Letters from The Group of Eight

The "Group of Eight," who are former senior executives of Morgan Stanley and significant shareholders of the Firm, sent the following letters to the Board of Directors of Morgan Stanley, including Edward A. Brennan, Sir Howard Davies, John E. Jacob, C. Robert Kidder, Charles F. Knight, John W. Madigan, Miles L. Marsh, Michael A. Miles, Philip J. Purcell, Laura D'Andrea Tyson, and Dr. Klaus Zumwinkel.

Please click on links below to view and download the letters.

May 12, 2005: To the Shareholders of Morgan Stanley

April 11, 2005: Third letter to the Board of Directors of Morgan Stanley

March 31, 2005: Second Letter to the Board of Directors of Morgan Stanley

March 3, 2005: First Letter to the Board of Directors of Morgan Stanley

May 12, 2005

To the Shareholders of Morgan Stanley:

We are today releasing detailed materials outlining a proposal to spin off the Institutional Securities Business (available on www.futureofms.com). As has been reported, this proposal was reviewed in preliminary form with three non-executive directors of the Morgan Stanley Board on April 22, 2005. Since that meeting we have received no direct response from the Board. We have subsequently discussed a spin-off with institutional shareholders and expanded the initial proposal to reflect their input.

The proposed spin-off is motivated by a belief that the Board of Morgan Stanley faces an immediate crisis and that the Firm has been badly served by its present management and leadership. The recent improvements in corporate governance announced by the Board in reaction to pressure from shareholders are overdue, but they fail to address the leadership and structural issues that, if left alone, will continue to damage the Firm and erode shareholder value. The crisis continues and will likely deepen.

Central to any successful resolution of the current crisis is the separation of Philip Purcell from authority over Morgan Stanley's Institutional Securities Business and the installation of a new management team, which can stem the tide of departures and attract key leaders, who have recently departed, back to the Firm. If Morgan Stanley's optimum strategy is to build a fully integrated securities business - an outcome that Mr. Purcell has failed to accomplish in the eight years since the merger with Dean Witter Discover - the strategy requires the immediate replacement of the current leadership team.

Alternatively, a spin-off of the Institutional Securities Business would acknowledge the failure of the integration effort, allow the Institutional Securities Business to regain its stature and reputation and significantly improve its performance. This could be accomplished under the leadership of the five widely respected senior executives who were forced to depart, but who we are highly confident would return to lead the Institutional Securities Business in a spin-off.

The business strategy presented by Mr. Purcell, Ms. Cruz and Mr. Crawford at the UBS Global Financial Services Conference on Tuesday, May 10, 2005, while acknowledging the Company's underperformance, the departure of key managers from the Firm and the high likelihood of more departures in the future, offered no credible solution to the present crisis. In the eight years since the merger, Mr. Purcell has failed to successfully execute the integrated securities business model senior management promoted at the conference. Staying the course under the present leadership is not an acceptable solution. Shareholders deserve better. We strongly believe that new leadership is critical to the success of the Firm and to the creation of shareholder value. We invite you to study the spin-off proposal carefully, before the crisis worsens.

If you believe that a spin-off of the Institutional Securities Business and the return of recently departed and highly respected leaders would be beneficial to shareholders, we urge you to let us know by e-mail on our website (www.futureofms.com) or by contacting us at (212) 372-4005. We also encourage you to make your views known to the Morgan Stanley Board by contacting them directly.


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April 11, 2005

Board of Directors
c/o Morgan Stanley Inc.
1585 Broadway
New York, New York 10036

Dear Board of Directors of Morgan Stanley:

Last week, in an open letter to Morgan Stanley's employees, in which he discussed recent criticisms of his performance and calls for his replacement, your CEO, Phillip Purcell wrote: "I would not have chosen this debate to be so publicly aired." We agree and demonstrated as much when we wrote to you in advance of the Company's annual meeting in March, to express our concerns and to request a private meeting with you to discuss them. You have stated that you believe there is no "fair and compelling case" to replace Mr. Purcell, yet you have not spoken to us and have so far declined our repeated requests to meet with you. You have chosen instead to react to our concerns and those of others by announcing a radical restructuring that has cost the firm some of its most talented professionals and further entrenched and insulated Mr. Purcell. Additionally, in an abrupt and poorly explained about-face in corporate strategy, you have decided to spin-off Discover.

