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PHILEAS FOGG’S FOLLOWERS
JXnowledge Elites in the Global Financial ServiceIndustry
Lars Engwall
Invited paper for the European Science Foundation Workshop
on“Knowledge Elites, the Process of Professionalisation and
Changesin Comrnunication Systems: Transformation of Control
Mecha-nisrns” held at SCASSS, Uppsala, Sweden, 14-17 April 1988.
The re-search reported in the paper has been supported by the
Foundationfor Scientific Research of Första Sparbanken.
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ABSTRACT
Traditionally the finantial service industry has been
characterised byhigh mobilny barriers due to extensive Government
surveillance. Si-milar barriers have also been existing for its
employees, who havetended to be recruited among cautious
candidates. Both these circ-umstances have undergone changes as the
working conditions of theindustry have altered. An important event
in this tontext is the intro-duction of modem computer and
communication technology. It hasto some extent created new barriers
to mobilny by the requirementsfor extensive investments, but
primarily it has reinforced tendenciesof deregulation thereby
increasing tompetition This in tum has im-plied the creation of new
instruments and the need for a new type ofemployees with another
time and risk orientation than earlier. Theyconstitute a new
knowledge elite, the introduction of which may beexpected to create
tensions in traditional finantial institutions.
1. Introduction
Phileas Fogg argtred at the Reform Club in the 1870s that the
development oftransportation had made the world smaller (cf. Verne,
1873). He was right atthe time, but he is even more so to-day in
the late 198Os, when individuals maytrave1 around the world in much
less time than the eighty days used by JulesVerne’s hero. In
addition to the innovations in transportation, the distance intime
has been reduced by a rapid evolution of communication technology.
Mes-sages may thus to-day go around the world several times within
an hour. Thisdevelopment has had important repercussions for many
industries, but parti-cularly for those handling information rather
than physical products. One suchindustry is the finantial service
industry, within which to-day sudden changesin exchange rates,
interest rates and quotations Will flow instantaneously fromone
finantial center to another. Trading around the clock has therefore
beco-me the rule for many finantial institutions. In this way
experts in the finantialservice industry can be regarded as
followers of Phileas Fogg, although theyconcentrate on moving
finantial information in terms of orders and quotationsrather than
people.
This paper Will distuss the implications for the finantial
service industry ofthe described changes. In order to provide a
background for this analysis thefollowing two sections Will deal
with the traditional working conditions in the
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industry and recruitment policy, respectively. In so doing the
concept of mobil-ity barriers for corporate and individual actors
will be used as an analytical tool.Sections 4 and 5 Will then
distuss how these mobilny barriers are influenced bythe
introduction of computer communication technology.
2. Mobility Barriers in the Financial ServiceIndustry
One basic assumption in the theory of perfect tompetition is
that “there is afree entry and exit in every rnarket” (Cohen &
Cyert, 1965, p. 5). In realhythere are, as shown by Bain (1956) and
Mann (1%6), considerable barriers toentry in a number of
industries. These circumstances have also contributed tothe
occurrence of markets of imperfect tompetition (cf. Chamberlin,
1933 andRobinson, 1934). The barriers to entry in industries often
are of an economiccharacter, i.e. that established firms have
advantages over potential entrantfinns through (1) product
differentiation, (2) absolute cost advantages, and (3)economies of
scale (Bain, 1968, p. 255). These barriers to entry may also be
re-inforced by baniers to exit for actors in other industries, i.e.
“economic, strate-gic, and emotional factors that keep them
competing in businesses even thoughthey may be eaming low or even
negative rettum on investment” (Porter, 1980,p. 20). Together the
barriers to entry and exit will constitute factors of
inert&which we will here denote as mobility barriers (Engwall
& Johanson, 19&1).
In certain industries the mobilhy barriers are a result of
Govermnent inter-vention. Pritnarily they imply screening of
entrams for the exploitation of na-tural resources and the
provision of publit services (cf e.g. Scherer, 1970, Ch.22). Among
the latter we may inciude the focus of the present paper: the
finan-cial service industry, which throughout the world is
characterised by a high de-gree of regulation (cf. e.g. Wilson,
1986). The most central finantialintermediaries, banks, thus need a
charter to begin their operations and arethen carefully scrutinized
by regulators. The industry therefore contains bothhigh barriers of
entry and high barriers to exit. The main reason behind this isthe
cancern of Governments for economic stabilhy, ultimately fears of
finan-tid u-isis through domino effects if a bank should fail.
