The Decline of Investment Banking
Not just less profitable
Posted November 11, 2014
n 2007, according to The Economist,“44% of Harvard’s MBAs landed a job in finance; 12% became investment bankers. Yet in the class of 2013 only 27% chose finance and a meagre 5% became [investment bankers.]”
“The trend is the same at other elite business schools. In 2007, 46% of London Business School’s MBA graduates got a job in financial services; in 2013 just 28% did, with investment banking taking a lower share even of that diminished figure.”
But why? To be sure, the financial rewards are less. The outcry about excessive bonuses, following the crisis of 2008, especially for firms that had been bailed out by the government, led to increased scrutiny and regulation. But banks also tend to lock in their people, tying them down when the business climate is volatile and varied. That’s not appealing to those starting out on their careers.
The increasingly more attractive alternative careers for new MBAs are in consulting, which in addition to offering good financial rewards also provide exposure to different firms and industries. “Almost 30% of students at the elite business schools now typically find work at consulting firms.” A close second is technology.
The Economist notes, it’s not just about the money: “less than 5% said that higher pay was their most important consideration when deciding to enroll at business school.” The entrepreneurial approach of smaller firms is increasingly appealing. One B school graduate said: ‘I have never heard anything about the corporate culture of investment banks that sounds like it’s an environment I’d like to work in.’”
Added to this, MBAs also seem to be searching for a sense of moral purpose, seeking “careers that have a positive impact on the world around them.” That contrasts with the fact that investment banking became tainted during the credit bubble, playing a major role in preparing the ground for the unemployment and economic misery of the Great Recession.
But there may be an even more important reason for the shift away from banking: “A survey by the Graduate Management Admission Council found . . . 26% say they want to start companies after they graduate.” That makes a lot of sense in an economic climate where success is measured almost entirely by “shareholder value.”
That undercuts the gratification of managing and building a business. Investors seeking higher stock prices continually urge restructuring, merging, and repurposing with an eye to raising the value of their investments. Producing products, offering useful services, being good places to work, creating jobs, protecting the environment, serving as responsible citizens – all are secondary. Business leaders are increasingly judged by that one standard.
For managers that can be frustrating and demoralizing. Moreover, the very jobs they work hard to accomplish responsibly and successfully can be spun off, outsourced, or consolidated if investment advisors start to think that such moves will make the stock rise in price.
The one way to avoid that loss of control is to be at the top, owning and controlling your own business. That seems to be what the really bright people want, and who blame them for wanting that kind of control?