Wall Street Culture and the Shareholder Value Mantra

How have the mores and operating models of investment banks shaped the markets of today?

A deeply-researched book by Karen Ho, Liquidated: An Ethnography of Wall Street, provides the source material for this posting (the first of two about investment banks), continuing a series of anthropological evaluations of industry organizations (which began with a look at pension funds).

Ho’s first exposure to Wall Street culture came when she worked for Bankers Trust in the 1990s, during a go-go period for corporate activity.  The book was published in 2009, just after the financial crisis — during which many investment banks would have perished if not for extraordinary intervention by governments and central banks.

An ethnography is a descriptive study of a culture.  Ho’s work is based not just upon her own experience, but on the development of the industry, studies by others, and, most importantly, extensive interviews with employees from a variety of firms.  Evaluating “the culture of power rather than the culture of the powerless,” as one anthropologist put it, often requires a different approach than embedding in a tribe, since access to key people is more challenging in that situation.

Painting a picture of a culture involves understanding its historical underpinnings, noticing the details that define how it works, and recognizing the themes and beliefs that tie it all together.

Ho could pinpoint the day in 1995 when she became interested in studying Street culture.  AT&T announced a massive restructuring, causing a strong rally in its stock.  By then, that sort of reaction had become the norm, with investors cheering every downsizing or dismantling that hit the newswires.  For Ho:

What was so arresting about Wall Street’s approach to corporate downsizing was its celebratory tone, its rejoicing in the very fact of corporate restructuring.

Ho could have studied the phenomenon from a variety of angles.  For example, why did sell-side analysts (the most influential of which work within investment banks) raise their earnings and ratings on the companies that restructured?  Why did asset managers buy the stocks in response?  How did asset owners respond to the change in market behavior, given that they have longer time horizons and broader concerns?

Ho chose to analyze the major investment banks, specifically the functional areas of corporate finance and M&A, “because they directly demonstrate the interconnections between financial and productive markets, between financial and corporate institutions.”

In her book, she captured the investment banking culture — and connected it to the predominant investment narrative of our era.

A culture of smartness

Above all, the top investment banks try to foster — and market to their clients — a culture of smartness.  To bring that narrative to life, over the last four decades the firms have built an elaborate feeder system that concentrates its efforts on attracting talent from a small number of top schools.  (Ho’s time at Stanford and Princeton made her part of this “elite kinship,” which led to her Bankers Trust job and enabled her to have the credentials and contacts to tap a network of interviewees during her field work.)

The “hunting season” for that talent is well documented in the book — emails, ads, events, swag, and wining and dining (which was referenced in an earlier piece on reciprocity).  A Goldman Sachs recruitment schedule for Harvard provides a sample of the progression of meetings and interviews that go along with its marketing efforts.  Candidates are sourced primarily based upon their apparent smartness, not on their finance ability; they hear over and over that they deserve to move from elite universities to elite (and very high-paying) jobs.  Each firm tries to pitch itself as the best of the best to buttress that message.

White-collar sweatshops

Orientation for those who are selected starts with a financial training course and some basics about the firm that hired them.  Soon enough they learn that “Wall Street emphasizes short-term, competitive individualism, not teamwork or the cultivation of long-standing mentorship or collegiality.”  And that the work itself can be brutal, despite the “mundane, but seductive perks” of expensed food and free rides home:

On Wall Street, overwork is a normative practice.  One is not initiated into the investment banking life until one has experienced its rigorous hours.

After being chased and pampered during the courting stage, the promised glamour of investment banking is at first out of reach, further up the ladder.  The early years in the “white-collar sweatshop” primarily involve doing grunt work — models and endlessly-revised slide decks — for the pitches the new hires hope to make themselves someday.

In 2021 the financial press was full of stories about junior bankers at a number of firms rebelling against this long-established culture — and being awarded bigger salaries and less onerous working hours by the investment banks.  That was a time of hot and heavy dealmaking.  The cycle turned the next year; the stories disappeared (and some of the junior bankers probably have too).

Doing deals

Momentum drives the investment banking business.  The appetite for mergers and acquisitions fluctuates in response to the economic environment and the popularity of those activities at any point in time.  And while some corporate finance tactics have been on the table forever, there are always trendy new strategies to market.  Whatever the situation, investment bankers have something to sell — and for the most part they sell what’s hot.

The firms in which they work do the same thing.  Take SPACs as a recent example.  Out of the blue, that market backwater became the topic of headlines and several new SPACs were announced every day.  Big investment banks scaled up in an area they had ceded to bit players in the past.  Now the business has withered.  That’s one small example; a much more dramatic one in size and economic effects was the subprime mortgage mess.

Scale up, scale down is the name of the game.  Push something as hard and far as you can until it doesn’t work any more, and don’t worry about the consequences, because:

It is important to remember that investment bankers always received high compensation for the deal no matter the result.

The bankers and their firms go where the money is flowing.  That leads to cycles of booms and retrenchments (and occasional busts or government interventions) at the firms and within individual units and specialties.  That fact defines the culture of the organizations and the experiences of the people who work there.

