Financialization as recombination:

Bureaucracy and neo-patrimonialism on Wall Street

Fabien Foureault, senior SNSF researcher, sociology, University of Lausanne

Lena Ajdacic, junior SNSF researcher, sociology, University of Lausanne

Felix Bühlmann, associate professor of sociology, University of Lausanne

Correspondence:

Fabien Foureault

Quartier UNIL-Mouline, Bâtiment Géopolis, Bureau : 5516

CH-1015 Lausanne, SWITZERLAND

Phone: +41 21 692 32 16 [email protected]

1 Financialization as recombination:

Bureaucracy and neo-patrimonialism on Wall Street

Abstract

Finance is widely seen as a driving force of modern capitalism, a progress of organizational rationalization, and scaffolding for meritocratic elite reproduction. Using Orbis data on over

28,000 US financial firms, and sociodemographic data on 806 founders and managers in key firms, we show that neo-patrimonial elements, such as hybrid legal forms and trust relationships, are spreading within finance. Our findings show that hedge and private equity funds rely heavily on secretive hybrid forms in which “elite white men” benefit from baked in advantages. Financialization is not a modernization process but a recombination of bureaucracy and neo-patrimonial logics.

12 310 words

2 Introduction

Modernization narratives, rooted in the theories of the founding fathers of sociology, crystallize sociological conceptions of social change to date. In these conceptions, a master process leads to the replacement of one social order by another. For Marx (1998), the development of productive forces leads to the replacement of capitalism by communism; for

Durkheim (1997), the increasing division of labor in society leads to the replacement of mechanical by organic solidarity. For Weber (1969) – who represents the starting point of this study ̶ the rationalization of social processes leads to the replacement of traditional domination by rational-legal domination. Twenty-first century social scientists apply the modernization scheme to describe the most recent changes in the capitalist system: the financialization of the economy. Nonetheless, this modernization narrative is inadequate.

Financialization can be defined as “the increasing role of financial motives, financial markets, financial actors and financial institutions” at the level of societies, businesses and households (Epstein 2005:3). Proponents of the modernisation perspective can be found in the field of social studies of finance because they understand financialization as a process of accelerated rationalization and automatization (Knorr-Cetina and Bruegger 2002). To them, financial markets are the pinnacle of capitalist modernization. In the same vein, institutionalist authors see the evolution of capitalism as a chronological succession of phases with financialization representing the most advanced and rational stage of capitalism

(Bacharach and Mundell 2000; Useem 1999). In this perspective, financialization, enhanced the ongoing bureaucratization of organizations. It led to a shift in the reproduction of economic elites towards meritocratic principles and favored the standardized distribution of rewards. In consequence, the traditional and responsible capitalist class was replaced by a

3 diverse set of elites motivated only by financial performance (Bacharach and Mundell 2000;

Folkman et al. 2007).

This view of “modern” finance-led capitalism is challenged by authors such as Piketty

(2014), Lachmann (2011) or Tilly (2003). They argue that family ties, class solidarity and trust – so-called patrimonial elements – have made an important comeback in contemporary capitalism. Recent research reinforces this standpoint. The finance industry, at the center of financialization, relies heavily on partnerships and hybrid forms of organizations (Froud and

Williams 2007; Soener and Nau 2019). Hybrid firms lack standardization and legal oversight, and thereby diverge substantially from the modern ideal of bureaucratic organizations.

Because these firms lack formal procedures for promotion and leadership succession, the financial sector entrenches elite reproduction based on trust networks and master- apprenticeship ties, a logic which stands in contrast with the modern idea of meritocratic selection principles (Soener and Nau 2019; Tobias Neely 2018). Finally, authors highlight that instead of using salary as the standard of pay, most actors in the financial sector use compensation models which facilitate disproportionate value extraction by a small number of people (Hacker and Pierson 2011; Kaplan and Rauh 2010).

Our article contributes to this debate by framing capitalism as a system that relies on competing institutional logics – bureaucratic and neo-patrimonial – promoted by elites and executed by organizations. The surge of neo-patrimonialism must be understood as an outcome of wealth extraction strategies by groups of actors who saw their social status threatened by the very process of rationalization which seized the US banking sector from the early 1970s. Paradoxically, the spread of the neo-patrimonial logic within the financial sector was driven by the initial expansion of bureaucracy. We argue that to date, neo-patrimonial logics are an integral part of US finance and co-exist with modern, bureaucratic logics within the capitalist system.