Needless to say the cen-tral role of banks in the implementation of
economic policy is anotherimportant explanation for the concem
regarding soundness in the finantial ser-vice mdustry. In the
tradition of Siebert er al. (1956), who - in addition to the
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Executive, the Judiciary and the Legislative bramhes - have
mentioned thePress as a fourth Branch of Government, there are
therefore good reasons toconsider banks as a fifth such branch.
The basic function of the bank charter is to permit the holder
to build up re-lations to different kinds of customers. In certain
countries legal restrictions,for example the Glass-Steagall Att in
the United States, limit the tustomer ca-tegories basmally to
depositors and borrowers, whereas others, among themmany European
countries, provide the possibility for a bank to be involved inboth
commercial and investment banlcing (Wilson, 1986). Of these the
analy-sis here will concentrate on the former type of activity.
Banking operations have traditionally been built on trust and
long-term re-lationships with a certain reciprocity, i.e. that a
tustomer both deposits his sur-plus in the bank and obtains loans
and other fmancial services. Particularly inwholesale banking (the
relations to corporate customers) it has been comrnonto talk about
house banks. In this way the fiicial relations have exhibited
si-milar characteristics to those observed in industrial marketing
and purchasing,i.e. long lasting permanent relationships (cf. eg.
Håkansson, 1982). These re-lations in tum are built on the
experience that reliability and mutual under-starrding of arising
problems are important assets for both partners.
The importante of permanent relationships in the finantial
service industryno doubt imply additional barriers to mobility.
Customers tend to stick totheir old bank relations. This tendency
is reinforced by the fatt that service pro-ducts are extremely easy
to copy. Companies operating in service industriesthus do not have
patent protection or other technical barriers to imitation si-milar
to those existing in manufacturing industries. In the finantial
service in-dustry it is thus difficult for an actor to break into
old tustomer networksthrough the development of new products,
particularly when the hardwarecomponent is insignificant. For the
introduction of the new product in most ca-ses orrly results in
competitors taking it up. In the words of a banker quoted byMayer
(1984, p. 59): “We have to copy what the other banks are doing -
it’s aproduct, and customers will perceive us as a less useful bank
if we don? offerit.”
The finantial service industty has thus traditionally been
characterised byhigh mobility barriers as a result of Govemment
regulation. The mobilny bar-riers created by the close surveillance
of the industty have then been reinfor-ced by the existence of
networks of permanent relationsbips and the ease ofcopying
newproducts. Together the different mobilny barriers have created
anindustry of companies with access to crucial resources. To be
accepted as em-
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ployee in such an industry may therefore be a good precondition
for elite po-sitions.
3. Mobil@ Barriers for Individual Actors .
The literature on professions has certain features in tommon
with the just dis-cussed research in industrial organixation,
particularly in terms of barriers toentry. For the whole idea of a
profession is to control the perforrnance of cer-tam tasks in
society. Therefore professions screen entrams by educational
re-quirements and set standards for educational institutions as
well aspractitioners. Thus only a selected mnnber of schools are
authorixed for apar-tmular professional education, and those
passing through them may be recei-ved in the profession after
fulfilling certain additional requirements. As amember the
professional is then expected to perform his duties according tothe
professional code and has to expect reactions - through different
kinds ofpunishments, even expulsion - in cases of deviant behavior
(cf. e.g. Larson,1977, p. 132). In the stritt sense there are very
few professions. Theology, me-dicine and law are the three major
groups, which comply with a stritt defini-tion. As pointed out by
Larson (1977), however, the grow-ing body of academiceducation has
implied that a number of groups become increasingly
professio-nalixed, or in the words of Collins (1979, p. 184) have
become semi-professions.
But even without the academic training within an occupational
group onemay expect mobilny barriers to be existent, particularly
when the appropriate-ness of employee behavior is crucial. One
example in this tontext is dailynewspapers, inwhich one may observe
(cf. Engwall, 1978) that gate-keeper me-chanisms are important, not
enly in the selection of news, but also in recruitingnew employees.
