The UK Social Mobility Commission released a damning report on the inequality within the UK investment banking industry in September this year. The report found that most investment banks still predominantly favour candidates who come from middle- and higher-income families and ‘six or seven of the country’s top universities’. It portrayed an industry that is elitist and antiquated, in which, said the commission’s chair, Alan Milburn, “some investment bank managers still judge candidates on whether they wear brown shoes with a suit, rather than on their skills and potential”.
Ten years ago such reports might have gone largely unnoticed, but a political focus on income inequality and the general unpopularity of the banking sector after the 2007 crisis mean that the pressure for change at financial institutions is growing.
Questions of social mobility and perceived inequality are receiving political attention. Brexit, for example, is seen as being partly the result of a sense of disenfranchisement among the UK working class. According to the UK Office for National Statistics, the poorest 10% in the UK have on average an original income – that is, before social benefits have been added and taxes taken away – of £4,467 ($5,478), while the top 10% have an original income 24 times larger (£107,597).
In the US, Donald Trump’s presidential campaign is frequently said to have its roots in the frustration with the increasing wealth gap. There, income inequality is even greater than the UK. According to the Luxembourg Income Study, the US has the second-largest income inequality of the OECD countries (after Mexico), while the UK ranks sixth (better than Israel, Spain and Greece).
We found that we were limiting our opportunities to improve socioeconomic diversity and missing out on talent by narrowing our recruitment to top universities
- Chris Jackson, Lloyds
Politicians are under pressure to address inequality. The rhetoric of the new UK prime minister Theresa May has been on the theme of ‘governing for the many and not the few’, while the popularity of some policies put forward by Democratic contender Bernie Sanders led Hillary Clinton to adopt a similar approach in her presidential campaign.
Banks, whose reputations have already been damaged by the financial crisis, have also faced criticism for excessive pay and elitism. Reports such as that by the Social Mobility Commission do little to help the popular perception of the sector. A handful of banks however were early in realizing the inherent biases in their internal hiring procedures and they have been pioneering change.
“Is it [banks’] responsibility to close the socioeconomic gap? No,” says Oren Cass, a senior fellow at the Manhattan Institute for Policy Research. “But if their policies or practices exacerbate the gap, that is something they should fix.”
Lloyds Banking Group is one of those banks in the UK that has made a commitment to hiring individuals from disadvantaged backgrounds. One initiative has simply been to broaden the pool of universities from which it recruits. The Commission’s report shows that front-office roles are more likely to be filled by students from the London School of Economics (LSE), Oxford and Cambridge, Imperial College London, University College London and the University of Warwick.
|Chris Jackson, Lloyds|
“We found that we were limiting our opportunities to improve socioeconomic diversity and missing out on talent by narrowing our recruitment to top universities,” says Chris Jackson, group talent and development director at Lloyds Banking Group. That became even more apparent when Lloyds introduced a local outreach initiative in the London borough of Tower Hamlets, which sits next to the City of London and includes Canary Wharf where many banks have established their London headquarters.
It has the highest ratio of pay inequality of any London borough and almost half the children in the borough live in poverty.
“Our bank is surrounded by Tower Hamlets, yet how often do people from the borough come and work for Lloyds? So we began our outreach there,” he says. Lloyds decided to partner with a local school for Bangladeshi Muslim girls.
“We brought in senior ethnic minority leaders from within the bank as mentors. What we discovered was that, if we wanted to create a path to hiring those girls after they went through university or college, then we would have to change which academic institutions we recruit from,” says Jackson.
What emerged was that young Muslim women typically attend colleges that are close to home due to family ties and the cost of living. That is not only the case for Muslim girls, but for many inner-city students from low-income families. Jackson notes that the experience sheds light on the fact that the bank could be limiting its opportunities by recruiting only from the top 10 universities. Lloyds now pools from 30 UK universities.
Lloyds also altered its job application and interview process for graduates to better provide opportunities to students from disadvantaged backgrounds. For example, UCAS points (points gained from A-level exams taken at age 18) are eliminated from CVs, as are the names of universities. While the bank had insisted on a 2.1 degree or higher from graduates, that has been lowered to a 2.2 and no UCAS requirements.
“We recognized that grades may not reflect a person’s abilities or strengths,” Jackson says.
Noticing that students from middle- and higher-income families were also more likely to have gained relevant work experience, which gave them an advantage in the interview process, Jackson says recruiting questions were altered to try to draw out what interests and energizes candidates rather than asking them for examples of leadership.
In the US, so-called 'blind resumes’ have yet to gain traction among banks, but they have been seeking to widen their net of university applicants to improve social mobility. There, however, social mobility is a different animal – because those from disadvantaged backgrounds are predominantly ethnic minorities.
According to the US Census Bureau, 26.2% of black Americans and 23.6% of Hispanic Americans were below the poverty threshold in 2014, compared with 10.1% of white Americans and 12% of Asian Americans. And the wealth gap between whites and non-whites is stark. In 2013, data collected by the Urban Institute showed the average wealth of white families was over $500,000 higher than the average wealth of African American or Hispanic families.
