Schwab Abruptly Ousts CEO
Struggling to find a viable growth strategy in the brokerage business, Charles Schwab Corp. dumped its chief executive Tuesday and gave the helm back to its namesake founder.
The surprise move raised new questions about the San Francisco-based firm’s efforts in recent years to diversify its operations away from the discount brokerage business it pioneered 30 years ago.
Schwab said CEO David S. Pottruck, 55, had quit and was immediately succeeded by Charles R. Schwab, 66, who founded the firm in 1971 and has remained chairman since retiring as co-CEO a year ago.
The company announced Pottruck’s ouster as it reported that second-quarter profit fell 10% from a year earlier, hurt by a drop in investors’ trading.
Pottruck, who has spent most of his 20-year career at the brokerage as Charles Schwab’s right-hand man, said in a statement that he accepted “the board’s decision that it’s time for me to step aside.”
His exit follows those of two other high-level Schwab executives. Mary S. McLeod, head of human resources and Pottruck’s chief of staff, left the company last week, a spokesman confirmed. He declined to comment further on her departure.
Geoffrey J. Penney, who had been chief information officer, retired July 1, the spokesman said. Neither departure was publicly announced.
Reached at their homes in the Bay Area, both McLeod and Penney declined to comment.
The company on Tuesday said Charles Schwab would remain CEO indefinitely.
Some analysts said the firm’s second-quarter results, and Pottruck’s ouster, reflected the company’s battle to find a place for itself between full-service brokerages and deep-discount trading firms.
Although Schwab is a major player in financial services, with 7.5 million accounts and nearly $1 trillion in client assets, many analysts say it has failed to live up to its profit potential.
With its stock down 25% this year and down 80% from its high in 2000, Schwab hasn’t convinced Wall Street “that there was an opportunity for them to be a growth company in the middle” of the market, said Ken Worthington, an analyst at CIBC World Markets in New York.
The company’s stock got a bounce Tuesday, rising 55 cents to $8.85 on the New York Stock Exchange. It had fallen for 16 straight sessions through Monday, to a 15-month low.
Pottruck, who in 2003 earned $3.6 million in cash and stock, also holds unexercised stock options worth $47 million, Schwab’s last proxy statement showed. The company did not provide details of his severance deal but said it would disclose the information in a future regulatory filing.
After riding high in the late- 1990s bull market, when many do-it-yourself small investors tried their hands at online stock trading, Schwab was slammed by the long bear market from 2000 through 2002 as business plummeted.
Pottruck, a standout wrestler in college and a self-described hard charger, has turned the company toward new fee-generating services, including investment advice and stock research.
In 2000 Schwab paid $3 billion for U.S. Trust, a money manager for affluent investors. Last year Schwab bought research firm Soundview Technology. But the acquisitions have received mixed marks, at best, from analysts, and there have been rumors that Schwab might consider selling either business.
In the meantime, Schwab has agitated some longtime brokerage clients by increasing fees.
Dan Harrison, a Beverly Hills investor, said he dropped Schwab this year after the firm instituted a new fee structure.
“I was a loyal Schwab customer for four or five years,” he said, “and suddenly they wanted to charge for the privilege of holding my money, in addition to charging a premium fee for trading.”
Schwab’s moves also have angered some of the thousands of financial advisors who house client assets at the brokerage.
“We have not felt that Pottruck was much of a friend,” said Laura Tarbox, a Newport Beach financial planner. “We [advisors] bring in about one-third of their revenues, but we don’t feel that they give us a third of their resources.”
But all of the company’s major moves in recent years have been overseen by Charles Schwab as well as by Pottruck; the two were co-CEOs from 1998 until May 2003.
In a conference call with analysts on Tuesday, Christopher Dodds, the firm’s chief financial officer, said the founder had no plans to change the basic business strategy.
This spring the company announced plans to slash trading commissions for active customers, in an effort to beat back cut-rate brokerage rivals -- a move that Dodds said had the founder’s full backing.
Dodds also said that the company would continue to focus on cutting costs and that its staff of 16,700, down from 26,000 in 2000, would decline further.
Despite its efforts to diversify into investment advice and other services, the importance of bread-and-butter stock trading to Schwab’s bottom line showed in its second-quarter earnings: Net income slid to $113 million, or 8 cents a share, from $126 million, or 9 cents, a year earlier, as daily average trades declined 20% from the first quarter.
Some Schwab shareholders said they worried that the company’s strategy of trying to serve diverse investor groups -- from infrequent traders to the super-affluent -- was too ambitious.
“It’s a difficult situation,” said Wayne Bopp, an analyst at Fifth Third Bancorp in Cincinnati, which owns 1.2 million Schwab shares. “Schwab needs to have a space all their own.”
*
Times staff writers Chris Gaither in San Francisco and Walter Hamilton in New York contributed to this report.