The screening of potential candidates is petfornred on the ba-sis
of their earlier performance and interviews, and the selection is
made withthe aim of minimixing uncertainty about future behaviour.
One important pro-cedure is then to recruit people for temporary
positions in the periphery - forexample as lotal editor in a small
place. - and then gradually have them movetowards the centre, if
they petform well (Engwall, 1985). This step-by-step stra-tegy also
means that employees may be subjett to a gradual
socialisationthrough irrformal contacts with more experienced
newsmen, in editorial confe-rentes and through editorial revisions
(Sigehnan, 1973). in this way employeemobilny Will be subjett to
successive mobilhy barriers; the temporary employ-
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ment being one first step, the permanent employment a setond,
whereas themovement to more and more central positions are further
steps, which all aresubjett to gate-keeper mechanisrns.
In this selection process the existence of a certain
professional education pro-vides a screening device (cf. e.g.
Blaug, 1976, pp. 845849), but it also constitu-tes a form of
presocialisation into the occupation. An irnportant post-warexample
of this is the business graduates, who to an increasing extent
penetra-te the modern torporation with a language of their own with
concepts for ac-counting, administration, finante, managerial
economics and marketing (6.EngwalI, 1986 and Whitley, Thomas &
Marceau, 1981). In terms of Collins(1979, p. 189) they constitute a
techno-bureaucratic profession, and they tendto fit into the
requirements of Larson (1977, p. 132) for a strong profession,
i.e.that they exhibit “a real technical skill that produces
demonstrable results andcan be taught”. Interestingly enough
studies from Sweden have shown thatbanks were early to absorb
numbers of business graduates (Lindgren, 1988,Markgren, 1983 and
1986). In this way bankers and managers have come tohave similar
backgrounds and professional vocabulary, a circumstance whichof
course has facilitated the above mentioned creation of
networks.
As a result of the importarme attached to trust and stabilny in
banks (cf. Sec-tion 2) their recruitment policy has been somewhat
wary. Remitz (1960, p. 219)thus concluded that althot@ “bank
employees do not show a personalny struc-ture different from that
of people in general they show one tommon trait: cau-tior?.
Similarly McMurry (1958) has argued that banks tend to stress
securitybefore creativity in recruiting. In this way, McMurry
continues, the hired em-ployees will be persons who have “spent all
their working lives in well-structu-red positions, . . . have had
little opportunity to make decisions, to take risks,and,
particularly to work through people” (ibis, pp. 95-96). Therefore
turnoverof bank employees tend to be lower than in other
industries. Those once ac-cepted tend to stay, although their top
bosses may be brought in from othercompanies.
The above arguments imply that employees of finantial service
companies,although they have been carefully screened, have not been
professionals in thetraditional sense. Although business graduates
to a harge extent have been hi-red by banks, they have often
constituted a special segment of this populationcharacterized by
caution and only slight mobilny. In this latter sense they havenot
exhibited a characteristic often mentioned for members of
professions, i.e.an identification more oriented towards their
trade than towards their employ-
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er. This traditional picture has, as will be shown below,
changed somewhat du-ring the 1980s.
4. The Development of International Capita1Markets
The main task of fiicial intermediaries is to distribute
liquidity and risks. Inthe last decades the operations of these
intermediaries have been increasinglyintemationalized through the
development of international capital markets.Behind this
development we can track an intemationalization of business interms
of an increasing world trade and a growing tendency of large
corpora-tians to become multinational through foreign direct
investments (cf. eg Ver-non 1971 and 1977). Another important
explanation to the described trend istbe development of the
Ettro-cmrency market. This has its origin from depo-sits of
Soviet-owned U.S. dollars in European banks after World War II
andhas experienced averitable boom in the last decade (Sampson,
1981, Ch. 7- 8).The evolution of this market has implied a
substatmal change in terms of mo-bilny barriers: national
Govermnents have to an increasing extent lost controlover large
parts of the operations of their finantial institutions. In
addition ithas lead to a tompetition between different
international centres for estab-lishments of finantial
institutions, This in tum has forced most govemments toderegulate
and to relieve some of the existing barriers to entry for foreign
ac-tors (cf. e.g. Walters, 198.5).