4 We evidence our argument in three steps. First, we hypothesize that partnerships and hybrid organizational forms – such as limited liability companies (LLCs) and Limited liability partnerships (LLPs) ̶ have become increasingly important in specific segments of the finance industry (private equity and hedge funds) but not in others (banking). This divergence indicates a polarization between the bureaucratic and neo-patrimonial sectors within finance. Second, we posit that the founders of these neo-patrimonial firms are disproportionally sourced from traditional elite groups (male whites with high social status).

These groups have both the resources (in terms of networks and wealth) to found these new financial firms, and a feeling of being threatened in their elite status by the bureaucratized modernization of finance. Third, we argue that even in 2018, top managers who are male, white and enjoy elite social status, tend to get preferentially selected in hybrid organizational firms compared to public firms. We posit that the reason is that these hybrid organizational forms recruit people according to principles of trust and social similarity.

Our analyses draw on firm-level Orbis data to locate LLCs and LLPs within the financial industry, and on a stratified sample of 806 individuals, who in 2018 occupied top positions in the 40 largest organizations in key segments of the US financial field (investment banks, hedge funds, private equity and asset management firms). Overall, our results confirm that hybrid firms are dominant and increasing in hedge funds and private equity. Moreover,

“elite white men” are over-represented among founders and top managers within hybrid organizations, holding constant their educational backgrounds and social networks. We conclude that the modernization of finance is accompanied by the emergence of neo- patrimonialism. Contemporary finance combines both bureaucratic logics (especially in asset management and investment banking) with neo-patrimonial logics (in hedge funds and private equity).

5 This paper is organized as follows. First, we review both modern and traditional narratives of capitalism and show how they apply to financialization. We then provide a theoretical narrative which combines both to propose three hypotheses addressing the organizational and the individual level. After a presentation of our data and methods, we show the results and illustrate our argument by identifying the most and least neo-patrimonial organizations in the sample. The article is completed by a discussion of the theoretical implications of our findings for the narrative of financialization as modernization.

1. Theoretical background

1.1. Capitalism: modern or traditional?

Two perspectives on capitalism can be distinguished: one that considers it as a quintessentially modern phenomenon, and one that views it as grounded in a traditional order.

The modernization perspective defines capitalism as an economic system in which the search for profit occurs in increasingly rational and bureaucratic firms operating in highly competitive markets. Not only Weber (1969), who most prominently championed the idea of rationalization, but also Marx (1998) saw the constant evolution of productive instruments, based on knowledge and science, as a core component of modern capitalism. Over the 20th century, Weber’s conceptions of modernization were further developed by “managerialist”

(Berle and Means 1991; Burnham 1941; Chandler 1977) and “industrialist” (Bell 1973) authors, who aimed to describe the transition from small family firms to large and capital- intensive corporate enterprises. This transition, as the authors observed, was marked by the spread of rational, modern principles that transformed corporate governance during the 20th century: stock ownership broadened, ownership and control of firms divided, and salaried managers gained power over property owners.

6 A focus on the advent of bureaucratization within firms is vital to viewing capitalism through a modernization lens. Ideal typical bureaucratic organizations operate according to impersonal and “rational-legal” criteria for retribution. Career advancement and leadership succession in bureaucratic organizations operates according to formal rules, based on educational credentials, seniority and performance (Weber 1969). The modern industrial firm becomes a complex, differentiated and hierarchized institution, in which well-educated managers take control of the firm (Chandler 1977). Bureaucratization thus affects elite reproduction and power dynamics within firms. Elite positions become untethered from status groups and therefore from family, community and trust relations. Individuals do not inherit their positions based on extra-economic criteria, but acquire them if they succeed competitively through higher competence and performance.

For authors who deem capitalism to be grounded in a patrimonial order, the capitalist system is based on profits generated by non-routine activities and carried out by collectives connected through trust and other networks which extract profit through primitive means, called “accumulation by dispossession” by Harvey (2004). Characteristic of colonial and commercial capitalism (Weber 1969), this dispossession is justified by moral systems that attribute high and low qualities to different kinds of people. Leading positions are typically filled by members of elite families or privileged communities which rose to power before industrialization. A typical example is the WASP “protestant establishment” which, according to Baltzell (1987), characterizes the upper class of the United States. The lowest positions are usually held by colored people and women (as well as children).