In his carefully crafted press statements in London last week, Mr. Purcell declared victory and announced that the debate about his performance and leadership was "over." This is not a game of winning and losing. There are already too many losers among Morgan Stanley's employees, shareholders and clients. This is about corporate governance, executive leadership and creating value for shareholders. Before you pledge your continued and unconditional support of Mr. Purcell and before you expend any more corporate resources to do so, we think the Board should answer the following questions:

  • Given that Mr. Purcell has stated that he does not believe "it is in the custom of Morgan Stanley . . . to risk a course of action that would damage our franchise," did the Board approve the decision to relieve Messrs. Newhouse, Pandit and Havens of their responsibilities – thereby causing their departures? Does the Board believe that the departures of these senior executives, highly respected by shareholders, employees and clients, benefit the franchise and enhance shareholder value?

  • Did you believe that you fulfilled your obligations in approving a management restructuring, even though a key management committee member was never interviewed by directors, and most of those in institutional securities were only briefly interviewed by telephone?

  • How many more talented employees must leave before the Board understands that the value of the Morgan Stanley franchise is deteriorating while the Firm is facing a crisis of confidence in the Chairman and CEO?

  • Since the receipt of our March 3 letter, has the Board or any Board Committee approved the payment of "retention" or "stay-on" payments to key employees?

  • In light of the fact that the By-Laws require a 75% vote of the directors to remove the current Chairman and CEO, did you feel it was appropriate to appoint three directors to the Board, one in December of 2004 and two in April of 2005, without a shareholder vote?

  • In the wake of two successive shareholder votes demanding the elimination of the staggered Board, and the Board's own recommendation to de-stagger the Board, why didn't you follow the example of other firms and immediately eliminate the staggered Board? Indeed, why did the Board appoint two of the new directors to multi-year terms, including a director appointed after shareholders approved the de-staggering of the Board?

  • Shouldn't you have disclosed to shareholders before the annual meeting that the Division of Enforcement of the SEC had sent the Company a "Wells notice" in January, 2005 recommending that the SEC pursue an enforcement action relating to the Company's retention of e-mails and the potential violation of a previous Cease and Desist Order?

  • What investigation has the Board conducted in the wake of the Florida Court's finding in the Sunbeam/Perelman litigation that "contrary to federal law" the Company failed to preserve e-mails, and willfully disobeyed the Court's order?

  • Is it true (as has been reported in the April 8, 2005 edition of the Wall Street Journal) that the Sunbeam/Perelman litigation, for which $360 million has now been reserved, could have been settled for approximately $20 million in 2003, and was the Board aware of this?

  • Has an independent committee of the Board reviewed the quality of the Company's relationships with its primary regulators, including the SEC, NYSE, NASD and key state regulatory bodies, and do you believe that the quality of the Company's relationships with its key regulators has deteriorated over the past several years? If so, who should be held accountable for the deterioration?

  • What happened over the weekend of April 2-3, 2005 to cause the Board to depart from the publicly-stated strategy (reaffirmed to institutional shareholders on April 1) that Discover was an integral part of the Company's asset base?

  • How does the Board reconcile the inability of the CFO to answer basic questions on the April 4, 2005 analyst call about the structure of a spun-off Discover with Mr. Purcell's claim that the spin-off had been under review for months?

  • Did the Board meet with clients, major institutional shareholders and key employee groups, including key employees who have recently left the Company to elicit their views on the performance of the Company, the leadership of its Chairman and CEO, and the wisdom of the recently announced restructuring and spin-off of Discover?