The said deregulation has led to an increasing market
orientation of finan-cial institutions, which have felt their
margins squeezed by new competitors.Tbc latter have not only been
foreign entrams but also domestic actors, whichhave entered the
finantial service area. It is thus argued by Leavitt Sr Cunning-ham
(1979) that banks of the 198Os, similar to the railway industry,
have ten-ded to define their business too narrowly thereby
neglecting tompetition fromadjacent industries. In the new
deregulated world the border lines betweenbanks and other
industries are thus becoming less and less stritt. Bank opera-tions
are to-day tun by large industrial torporations, retail chains,
trave1 agen-ties and insurance companies (cf. e.g. Ballatin, 1986
and Eisenbeis, 1983,thereby moving important business from the
traditional commercial banks. Inthis way the traditional banks have
been forced to reconsider their role. Somehave even developed to
finantial supermarket all-purpose banks (Hanson,
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1982), providing their customers with a variety of services.
Many of these havebeen developed in the industry, frequently first
in the United Stams, and havethen spread rapidly (cf. above Section
2), be they different kinds of bonds, com-mercial papers, futures,
money-market furids, options, swaps, etc. In case ofconsiderable
hard-ware components, however, the situation has beensomewhat
different. Then the actors have faced barriers similar to those in
ma-nufacturing industries: the need for far-reaching investment
decisions and ex-tensive design work. The described situation is
also the one faced by thefinantial service industry as computer and
commtmication technologies havemoved into this sector. Investment
costs, and also restrictions on access to com-puter networks, in
this way have implied and still imply new mobility barriersfor the
traditional actors in the industry (Mayer, 1984, p. 128). For
companiesin the computer and communication industry, on the other
hand, the techno-logmal development and deregulation have created
new business opportuniti-es, thereby loosening up the border lirtes
between traditional industries stillfurther. A striking example in
this tontext is the development of the Britishnews agency Reuter,
established 130 years ago, for which today the dissemi-nation of
finantial information has become much more important than
theirtraditional business.
Although the investments in modern technology may lead to
certain mobi-lity barriers, its introduction has no doubt
stimulated tompetition for finantialservices. It has made market
information more easily accessible for differentactors thereby
making markets more efficient. In the domestic retail
marketscustomers may notice - not always with enthusiasm, sinte it
also implies thereduction of float - how transaction costs are
reduced through bank cards, au-tomatic teller machines,
point-of-sales systems and computer networks (cf. e.g.Phillips,
198.5). Similarly market information ternis to be spread to
different ac-tors more rapidly and accurately, which in turn has
implied that another as-sumption of the competitive model - that
actors have perfect information (cf.Cohen & Cyert, 1965, p. 5)
- has become less questionable than earlier in fi-nancial markets.
Trading of foreign currencies and securities have become
ac-tivities, where continuous watch is both possible and necessary.
The abovementioned intemationalization of business has thus been
reinforced by thetechnological development, and the latter can even
be argtred to be an impor-tant contributing factor to the wave of
deregulation under way in the finantialworld.
Computer and communication technology have thus radieally
changed theworking conditions of the traditional actors in the
finantial service industry.
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They have implied (1) heavy investment requirements finantially,
and in termsof human resottmes, (2) the intrusion of companies from
other industries intothe sector, and (3) pressmes for more
efficient markets through the reductionof transaction costs and the
increase in the accessibility of market information.
5. The Development of a New Knowledge Elite
The tendencies discussed in the previous section no doubt have
implicationsfor employees in the finantial service sector. One such
consequence is the needto recruit people who have a background
different from that discussed in Sec-tion 3. In addition to the
earlier cautious persons with a general education, fi-nancial
institutions increasingly need people with very specialised
competence,some more oriented towards the new technology, others
more towards thetechnicalities associated with the increasingly
sophisticated instruments. Theyalso need to a higher extent
traders, who are willing to take fast decisions inturbulent
markets, which require risk and time orientations different from
tho-se traditionally found in the industry. The recruitment of the
mentioned typesof persons may no doubt lead to tensions with more
traditional employees par-ticularly conceming the traditional issue
in banking: risk and retnm.
