Succession Battles at Morgan Stanley

This article appeared in NYT on May 15.
The last time a former management consultant from the brokerage world, Phil Purcell, ran Morgan Stanley, the experience ended in tears for the Wall Street firm’s employees and shareholders. Yet, Breakingviews says, Morgan Stanley’s board may be considering the same blueprint for its new leader as it looks for candidates to succeed John J. Mack, who turns 65 this year.
The same pedigree, it says, fits one of the internal front-runners, James Gorman. He runs the firm’s asset management business as well as the brokerage arm, which is merging with Citigroup’s Smith Barney.
But to win the top job, Mr. Gorman, a former Merrill Lynch and McKinsey man, must do a better job than Mr. Purcell did in winning over the bluebloods of the bank’s institutional business that is Morgan Stanley’s profit engine, Breakingviews says.
The bank has not said anything publicly about succession. But whoever gets the job when it opens up over the next 18 months faces a formidable challenge, the publication notes. Unlike archrival Goldman Sachs, which focuses almost exclusively on institutional clients, Morgan Stanley is of two minds. In addition to being a wholesale bank, it has a relatively large retail operation on which it has staked much of its future.
So Mr. Mack’s replacement must find a way to balance both business priorities — and their different cultures, Breakingviews says. That is why guessing who is best suited to succeed the current chairman and chief executive has become the Wall Street parlor game of the year.
There are other Morgan Stanley executives said to be in the frame, including Walid Chammah, who is co-president with Mr. Gorman and looks after the institutional business from London; Colm Kelleher, the chief financial officer; and Paul Taubman, the head of Morgan Stanley’s investment bank.
There are also whispers about potential external candidates, like Bob Steel, who left Goldman to work at the Treasury before running Wachovia and then selling it to Wells Fargo.
Choosing among this group will not be easy since none of them has experience running both sides of the business — except perhaps Mr. Steel. However, Mr. Steel’s tenure at Wachovia was short and it’s hard to see the Morgan Stanley rank and file welcoming a Goldman man with open arms.
The relative importance of the institutional arm to Morgan Stanley in theory argues for a banker rather than a broker to take the mantle, Breakingviews says. In 2009, the banking operation generated $16.6 billion of revenue, twice the combined top line of the global wealth and asset management divisions.
But after the firm’s near-death experience in October and its subsequent conversion to bank holding company status along with Goldman, the Morgan Stanley board must consider its future as a less capital-intensive and more client-driven franchise when selecting its next leader, Breakingviews says.
What is more, after the deal to take control of Smith Barney is consummated, most likely this summer, the brokerage arm will loom larger in Morgan Stanley’s overall strategy, it notes. Indeed, it is expected to be the largest in the country.
This strategic shift might help Mr. Gorman’s candidacy, especially given his track record revamping the brokerage business and now tackling the group’s troubled asset management division, Breakingviews argues. The problem is that, after the Purcell years, the idea of having someone whose background is so similar to Mr. Purcell’s might not sit well with the bankers and traders generating the bulk of Morgan Stanley profits, it says.
There may be compromise solutions, Breakingviews suggests. If the concern is that Mr. Gorman is not a “culture carrier,” there are ways to surround him with executives who are, the publication says. One way, Breakingviews says, would be to let Mr. Mack remain as chairman, and then name co-presidents from the institutional side of the business, say Mr. Taubman and Mr. Kelleher, to succeed Mr. Gorman and Mr. Chammah — who in turn could become vice chairman.
Alternatively, the publication says, it might be better to find an outside executive whose résumé spans the retail and institutional worlds. But breadth of experience doesn’t always produce the goods. After all, Mr. Gorman’s old boss at Merrill, Stan O’Neal, worked in nearly all of its businesses in addition to being a whiz with numbers, and his tenure at the helm was a disaster, Breakingviews notes. Maybe that McKinsey management experience will turn out to be worth a second try.