This perspective argues that pre-modern structures persist in important niches or have adapted so they become compatible with seemingly “modern” forms of contemporary capitalism. These authors argue that even today capitalism continues to co-evolve with patriarchy and racial classification systems (Feagan and Ducey 2017) and that persistent

7 income and wealth gaps between men and women, whites and non-whites (Keister 2014) or upper- and lower-class members (Friedman and Laurison 2019) are a reflection thereof. The literature on the history of family capitalism shows that bureaucratic organizations did not eliminate all other organizational forms. Family dynasties gained new legitimacy (Lachmann

2011) and family firms have successfully adapted – for example in size and scope (Colli

2002; Jones and Rose 1993). Piketty (2020) argues that in the age of “neo-proprietarian capitalism”, inheritance – and therefore family ties – have re-emerged as a core stratification principle. In sum, these authors suggest that neither the organizational logic, nor the elite reproduction of contemporary capitalism, have become fully modern. Family and community networks remain at the core of contemporary capitalism.

1.2. Financialization as the pinnacle of modernization

In the modernization view of capitalism, financialization is a further step in the modernization process and the logical continuation of the “managerial revolution” (Duménil and Lévy 2015). This view of financialization as the pinnacle of modernization is widely shared across otherwise diverse approaches to financialization (Davis 2009; Useem 1999).

Social studies of finance consistently highlight modern elements within financial activities

(Knorr-Cetina and Preda 2012)1. Influenced by STS inspired lab-studies, they present finance as the technological spearhead of modern capitalism and study the most technologically advanced niches of finance, such as digitalized trading rooms (Knorr-Cetina and Bruegger

2002), high-frequency trading, (MacKenzie 2018) or stock market automatization (Pardo-

Guerra 2019).

Institutionalist inspired accounts of financialization argue that the new dominance of finance stimulated rationalization processes in governance and ownership principles throughout the economy. Financialization led to a transition from managerial capitalism to

1 In the handbook of the sociology of finance (Knorr-Cetina and Preda 2012) finance is labelled as “modern” or at least “non-traditional”. See Knorr-Cetina (p. 54) Beunza and Stark (p. 95). 8 “shareholder capitalism” or “investor capitalism”(Useem 1999), concepts which reflect a rise in power of institutional investors from the 1970s onward. It is important to highlight that these theories address the latest stage of capitalism: family owners were replaced by managerial elites and they, during financialization, were themselves replaced by an even more advanced form of ownership – institutional investors. These investors reoriented firm strategies towards the maximization of shareholder value, and encouraged firms to desist from “retain and invest” strategies in favor of “downsize and redistribute” strategies

(Lazonick and O’Sullivan 2000). The modernization view interprets the power shift from managerial elites to institutional investors, and the new dominance of shareholder value orientation under finance capitalism, as a step towards a more meritocratic and competition- based system. Agency theorists argue that firm governance in a regime of shareholder dominance is tightly coupled to predefined, rational rules and that shareholders have less self- interest in firms than managers (Jensen and Meckling 1976). In the event of weak firm performance – at least theoretically – investors divest, enhancing the “efficiency” of the system.

On the organizational level, segments of the financial industry gradually replaced trust and community based partnerships through vertically integrated, bureaucratic organizations

(Fligstein and Goldstein 2010). Between 1950 and 2000 investment banks profited from ever cheaper computing power in order to rationalize and automate their procedures and tasks

(Morrison and Wilhelm 2007). At the same time, advances in modern finance theory

(MacKenzie 2008) and financial engineering (Lépinay 2011), in particular the portfolio theory (1950) and Black and Scholes’ relative pricing theory, became standardized trading practices (Morrison and Wilhelm 2007). Resultant organizational transformations were accompanied by a modernization of the legal forms of financial firms. As a reaction to changing stock market regulation in the early 1970s, most investment banks, which were

9 traditionally held as partnerships, went public and thereby adopted more transparent and standardized legal forms (Morrison and Wilhelm 2007). While retail-oriented Merrill Lynch took this step early, in 1971, Goldman Sachs held out until 1999, and was the last of the large banks that changed from a partnership to a public firm. All these processes at the organizational and legal level seemingly contributed to the bureaucratization of the finance industry.

