A day after Morgan Stanley (MWD) announced its plan to spin off its Discover Card division, dissident shareholders demanded Tuesday that the investment firm's chief executive, Philip Purcell (search), be dismissed and replaced by one of their own.

Morgan Stanley shares sank more than 3 percent.

In a statement, the so-called "group of eight" former executives and current shareholders said Purcell should be replaced by former President Robert Scott, and that a separate non-executive chairman be named. Purcell currently holds both positions.

Scott said that, as CEO, he would contact former Morgan Stanley executives Stephan Newhouse, Vikram Pandit and John Havens — all of whom unexpectedly left the firm in the wake of last week's management shakeup — and ask them back to the firm.

Newhouse was replaced as president by co-presidents Zoe Cruz and Stephen Crawford, who were named to Morgan Stanley's board on Monday. Pandit and Havens left in response to the management changes.

Scott also promised to make changes in the company's retail and asset management businesses, though the group's announcement did not give any details.

In a statement, Morgan Stanley reiterated its support for Purcell.

"The board is well acquainted with Mr. Scott and his record running our individual investor group and Discover card businesses and can only reiterate what it said yesterday in its message to employees," the company said. "The board is fully behind Phil Purcell and the firm's management team. There is no fair or compelling case for a change in the CEO, an action that would involve risk or discontinuity. "

A representative of the dissident group did not return repeated calls for comment.

Meanwhile, Morgan Stanley's share price fell sharply after the company announced the spinoff of Discover into a separate publicly traded company. Morgan Stanley shares fell $1.85, or 3.2 percent, to close at $56.45 in trading Tuesday on the New York Stock Exchange (search).

In a news release Monday, Purcell said that it was "the right time" for the spinoff, which would leave the credit division as a stand-alone business. He did not provide details of how many shares of Discover stock would be distributed to shareholders for each existing Morgan Stanley share.

"The rationale for this action is twofold," Purcell said. "One, to maximize the shareholder value in the Discover Card (search) division, and allow management of that business to capitalize on the momentum, both in performance, and in the opportunities opening up in the payments market, and two, to further intensify our focus on the high return growth opportunities within our integrated securities businesses."

While the Discover Card issue may have been taken care of, the dissident shareholders continued to push for change at Morgan Stanley, and the company still has outstanding issues that concern investors on Wall Street.

"The retail brokerage side still has issues that need to be resolved," said David Trone, an analyst with Fox-Pitt Kelton. "It has somewhat slow growth characteristics, sub-par profitability relative to other securities businesses and other retail brokerages in its peer group."

The problem, Trone said, is that Morgan Stanley's clients aren't worth as much as those of other competitors such as Merrill Lynch & Co., and their investments are generally smaller. But Morgan Stanley still spends as much as its competitors to provide the same high level of service. The company will need to improve its margins by either attracting higher net-worth customers or cutting back on service.

Internally, Morgan Stanley also has internal divisions between Morgan Stanley loyalists and the Dean Witter employees who came over in the 1997 merger. The dissident shareholders and former executives, for example, are almost all from pre-merger Morgan Stanley, while Purcell and much of his management team comes from Dean Witter.

One institutional shareholder, who did not wish to be identified, said he and other shareholders were concerned that the feud between the two sides would undermine the company's strengths and unduly drive down the stock price, and that the matter should have been handled before it became a public rift.

For their part, the dissident shareholders plan to openly promote Scott's candidacy for CEO to institutional shareholders, making themselves available to answer questions about Scott's plans for Morgan Stanley.

"We're going to meet with institutions and people, give them a chance to hear what he has to say," former Chairman S. Parker Gilbert told cable business news channel CNBC. "I think we can give them a very good sense of what kind of leadership we can provide."