Diversity has become the focus in banks’ graduate recruitment, leading them to look beyond Ivy League and top state schools. Bank of America Merrill Lynch broadened its pool of universities two years ago, while JPMorgan now hires from more than 450 universities globally.
Michelle Bucaria, JPMorgan’s global head of campus recruiting, says that the bank has introduced specific on-campus initiatives targeting black and Hispanic students.
“We try and reach students in their first and second years to give them the opportunity to understand what investment banking is and how they could be a fit,” she says. “We also have a few feeder and intern and scholarship programmes aimed at black and Hispanic students. For example, we have a third-year firm-wide programme called ‘Launching leaders’, which includes feeders to our asset management and corporate and investment banking divisions.”
One challenge, Bucaria says, is that the pool of students who are typically drawn to work in financial services tends not to be very diverse. She says JPMorgan has put in place policies to approach students on campus with nontraditional majors such as the liberal arts. Barclays investment bank has adopted a similar strategy. Some 40% of interns at the bank this summer were students of non-financial degrees. In the past that figure was closer to 10%.
To reach an even broader pool of students, Bucaria says the bank has also engaged in marketing and social media partnerships. JPMorgan teamed up with LinkedIn’s student app, providing content and advice, for example, and ran a global Snapchat campaign in June this year. Goldman Sachs similarly widened its graduate recruitment search by switching from a purely on-campus interviewing process to allowing students to submit pre-recorded interview videos.
The diversity initiatives of US banks have borne fruit. According to data from Business Insider, last year Goldman Sachs, Bank of America Merrill Lynch, Wells Fargo and Citi hover around a 60/40 ratio of white to non-white employees – in line with the demographics of the US population. Morgan Stanley fares worse at 78/22, while JPMorgan has the most diverse workforce with a ratio of 53/47.
Some critics point out that hiring graduates and focusing on diversity, may not tackle the challenges of social mobility in the US.
“Once children graduate from high school and make it into a university, then social mobility problems tend to be lower,” says Cass. “The challenge is that those at the lowest end of the economic spectrum often don’t make it that far.”
He also points out that the focus on racial as opposed to socioeconomic diversity can be a disadvantage.
“Because of the spotlight right now on diversity, employers often end up giving an advantage to the members of minority groups who come from well-off and highly educated families,” says Cass. “That may improve diversity scores, but it’s not addressing the socioeconomic challenges we have here in the US around race.”
Some banks are working on programmes through their CSR divisions and foundations to improve chances of social mobility earlier in the education system. JPMorgan, for example, has initiatives on both sides of the Atlantic providing skills to high-school students to better prepare them for further education or the workforce.
Lloyds works with 100 schools to support their students to understand their vocation and facilitate their transition into university or work. Senior executives at the bank act as ambassadors for students to help them make informed decisions about going to university because, says Jackson. “Many students from disadvantaged backgrounds often de-select themselves from higher education without good reason.”
In an effort to address this type of self-de-selection, JPMorgan launched its Aspiring Professionals Programme in the UK in 2012. Fifty high-school students from low-income backgrounds take part in a two-week work placement and are teamed up with a JPMorgan mentor for a year. Many of those students are from outside the capital and are given accommodation in London, allowing them to experience what it is like to live and work in the city. This year, 11 of the alumni secured front-office Spring Week places and six of those have been offered internship places next year. Since the programme began, two alumni, having graduated from university, have been given full-time positions.
|Louise Ashley, chief banking researcher on the UK Social Mobility report|
Louise Ashley, from Royal Holloway, University of London, was the chief banking researcher on the UK Social Mobility report. She says it is imperative for banks to target students before they go to university to prevent this de-selection from a career in banking. She points out that the industry has a reputation as a place only for the wealthy. It is a reputation grounded in fact.
The Sutton Trust’s ‘Pathways to banking’ report estimates that in asset management, private equity and investment banking as many as 60% of hires are individuals who received a private education and most likely attended a top-tier university as a result.
“It differs across sectors of finance, but it seems that corporate finance in particular is the most socially exclusive,” says Ashley. “That historical legacy of the old-style merchant banker being from the upper-middle classes casts a long shadow. Add to that the fact that client-facing jobs in banks tend to be based on networks and projecting an image of elitism and it’s not hard to see that those roles tend to map onto certain social classes.”
The implications are two-fold, says Ashley. Firstly, talented students who do apply for investment banking jobs may be rejected on the basis of apparent lack of ‘cultural fit’. The second is, as in the US, many students from lower-income backgrounds de-select themselves from a career in banking long before university because they do not regard it as an environment for people from their background. School programmes like those of JPMorgan and Lloyds can therefore give students both the opportunity to see that they can achieve a job in banking, while simultaneously helping to change the vision for others when they become employees.