At an individual level, recruitment and promotion in finance shifted increasingly towards criteria such as educational credentials or performance, replacing previous career logics of trust and networks (Augar 2008; Morrison and Wilhelm 2007). Modernization scholars argue that the rise of large, bureaucratic financial corporations introduced a rupture with the ancient system of WASP business leadership, which favored mainly white Anglo-

Saxon protestants of upper-class origin (Bacharach and Mundell 2000). The finance sector instead came to value a new, ethnically diverse elite, accountable solely to financial performance (Bacharach and Mundell 2000). With financialization, class solidarity has been replaced by company focused management practices (Useem 2015). Some financial firms have made great efforts to increase diversity, and the representation of women has increased in executive teams and board rooms of financial firms (Clempner, Daisley, and Jaekel 2020)

In opposition to the modernization and bureaucratization perspective on finance, a new wave of scholars argue that the financial system is structured by emerging patrimonial logics (Tobias Neely 2018). Patrimonial elements were strongly present in the early 20th century, when banks were headed by male family members, and age was perceived as a

‘fashionable’ characteristic (Thompson 1997). At that time the financial elite ‘read cattle herd books rather than bank accounts’ and shared mutual values based on their common comfortable family background, permitting a relaxed atmosphere and bantering, masculine interactions (Thompson 1997:294–95). Exactly those elements, in a renewed form, Tobias

10 Neely (2018) argued, saw a revival within the financial system and resurfaced as so-called neo-patrimonial elements. The rise of private equity ownership, for instance, contradicts the idea that there is a growing separation between ownership and control (Baker and Smith

1998; Applebaum and Batt, 2014), because private equity firms are typically characterized by an active managerial style as owners. Today, there are more companies under private equity ownership than publicly listed firms (Wilhelmus and Lee 2018). Moreover, Windolf (2005) and Braun (2020) emphasize that in the light of an ever growing concentration of equity in the hands of a few passive asset management firms, the central concepts of managerialist theories, a subset of the modernization narrative, such as “ownership” or “control”, no longer make sense.

When it comes to patrimonial tendencies at the organizational level within finance, recent studies show that there has been a decrease in the proportion of public firms and a steep rise in hybrid organizational forms such as LLCs and LLPs (Soener and Nau 2019). The rise of these legal forms corresponds to a move away from bureaucratic and transparent organizations, towards collegial organizations which face low regulatory requirements.

Within hybrid organizations, elites often use a compensation model which allow owning partners to minimize taxes and to extract large amounts of wealth. A typical compensation scheme is based on carried interests, which secures a share of the profits on invested capital for the fund managers. Such schemes have been labelled “medieval”, copying elements of ancient remuneration schemes (Mallaby 2010).

At the individual level, the spread of neo-patrimonial logic leads to an enhanced reliance on recruitment mechanisms based on trust, loyalty and tradition within the financial industry. These practices play a crucial role and lead to a systematic discrimination of women, racial minorities and individuals from lower class backgrounds. For Tobias Neely

(2018), this explains why hedge funds are 97% headed by white men. In private equity firms,

11 women represent only 18% of members, 10% of seniors members and just 5% of board members (Preqin 2019).

1.3. Financialization as recombination

In an attempt to reconcile modernization theory with the claims of a revival of patrimonial elements in current finance capitalism, we argue that financialization is best understood as a “recombination” (Stark 1996) of neo-patrimonial and modern social forms into new organizations and economic practices. While some segments of finance have indeed been bureaucratized, rationalized and automated, others, conversely, are increasingly based on a neo-patrimonial logic (Table 1). As the finance industry – at the core of financialization

– rose to new prominence and power in the 1980s and 1990s, this created new theories, new technological devices, but also new opportunities in terms of compensation and wealth extraction. Based on scholarship on organizations and elites (Fligstein 1990; Mizruchi and

Schwartz 1992; Palmer and Barber 2001; Stearns and Allan 1996), our argument is that in the

1970s, 80s and 90s a group “challengers” embedded within the financial world, and equipped with all the attributes of the patrimonial business elite (in terms of gender, race and social status), became dissatisfied with the distribution of this newly created power and wealth.