Althot@ the new employees will be more specialixed than the
earlier ones,the former can not be considered as professionals in
the traditional sense. Theydo not exclusively graduate from special
schools, they have no lorigg” traditionsand they have so far hmited
professional codes. They do however, to quote Lar-son (1977, p.
l32) once again, even more than before passess technical
skills“that produces demonstrable results and can be taught”. In
addition, in the fastexpanding and changing markets they have - in
tontrast to the earlier em-ployees - shown to be more oriented
towards their trade than towards theiremployers. The new knowledge
ehte in the finantial service industry has thustended to be much
more mobile than the traditional ones. Extreme examplesof the
latter were exhibited in London as the Stock Exchange took the
steps re-ferred to as Big Bang, i.e. the computerization of
secmities trading and the in-troduction of completely new rules in
the system.
The members of the new elite are not orrly moving between
companies pro-viding finantial servmes, however. They also tend to
move to and from the who-lesale customers, who to an increasing
extent build up strong finantialdepartments or even internal banks.
Through this increasing sophistication ofthe wholesale customers,
the fmancial service finns have entered a tougher
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worldwith slimmer profits (Mayer, 1984, p. 213). Another result
of the said de-velopment is that employees working with
sophisticated instruments in finan-cial service firms and their
counterparts in tustomer firrris become more closelyrelated than
they do to their colleagues in their own companies. They speak
thesame teclmical language, have the same Games of reference, and
are both li-kely to signal their affiliation to the yuppie culture
through dress, tar purcha-se, sparetime occupation, etc.
The new technology has thus decreased the barriers to exit for
certain grottpsof employees, but it has also implied certain
reductions in the barriers of entry.The computerized trading
networks, as soon as they have been created, provi-de the
opportunhy for decentralized trading. The individmal actors
thereforedo not need to be part of a larger organization but may
through a relativelysmall investment, a terminal and an entrance
fee, get continuous access to up-to-date market information. Some,
like Mayer (1984, p. 59), go even furtherand argue that “anyone
with a computer can offer banking services”.
Another feature of the new technology, which implies a certain
threat to thenew elite and their power in the system, is the
development of automatic tra-ding programs. Here research in
artificial intelligente and computer technolo-gy has been employed
to give the decisions to sel1 or buy to computers as pricesof
different securities reach certain levels. These tradmg programs
were so-mewhat questioned, however, as the stock markets over the
world went downdramatically in October 1987. On Wall Street the use
of such programs waseven bamred during a period following the Black
Monday (Institutional Inves-tor, January 1988, pp. 43-46).
The introduction of modem computer and communication technology
is thuslikely to have effects that Will tut mobilny barriers. At
the same time it Will, atleast in the short nm, create new
knowledge elites by their requirements fortechnical skills in
handling the new technology and the new financial instru-ments.
6. Conclusions
A basic concept used throughout this paper has been mobility
barriers, whichhas made it possible to distuss the changes in the
finantial service industry onthe Company as well as the employee
level. The analysis has pointed to the tra-ditionally high mobil@
barriers in the industry as well as to recruitment me-chanisms
characterised by a high degree of screening in order to obtain
cautious
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employees. In both cases efforts to reduce uncertainty conceming
future beha-viour have been the basic motive. The introduction of
computer and commu-nication technology, however has implied that
new actors are entering thefinaxial service industry. Industrial,
retail and service torporations run theirown banking operations and
providers of the new technology enter the indu-stty. This in tum
has led to the biring by firms in the sector of a new breed
ofemployees. They are not professionals in the traditional sense,
but no doubtknowledge elites by mastering the new technology and/or
the new fmancial in-struments. Their entrance in the traditional
finantial service firms have impli-ed and Will continue to imply
sources of considerable tensions with the moretraditionally
recruited employees. For this new breed of employees has a
morecosmopolitan orientation and are less risk averse than their
colleagues. In thatsense they do not just share Phileas Fogg’s
knowledge of fast means of globalcommunication, they also have
another feature in tommon: the ability to takecalculated risks in
fast decisions. Urdike the situation of Mr. Fogg their
coun-terparts in the Wager remain an anonymous atomistic crowd, as
they each indi-vidually bet on the future development of global
finaxial markets on the basisof available information. In that work
the computer remains their loyal setvant,their Passepartout.
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