Krawcheck, Sallie 1965–
Chief executive officer, Smith Barney
Born: 1965, in Charleston, South Carolina.
Family: Daughter of Leonard Krawcheck (attorney); married Gary Appel (merchant banker); children: two.
Career: Salomon Brothers, research analyst; Donaldson, Lufkin & Jenrette, corporate finance associate; Sanford C. Bernstein, 1994–1999, senior equity research analyst; 1999–2001, research director; 2001–2002, chief executive officer; Smith Barney, 2002–, chief executive officer.
Awards: Honored by the Financial Women's Association as Private Sector Woman of the Year, 2003.
■ As chief executive officer of Smith Barney, the retail brokerage and stock research unit of Citigroup, Sallie Krawcheck was accorded responsibility for restoring credibility to one of the largest retail stock brokerage firms in the United States. During the stock market boom of the 1990s, Krawcheck developed a reputation for outspoken honesty and integrity as a research analyst for Sanford C. Bernstein. That distinction garnered even greater respect when conflict-of-interest scandals over stock recommendations at some Wall Street firms were revealed in 2002. In the aftermath of fraud charges against employees of Salomon Smith Barney and its parent company, Citigroup, the chief executive, Sanford Weill, personally hired Krawcheck in October 2001 to restore investor trust at the newly separated Smith Barney.
A REPUTATION FOR INTEGRITY
Krawcheck developed her capacity for self-possessed opinion at the family dinner table. While all topics were open for
debate, her father, the attorney Leonard Krawcheck, held his children to rigorous standards of argumentation. Yet intellectual stimulation at home did not assure success in business. While attending a private college preparatory school, Krawcheck excelled in track and occupied herself with interests in boys and cheerleading. A counselor took note of Krawcheck's test scores and encouraged her to fully utilize her intellectual abilities. For inspiration the counselor gave Krawcheck a picture of a princess standing over a slain dragon. Taking herself more seriously, Krawcheck earned a BA in journalism at the University of North Carolina at Chapel Hill.
Krawcheck developed an interest in the financial world during an internship at an investment firm. After a short period of employment at Fortune magazine, she returned to college, obtaining an MBA from Columbia University in 1992. Afterward Krawcheck found employment at leading Wall Street brokerage houses, first as a research analyst at Salomon Brothers, and then as a corporate finance associate at Donaldson, Lufkin & Jenrette. In 1994 Krawcheck became an insurance industry analyst at Sanford C. Bernstein, a small, independent research firm.
Krawcheck discovered her place in the financial world when she became an analyst of financial services companies. She developed a reputation for being honest, outspoken, and value-driven during the speculative stock boom of the late 1990s. From 1997 to 1999 Institutional Investor recognized Krawcheck for providing the best research and analysis on securities brokers. In 1999 she became director of research at Bernstein. After Alliance Capital acquired Bernstein in 2000, she persuaded the company to triple the research staff with a focus on small companies, a move that significantly increased revenue and profit at Bernstein as the decline in the stock market stimulated demand for independent research. When the Wall Street brokerage scandals—in which stockbrokers exchanged positive stock recommendations for clients' investment banking business—became known, Bernstein stood out as a model of integrity, offering objective, in-depth research. A Fortune cover story on research analysts on June 10, 2002, pictured Krawcheck as "The Last Honest Analyst."
By this time Krawcheck had risen to the position of chief executive officer of Bernstein; however, in fall 2002 Sanford Weill hired her to oversee Smith Barney. Weill had some experience with Krawcheck's outspoken honesty. In 1997, when Weill's Travelers Group acquired Salomon Brothers, Kraw-check denounced the action as risky and downgraded the stock. After the conflict-of-interest scandal damaged Salomon Smith Barney's reputation, Weill separated the investment banking business from the research and brokerage firm and created the Smith Barney unit, consisting of the Global Private Client Group and Global Equity Research.
CONTROVERSY AT SMITH BARNEY
Despite Krawcheck's unquestioned reputation for integrity, Weill's choice of Krawcheck for CEO raised concern on Wall Street. First, Krawcheck's two-year, $30 million contract was viewed as exorbitant, given the differences between Bernstein and Smith Barney. A boutique research firm, Bernstein staffed 400 employees and generated revenues of $295 million. In contrast, Smith Barney, the second-largest retail brokerage firm in the United States, staffed 23,000 employees worldwide, generated $5.7 billion in revenue, and managed a trillion dollars in assets. Also, Weill gave Krawcheck the freedom to recreate the research unit, and she reported directly to him.
Krawcheck brought definite opinions and clear ideas to her position at Smith Barney. She attributed the problems on Wall Street less to corruption and more to sloppy work in exceptionally good economic times. Research had come to be considered a necessary expense on Wall Street, rather than a valuable asset, a mindset that led to a decline in its quality. The fees that clients had paid for research were reduced or eliminated, further diminishing perceived value. The challenge Kraw-check faced at Smith Barney involved reestablishing credibility with investors who had lost trust in research but were expected to pay more for it. She reviewed analysts' reports herself, basing issues of quality on decisiveness and a willingness to take controversial stances rather than conform to the presumed consensus.
To renew faith in Smith Barney as a source of unbiased, independent research, Krawcheck changed the basis for the analysts' compensation from fees earned on investment banking to those earned from individual investors. Since investment banking no longer provided funds for research, previously at 40 percent of budget, the funds allocated for this purpose declined significantly. Sales of research reports and retail broker commissions now funded the service. Krawcheck set a goal of doubling assets under the company's management within five years, assuming steady, modest growth in the stock market.
In addition to having a reputation for integrity, Krawcheck brought intuition, intelligence, a sense of humor, and a team-oriented management style to Smith Barney. She made a point to meet with analysts and brokers worldwide to determine changes in strategy and structure. While Krawcheck changed the management staff, many analysts left due to the large pay reduction that occurred as a result of the elimination of investment banking commissions; other analysts were fired for not adhering to the new code of ethics. Some changes were basic, such as simplifying the language of stock ranking, from "out-perform" and "market perform" to "add," "hold," and "reduce." Ranking eventually changed to a range of "favorite" to "least favorite," based on return on equity and other measurements. Brokers in offices worldwide had access to the information they needed through sophisticated information technology systems.
Krawcheck faced irate investors and skeptical Wall Street insiders at Smith Barney, but many concerned parties looked to her to reestablish credibility for the securities market as a whole, as well as for Smith Barney.
See also entries on Donaldson, Lufkin & Jenrette, Inc. and Smith Barney Inc. in International Directory of Company Histories.
sources for further information
Engen, John, "Rank #1," U.S. Banker, October 2003, p. 26.
Rynecki, David, "The Bernstein Way: There Is a Firm That Does Research Right. Inside the Best Little Shop on Wall Street," Fortune, June 10, 2002, p. 85.
——, "Can Sallie Save Citi, Restore Sandy's Reputation, and Earn Her $30 Million Paycheck?" Fortune, June 9, 2003, p. 68.