Liquid lives

Befitting and reinforcing the culture, investment banking compensation practices are marked by high pay and a lack of job security to “engender a relentless deal-making frenzy with no future orientation.”  As one of Ho’s interviewees said:

You need to be thinking I’m going to get as much as I can today because you don’t know what is going to happen tomorrow.

That employment volatility includes another wrinkle:  It is common for layoffs to occur before bonus season so that the pool of money that is available will go to those who remain at the firm.

Given the upsizing and downsizing, firms often aggressively buy talent at the peak of trends.  Therefore the success of your career is sometimes determined not by the quality of your work but by whether you arrived near the crest of a wave, only to be washed away before you had a chance to show your meddle.

For many, all of this is made acceptable by the levels of compensation that are available.  Some think they’ll make their pot of money and get out, but, as an interviewee said, it doesn’t always work that way:

They just can’t make that leap.  I’d say maybe half the people like [the investment banking life] and half the people don’t.  The half that don’t are sort of caught anyway.  They have built up a lifestyle around the compensation, and they are unwilling to give up the lifestyle or they can’t stomach the idea of making less.

Shareholder value

Ho’s analysis of the culture of investment banks is as industry regulars would have anticipated.  More surprising is how she connects it to the proliferation of the shareholder value mantra that has driven market and corporate behavior over the last four-plus decades.

The “two dominant visions of capitalism (one understanding the corporation as social entity, the other viewing the corporation as financial property)” have been in a tug of war, with the latter view winning out in the marketplace.

Ho points out that much of the story about shareholder value is muddled:

One of the most egregious mistakes in neoclassical narratives of corporate history is their refusal to understand the history of stocks, shareholders, and the stock market as a phenomenon different from (though related to) the history of corporations, and thus constructed on a diverging set of values and historical trajectories.

Those who advocate for the preeminence of the shareholder value philosophy claim that it is a return to the historical norm.  But Ho challenges that notion in detail, examining the tenets of Adam Smith’s philosophy and the history of corporations to conclude that the belief that the stock price as the sole measure of success does not rest firmly on those building blocks, but rather is a creation of the 1980s.

That decade was marked by the emergence of leveraged buyouts and the high yield bond market (as well as mortgage-back securities and new kinds of derivatives).  Wall Street was pivotal in the development of each and in the propagation of the shareholder value philosophy, which resulted in dramatic changes to the institutional investment landscape.

Time horizons collapsed, and “value” went from something to be delivered over time by means of the corporation (a purposely illiquid form) to “making a lot of money today” for shareholders.

When she was at Bankers Trust, Ho was told that “the mission (of all of Wall Street and all corporations) is always to create shareholder value.”  But the record of the philosophy in practice is spotty at best and often disastrous.  If you define value as what can be realized today, you don’t spend any time looking at how things worked out over time; it’s on to the next deal without regard to the ultimate consequences of the transactions that came before.

Despite the Street’s own striking failures, it has managed to lead the cheering section for shareholder value.  The M&A and corporate finance areas urge companies to do boost their stock prices in whatever way they can.  Corporate managers learn to cater to the stock research analysts at the banks and to manage to near-term numbers rather than looking further out.  Another author, Richard Sennett, wrote of the pressure that is “put on companies to look beautiful in the eyes of the passing voyeur.”  That’s hardly a prescription for true value creation.

Utterly predictable

At the end of the book, Ho quotes Fortune editor-at-large Shawn Tully, who wrote in November 2007, almost a year in advance of the dramatic collapse of Lehman Brothers and the rescue of many other firms:

Two things stand out about the credit crisis cascading through Wall Street:  It is both totally shocking and utterly predictable.  Shocking, because a pack of the highest-paid executives on the planet, lauded as the best minds in business and backed by cadres of math whizzes and computer geeks, managed to lose tens of billions of dollars on exotic instruments built on the shaky foundation of subprime mortgages.  Predictable because whether it’s junk bonds or tech stocks or emerging-market debt, Wall Street always rides a wave until it crashes.  As the fees roll in, one firm after another abandons itself to the lure of easy money, then hands back, in a sudden, unforeseen spasm, a big chunk of the profits it booked in good times.

The get-what-you-can-today ethos, built into Street institutions and part and parcel of the shareholder value movement, is still the defining feature of today’s capital markets, despite the cataclysm of the financial crisis.

The challenge

In a 2010 review of Liquidated in the Financial Analysts Journal, Janet Mangano and William Hayes wrote that the book “asks many questions that those who work in the investment field should ask themselves,” about how investment banks are run, the role that they play in the larger ecosystem, and the shareholder value mantra that they have promoted:

Although many in the financial industry will not agree with Ho’s hypotheses and conclusions, they will be challenged by the questions she raises and enthralled by the body of fieldwork she presents.

The shareholder value revolution has rippled through the investment world, with the ethos of investment banking culture permeating the practices of entities far and wide.

Cultures are built up slowly over time, often developing in ways that weren’t intended or foreseen.   Fourteen years after its publication, the questions prompted by Karen Ho’s book should be debated at investment organizations.  Foremost among them:  Whose game are we playing?