Mack has a charisma and personal energy badly needed at this time. He has personal integrity, a proven management record, has dealt at the top and is recognized as an industry leader.
Pandit is highly intelligent, has a breadth of knowledge across the Firm, was key to understanding the importance of hedge funds in the early 1990s and was then instrumental in building the Firm’s prime brokerage business. He is a dedicated and thoughtful person of great personal integrity who consistently places the Firm’s interests above personal considerations. In short, he is the role model for what Morgan Stanley is all about.
I know both these men have had problems in the Boardroom that make it tough for them to be considered. But, here’s why you should. It would immediately solve the leadership question, restore morale, bring an end to the departure of executive talent and set the stage for getting back some of the talented people who recently departed. There would be a groundswell of support from within the Firm. The risks to the Board are essentially minimal. There is no down side. Whereas, the risks from bringing in an outsider, unfamiliar with the workings of the Firm, are great. A mistake here and Morgan Stanley is in deep trouble.
Second Choice – An Interim CEO. Because there may well be less risk in bringing in an interim CEO than a permanent CEO from outside the Firm, it should be given serious consideration. The right interim CEO could sort out the Firm’s management issues and set the stage for its ongoing leadership.
As mentioned in the media, William Donaldson, the departing Chairman of the SEC is the obvious choice. He would be great. You all know his biography. Remember, he was Chief Executive of Aetna a few years ago in an interim capacity.
An idea I have not seen in the media is Erskine Bowles (age 59), the former White House Chief of Staff under President Clinton. Many people are probably not aware that Bowles started his business career at Morgan Stanley before moving on to found Bowles Hallowell, an M&A advisory firm serving the middle market. Bowles patterned his firm on the business principles he learned at Morgan Stanley. It was the best in its class. Obviously, he has the ability to deal at the top. Handling Congress ain’t easy.
Third Choice – Permanent CEO. Of the many names mentioned in the media, there are two that standout: Robert Diamond, the Chief Executive of Barclays Capital and Laurence Fink, the Chief Executive of Blackrock. People who I spoke with who know these executives give them triple A grades. Diamond, formerly a Morgan Stanley Managing Director, has been very successful building, and turning around, businesses at Barclays. Fink has built a fixed income business from scratch that now has $391 billion in assets and 1,700 employees. He is a fine person and his employees are exceptionally loyal.
Any short list of candidates should undoubtedly include John Thain, CEO of the NYSE and John Thornton, former President of Goldman Sachs. Thain is highly intelligent – his nickname is “Thain the Brain” – and disciplined. Thornton is now a professor at Tsinghua University in Beijing.
Other Candidates. You might also look at John Costas, the head of UBS investment bank. From inside the bank, I was told he is very highly regarded and “hits on all cylinders.” Brad Jack, recently retired from Lehman Brothers, is a high-energy executive, a great leader and inspirational. His background is in fixed income.
Good luck! Daniel B. Strickler, Jr.
CC: Thomas J. Neff, Spencer Stuart
(1) Based on the increased risk profile of the Firm, I recently reduced my holdings and now own about 2.8 million shares. I anticipate I will continue to have a substantial stock ownership position.
(2) Splitting up the business is not a value enhancing idea. The retail brokerage business would become a weakened orphan, with the daunting and costly task of developing a competitive research and trading capability. Presumably, it would have to operate under a new name, other than Morgan Stanley. As for the Discover card business, it is a substantial cash generator supporting other segments of the Firm. And, it is well managed. Down the road, if Morgan Stanley pursues a merger, Discover would be a valuable business, enhancing the Firm’s bargaining position. h. Drag me to add paragraph to your block, write your own text and edit me.
(2) Splitting up the business is not a value enhancing idea. The retail brokerage business would become a weakened orphan, with the daunting and costly task of developing a competitive research and trading capability. Presumably, it would have to operate under a new name, other than Morgan Stanley. As for the Discover card business, it is a substantial cash generator supporting other segments of the Firm. And, it is well managed. Down the road, if Morgan Stanley pursues a merger, Discover would be a valuable business, enhancing the Firm’s bargaining position. h. Drag me to add paragraph to your block, write your own text and edit me.