They quit bureaucratic finance firms and developed both organizational and individual neo- patrimonial strategies in order to secure what they perceived as a fair share of the cake. This resulted in a wave of foundations of new, but traditionally organized firms in private equity

(between 1975 and 1990) and as hedge funds (between 1985 and 2008)2.

Table 1: The recombination perspective [Insert Table 1]

2 In both sectors pioneering firms were founded earlier. However, in private equity it is mostly firms that have been founded during the leveraged buyout boom of the 1980s that still dominate the industry in 2018 (Applebaum and Batt, 2014). In the hedge fund industry, it is also the second wave of firms, often founded in the 1980s and 1990s, who still dominate today (Mallaby, 2010). 12 This evolution has been made possible by changes in the economic and political environment: As a consequence of the privatization of the retirement system, in the 1970s and 1980s, an enormous increase of the amount of pension money (of the upper-middle classes) became available for investment (Blackburn 2002). This glut was then combined with a unprecedented deregulation of finance: with the fall of the Bretton Woods system, the control of exchange rates disappeared, restrictions on international capital movement were rescinded, and regulations on what specific financial institutions and actors were allowed to do were loosened (Helleiner 1996). At the same time geographical boundaries were opened domestically (for instance with the suppression of the MacFadden Act), and international boundaries were also opened to transnational financial operations and savings flux. These developments, which boosted the possibility of wealth creation within the financial universe, were paralleled by an internal bureaucratization of the financial system which created and deepened the gulf between the old banking establishment and a new cohort of challengers

(Augar 2008; Lewis 1989). The automation of trading, the renewal of financial theory and the development of derivatives opened space for new investment strategies and opportunities for enrichment – and divided the financial elites roughly along generational lines into incumbents and challengers.

We argue that a specific group of investment bankers, in a context full of new opportunities, were discontent with their situation and potential advancement within the banks and sought to gain more from the rising profits around them in the financial industry.

In the early 1980s, in leading investment bank Solomon Brothers, Michael Lewis depicts accurately the tension between “traditional” senior bankers (such as Solomon CEO John

Gutfreund) and hungry young bankers – who know how to exploit the new opportunities, but

13 feel they are not adequately rewarded3. Olivier Godechot (2007) describes a very similar phenomena, the financial “hold-up”. He analyses heads of trading teams, who think they earn less than they deserve, and hence “menace” their employer to leave and join a competing company (with their whole team and inflicting thus a double penalty to the firm), if they are not willing to raise their compensation. While Godechot considers this mainly as a (firm internal) compensation negotiation strategy and thus a driver of excessively high compensation within finance, we argue that such teams might have also left the corporate banking environment, become entrepreneurs and founded partnerships by raising capital from trust networks. They often did so: with co-workers, friends, community or family members in whom they trusted and recruited other professionals from the same social circles, and with the same social characteristics (in terms of gender, race or social status) (Tobias Neely 2018).

1.4 The neo-patrimonial hypotheses

Overall, we argue that modernization forces within finance were affected by the strategies of challengers who introduced a neo-patrimonialization within some financial industry sectors. While most scholars have focused solely on modernization, this paper suggests integrating it with new research on neo-patrimonialism perspectives, and adds sector-specific views on how financialization changed organizations and opportunities for some social groups to secure positions of power. Contemporary, finance-led capitalism, we argue, represents a system that relies on parallel institutional dynamics – a recombination of bureaucracy and neo-patrimonial logics. The nexus between the type of organization and its leaders is created through the social dynamics of firm founding and later, through the recruitment and promotion criteria typical for these organizations. In other words, the neo- patrimonial or bureaucratic logics result from the interaction between the organizational form

3 Lewis reports that in 1983 one of the young traders, Howard Rubin, asked Salomon’s CEO John Gutfreund, when negotiating his compensation in 1983: “Who really made that money [$25 millions], Howie Rubin or Salomon Brothers? In Rubin’s view it was Howie Rubin. In John Gutfreund’s view it was Salomon Brothers” (Lewis, 1987: 157)

14 and the ascribed status of its leaders. We advance three neo-patrimonial hypotheses: the rise of the hybrid firms, the privilege of the founders, and trust-based recruitment.

a) The rise of hybrid firms

In modernization narratives, large and public firms led by salaried managers become ubiquitous (Fligstein and Goldstein 2010). However, recent evidence from the financial industry shows that public firms are in decline, whereas hybrid firms are on the rise. Hybrid legal forms such as limited partnerships (LLPs) and limited liability companies (LLCs) are more opaque to public scrutiny (Soener and Nau 2019) and they are governed by a collegial group of partners (Lazega 2001). According to Soener and Nau “between 1990 and 2012, the number of limited liability companies (LLCs) and limited partnerships (LPs) in the

United States increased by more than 750 per cent – far faster than other form of economic organization including traditional corporations” (2019: 400).