But if banks, or indeed any corporation, are to truly assist in social mobility, then they cannot solely focus on graduates. This realization is leading to greater creativity in the hiring process at some banks. Lloyds, for example, has introduced an apprenticeship programme. These candidates are more likely to find jobs within retail and commercial banking at groups like Lloyds than in corporate and investment banking, but there is at least a chance for mobility.
Jackson says Lloyds’ apprenticeship programme was designed in part to offer a solution to the large number of young working class people struggling to find jobs in the UK. Through its Helping Britain Prosper Plan, Lloyds has committed to hiring 8,000 apprentices by 2020, making a commitment that 30% of its apprentices come from a disadvantaged background. It has already exceeded that target, hitting 37%.
“It is a genuine alternative for those who can’t make it into university,” Jackson says. While most of those jobs will be in call-centre roles, we are expanding our offering to higher and degree-level apprenticeships.”
He says that the key is to ensure that those with talent progress through the bank.
Up to 200 of Lloyds apprentices are placed within professional roles. For those hires it is hoped that the training and experience will mean that they will eventually be considered on an equal footing with graduates.
“Those roles could be in commercial banking relationship management roles or within group IT,” says Jackson. “It’s a work in progress, but we hope the programme offers a genuine alternative to a degree.”
While retail banking and commercial banking may provide prospects to those without degrees, will investment banking remain the realm of graduates? One US headhunter says that the pace of investment banking does tend to call for individuals of a more intellectual nature than perhaps in retail banking.
“It sounds pompous, but it’s not meant to be,” he says. “It’s simply that someone without that stamina and mathematical capability might not enjoy a role in investment banking and would shortly leave, which is not a solution to social mobility.”
While banks have been pragmatic in looking at nontraditional applicants, there is a lack of deep thinking around how their cultures are creating a deficit in social mobility
- Louise Ashley, Royal Holloway
Ashley at Royal Holloway however points out that the Social Mobility Commission’s research indicates that in investment banking, even if the screening process becomes more flexible about education requirements, managers tend to hire individuals similar to themselves. Even with unconscious-bias training programmes that most banks now run, “the high level of informality at the selection phase often allows people to recruit in their own image,” she says.
That is a problem when there is a lack of racial and socioeconomic diversity among management. The percentage of middle managers who were non-white at the top six US banks last year was between 28% and 35%. That fell to as low as 4% at an executive level.
“Our recommendation is that there is more flexibility at the application stage, but a more formal process at the final stage of candidate selection,” says Ashley.
She also suggests that better hiring data would help the financial industry determine what practices would be most helpful in addressing social mobility and diversity.
“We need to find out where the real barriers are occurring,” Ashley says. “While banks have been pragmatic in looking at nontraditional applicants, there is a lack of deep thinking around how their cultures are creating a deficit in social mobility. Investment banks in particular will say that their businesses are meritocratic and reward hard work and talent, but the evidence is that that is not necessarily the case. There needs to be a more objective look at what is happening.”
Bucaria agrees that data is going to be key: “We need to look at how we capture the data, and how we use that data to make sure that any initiatives are working and to inspire new initiatives.”
Fiona Cannon, group director inclusion and diversity for Lloyds Banking Group, says some banks have shied away from asking applicants about their socioeconomic background in the data-collection process.
What would encourage investment banks, and the financial industry in general, to invest in data collection and developing algorithm-based hiring processes would be evidence that hiring from diverse backgrounds improves productivity or client retention: “That’s hard to prove,” says Ashley. Although she adds that from the Commission’s research banks did comment that lack of diversity was creating a culture of group-think: “There is a case that high levels of homogeneity result in droid-like employees, but I’m not sure whether that would convince banks to reconsider their hiring strategies. It’s worth noting however that there is a far greater background diversity among senior leaders in the FTSE 100.”
Cannon makes the oft-cited case that greater diversity of employees improves an organization’s ability to provide solutions to clients: “If you are a customer-facing organization, then you also need to be hiring individuals, not only with those skills, but who also understand the needs of your customers. It’s not just about good corporate responsibility, it makes commercial sense. How can you actively reflect your customer base? By widening the pool of where you draw talent.”
Perhaps the greatest argument for broadening the pool of talent, however, is simply that the availability of elite hires that the investment banking industry has relied on is rapidly diminishing. In 2007, 13% of Harvard Business School graduates went into investment banking. In 2014, that was just 5%.
A report from consultancy Deloitte at the end of last year provides further evidence of the decline. Its survey of more than 200,000 business students globally found the popularity of a career in software and computer services had risen by 4.1 percentage points between 2008 and 2015, while banking had simultaneously fallen by 4.3 points. The report’s authors predict that software and computer services will overtake banking as a career choice by 2022.
Margaret Doyle, head of financial services research at Deloitte, supports the work of banks like JPMorgan and Lloyds. She says that banks need to think about “bringing in younger talent, prior to university, via apprenticeships and work placements” to ensure they have a stronger connection with the new generation of talent.