  • Since Mr. Purcell declared "I would not have chosen this debate to be so publicly aired," did he recommend that the Board meet with us, and how did the Board determine that our concerns were groundless without even speaking with us?

In recent days, we have heard these and other questions from many of Morgan Stanley's constituents and believe it is critical for members of the Board to address them directly. Moreover, we believe that if the Board engages these constituents and answers these questions, it will conclude that there are "fair and compelling" reasons for Morgan Stanley to remove and replace its current Chairman and CEO. We remain willing to meet privately with the independent directors to discuss our concerns and to learn the response to our inquiries. If shareholders, clients, employees and others agree with us, are interested in learning the Board's response to our questions or have questions of their own, we urge them to contact the Board at: Morgan Stanley, Suite D, 1585 Broadway, New York, NY, 10036. Alternatively, constituents can also send questions and comments to our website, www.futureofms.com.


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March 31, 2005

Philip J. Purcell
c/o Morgan Stanley Inc.
1585 Broadway
New York, New York 10036

Dear Mr. Purcell:

We regret that we must resort to another letter, but given your refusal to meet with us, we have concluded that this is the only way we can communicate with you. We are shareholders concerned with the best interests of the Firm, and we are expressing our concerns to you, our Board of Directors.

The issues which are foremost in our minds as we call for a new CEO are at the heart of your responsibilities in the areas of business performance and governance. A common proxy for measuring performance is share price. Morgan Stanley's stock has dramatically underperformed the relevant market indices and its peers over the last five years. The Firm's growth in earnings per share has been negative versus positive growth for our peer companies. Morgan Stanley's premium return on equity has been eroded to where it is actually below that of our peer companies.

When you begin to look at performance by business segment, the reason for our stock's decline becomes clearer. In retail securities, we have experienced negative growth in revenues and our pre-tax margins are unacceptably low. The key to profitability in the asset management business is growth in assets under management, and our performance since 1998 has been mediocre at best.

The performance scorecard above summarizes your record since the merger. It is a failing report card.

We are also deeply concerned by the state of Morgan Stanley's relationship with regulators at both the Federal and State levels. Our reputation has been blemished further by a series of ill-handled court cases, most recently the Perelman/Sunbeam case in Florida. This unhappy state of affairs is not consistent with strong leadership at the top.

While you point out with pride that the Board met three times to discuss our letter of March 3, we view with dismay the process by which the Board concluded that our concerns were groundless. The number of meetings obscures the question of the depth and rigor of the process: we do not believe that having brief telephone conversations with selected management members is the kind of rigorous fact finding called for under these circumstances.

And finally, we view with dismay the manner in which the Board brought this matter to a conclusion this week. The loss of several key executives who were very important contributors to the success of the highly profitable institutional securities business - because they were unwilling to swear loyalty to an ineffective CEO - is an outrage. The departed leaders are highly regarded by the majority of our institutional shareholders. We view the Board's actions, including its apparent support of this "reorganization," as a failure of corporate governance, a failure to fulfill its fiduciary duties and a failure to act in the best interests of the shareholders of Morgan Stanley.

Our worst fears, highlighted in our first letter to you, that you might remove senior executives in the Institutional Securities Group, have been realized. These departures have precipitated the worst kind of crisis for the Firm - unless immediate action is taken to reverse the loss of talent, the Firm's ability to restore its reputation and its competitive edge will be put at risk. We believe that your immediate departure would stem the tide and possibly convince those who have left to return as leaders.

Finally, please remember that we are not just a small group of dissatisfied former employees. All of us held senior positions of leadership in the Firm and together own more than 11 million shares of Morgan Stanley stock. We care deeply about the Firm and remain ready to meet with you, face to face, to discuss our concerns.