The financial sector was key to this trend: the vast majority of profits from hybrid organizations were generated in the so called FIRE sector (Finance, Insurance and Real

Estate). Almost half of all US hybrid organizations are located in this sector (Soener and Nau

2019: 408). However, hybrid organizations are not ubiquitous in the whole finance sector.

We argue that different sectors of finance pursue increasingly divergent (or even opposite) organizational strategies. In fact, since the early 1970s central actors in the field of finance – in particular many investment banks – have undergone an organizational transformation, from traditional partnerships to public firms. They have become larger, more transparent and more meritocratic (Morrison and Wilhelm 2007). This social widening of traditional banking, characterized by more formal and meritocratic recruiting procedures, made their workforce and leadership more diverse. This change was perceived within the sector as a potential menace by those endowed with traditional elite attributes. As a reaction, some ambitious and

15 potentially unsatisfied “challengers” opted out of these mega-finance corporations and founded hybrid firms – structures better suited to satisfy their thirst for recognition and entitlements4. While those who worked in corporate finance departments (M&A) typically founded private equity firms, equity, bonds or derivative traders tended to start hedge funds.

Hypothesis 1: within finance, hybrid organizational forms are growing and are dominant in hedge funds and private equity, but are less prevalent in investment banking and asset management.

b) The privilege of the founders

If capitalism has undergone modernization and rationalization, and if its institutions are increasingly based on merit and performance, ascriptive criteria such as gender, race or status should no longer determine who becomes a founder of a company. However, entrepreneurship studies show that when it comes to firm founding, social networks based on race and ethnicity matter a great deal (Portes and Sensenbrenner 1993). Here, we argue that hybrid organizations are founded by individuals occupying a specific position within the finance field – both in terms of motivations and their capacity to found successful financial firms. First, they are a group that, though very privileged, feels relatively “threatened” compared to their “expected” entitlements. Second, it is a group that has the independence, the networks and the wealth to be able to found and build a successful firm in the financial sector.

During the second half of the 20th century, especially from 1971 onward, the US investment banking sector underwent radical changes. Former partnerships became public firms, recruitment based on community and trust became more diverse and meritocratic, and interactional know-how learned through in-house master-apprentice relationships was

4 In addition, the large financial conglomerates themselves create LLCs and LLPs as subsidiaries within their corporate universes (Soener and Nau 2019). 16 replaced by technical and mathematical knowledge learnt at business schools (Morrison and

Wilhelm 2007). As a consequence, we can imagine that younger representatives of the traditional banking elite felt “threatened” by an influx of diverse outsiders and newcomers.

Any feelings of “not getting what they are entitled to”, therefore, were likely to be highest among those with characteristics of the traditional financial elites: white men of high social status5. The tense negotiations described by Godechot (2007) or Lewis (1989) would likely have been particularly strained among that specific banking cohort.

Second, we argue that this group benefits from particularly favorable conditions and motivations in order to leave the bureaucratized world of the public bank behind and to found a successful finance business. Tobias Neely (2018: 369–70) describes the “founding” and

“seeding” process of hedge funds and argues that “prospective investors are more likely to invest in a founder’s startup when the person is perceived to have strong social ties and access to capital”. For both African Americans and women, it is more difficult to attract investments and to found a successful alternative finance boutique (Bielby 2012). To be able to leave the corporate world, fund and operate a financial boutique firm, requires good networks, trust based on social similarities, and the material security which traditional elites – white, male and endowed with social status – are better able to access.