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March 3, 2005

Philip J. Purcell
c/o Morgan Stanley Inc.
1585 Broadway
New York, New York 10036

Dear Mr. Purcell:

As retired senior executives of Morgan Stanley and significant shareholders, we care deeply about the Firm, its employees and its reputation for integrity and excellence. The Firm's commitment to excellence is the product of generations of professionals who worked, and sacrificed, tirelessly to assure that Morgan Stanley provided its clients with products and services which represented the highest standards in the industry.

Unfortunately, Morgan Stanley's performance over the past few years and its reputation have declined to the point where we are greatly concerned about the Firm's ability to regain its position as the premier global financial services firm.

Our perception of Morgan Stanley's decline is corroborated by the judgment of the equity markets. For example, the Morgan Stanley 2005 Proxy Materials show that, over the last five years, the Firm's total return has trailed the S&P Diversified Financial Index by nearly 40%, a stunning vote of no confidence for a company that has historically been a market leader. According to an article published in the International Herald Tribune on February 9, 2005, Morgan Stanley's stock was down 27 percent over the past four years, compared with a 4 percent gain for Goldman Sachs, an 18 percent gain for Lehman Brothers and an 11 percent decline for Merrill Lynch. Moreover, the Firm's stock price volatility has been significantly higher than that of other companies in its peer group, a fact which belies the claimed benefits of the Firm's diversified business portfolio.

We believe that the stock's poor performance and price volatility are a function of many factors, including:

  • the failure to continue to earn a premium return on equity;
  • the failure to maintain earnings growth relative to its peers; and
  • the weak performance of the Firm's retail and investment management businesses over the past five years.

More fundamentally, we believe that the overriding cause of the Firm's poor performance is a failure of leadership by you as the Firm's CEO.

Morgan Stanley's role as a leader in the securities industry and its reputation for excellence have always been a function of its ability to attract outstanding professionals and provide strong and supportive leadership. We are deeply concerned that there is a crisis of confidence in the Firm's leadership and governance not only in the market, but also, we fear, among employees of the Firm. We believe that you will not be able to inspire and lead the Firm back to its rightful position in the financial services industry. We also question whether you have the respect of industry peers or the Firm's regulators necessary to the task of regaining Morgan Stanley's leadership position in our industry.

We note that there is very little financial services experience among the independent directors and there is no Institutional Securities executive on the Board despite that unit's disproportionate contribution to the Firm's profits and reputation. In addition, while the Firm is headquartered in New York, the financial capital of the world, neither the Chairman nor any members of the Board reside in the New York area.

We believe that the loss of morale caused by these factors puts Morgan Stanley at great risk of losing more key professionals which would adversely impact the Firm's ability to serve its clients and to attract the staff necessary to carry on its businesses.

For all these reasons it is imperative that the Board act promptly to change the leadership and governance of Morgan Stanley. It is absolutely critical that your successor be experienced and well respected by the senior executive group. This change should be accomplished as soon as possible.

We would also recommend the appointment of three outside directors with experience in financial services. At least one of these directors should have experience in institutional securities while another should be experienced in the retail securities business. These additions to the Board could be accomplished with or without increasing the size of the Board.

The signors of this letter include a number of former senior executives and board members of Morgan Stanley. We are fearful that in reaction to this letter you may reassign or remove more of the senior executives from the Institutional Securities Group. Such action would damage the Firm's ability to improve its long term business prospects, would undermine the Firm's reputation and, perhaps irretrievably, injure its ability to attract and retain talented professionals.

We are united in our strong support of Morgan Stanley and our concern for its future. While we have not discussed this letter with a wider group of Advisory Directors or others who may share our concerns, we are confident that support for our recommendations will be widespread within and outside of the Firm.

We write this letter with a grave sense of our responsibilities to fellow Morgan Stanley shareholders and employees. We request the opportunity to discuss in private with the independent directors the issues and recommendations contained in this letter. We can be reached through our financial advisor, Robert F. Greenhill, at Greenhill & Co., 212-389-1510. We hope that constructive discussion between ourselves and the Board can result in mutual commitment to a plan which can allow the Firm to regain its position as the premier financial services firm.


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