Hypothesis 2: firm founders across the entire financial sector are more likely to be white males with high social status than other financial elites.

c) Trust-based Recruitment

Modernization theories state that all organizations undergo bureaucratization and introduce formal, meritocratic criteria for recruitment, career advancement and leadership succession. It is true that bureaucracy tends to decrease ascription (Reskin and McBrier

5 Social status is here defined according to Weber (1969) as the honor, social value or esteem that a group asserts or is given by others. 17 2000), although not systematically (Dobbin, Schrage, and Kalev 2015). But some firms such as partnerships remain small, and their leaders actively prevent such bureaucratization

(Lazega 2001). In hybrid organizations, individuals are promoted throughout the organization to positions of leadership according to trust networks rather than according to impersonal, bureaucratic rules. Trust can be defined, within a dependence relationship, as the belief that the other party will not take advantage of one’s vulnerability (Cook and Gerbasi 2006). This inference is based on proxy signs rather than direct information (Swedberg 2010). There are different kinds and varying degrees of trust, but “characteristics-based” trust tends to be strong, since the social attributes of individual humans are quite stable (Zucker 1986). There is evidence that social similarity in terms of attributes such as gender, race and social status has a positive effect on trust (e. g. Simpson, McGrimmon, and Irwin 2007; Tobias-Neely,

2018).

Networks of trust, which are important to be “groomed” and promoted, tend therefore to be organized along racial and gendered lines. They often exclude out-groups which differ from the profile of founders (Friedman and Laurison 2019; Tobias Neely 2018). We can thus assume that in hybrid organizations social similarity – in terms of gender, race or social status

– is an important foundation of the trust between partners and directors, and therein the likelihood is higher that people with specific attributes will be promoted into leadership roles.

Hypothesis 3: in 2018 hybrid organizations have a higher likelihood of having white men, or people from a high social status, at their helm compared to public corporations.

18 2. Data and Methods

2.1. Data

To respond to our first hypothesis about the spread of hybrid organizational forms we rely on firm-level data from ORBIS, which we have refined with specific categories and additional manual classifications. To test our second and third hypotheses on the nexus between organization and its directing personnel, we use a database on the 40 most important

US financial firms (investment banks, asset management firms, hedge funds and private equity firms) in 2018. We study both their top managers in 2018 and their founders in the period between 1975 and 2006. The selection of individuals is based on positional criteria and augmented by a combination of financial database sources such as Boardex, Capital IQ and Bloomberg. Before discussing these two datasets, we present the sub-industries within the US financial field which comprise our sample.

a) The US financial field

Our study focuses on the most important financial firms and their top managers in the US.

In particular, we are interested in the so-called financial intermediaries which play a crucial role in the process of financialization, as they reallocate streams of money between large institutional investors (such as pension funds, insurers or sovereign wealth funds) and corporate firms. These firms are in the middle of the “chain of finance” and form the core of the financial industry (Arjaliès et al. 2017). We have chosen to study the ten most important firms (in terms of assets under management) in the US in 2018 from the following intermediaries: asset management firms, investment banks, private equity firms and hedge funds.

Arguably asset management firms are the most important players in the world of contemporary finance (Fichtner, Heemskerk, and Garcia-Bernardo 2017). Though some of these funds were founded in the 1930s, it is only since the 1990s that their assets have grown

19 substantially. These funds elicit cash from a large (mostly institutional) audience and invest it in shares, bonds and other types of financial instruments. Recently, index funds and exchange-traded funds have formed the core classes of investment funds.

Historically, the core business of investment banks has been fee based consultancy serving mergers and acquisitions (due diligence, risk analysis, deal structuring, etc.). In addition, investment banks originate and distribute financial products (bonds, securities, derivatives) and trade on the financial markets, either on their own account or as brokers for institutional clients.

Private equity firms first emerged in the 1960s, but their rise to prominence parallels the emergence of a market of corporate control and the (hostile) takeover movement in the

USA in the 1980s (Appelbaum and Batt 2014). In the “leveraged buyout (LBO)” business model, private equity firms seize control of targets and use the cash flow or (stripped) assets of the portfolio firm to secure and then repay the borrowed money which typically represents

80% of the acquiring vehicle. “Operational” and “financial engineering” strategies are used to increase the share price of the targeted companies. Even larger private equity firms such as

Carlyle or KKR, are relatively small and manage between 30bn and 190bn dollars.

Hedge funds are a relatively heterogeneous group of investment funds, often actively managed, which promise high investment returns (Fichtner 2013). Initially, hedge funds used to “hedge” risks with specific investment techniques independent of any economic cycles.

Since the early 2000s, they have become popular investment vehicles utilizing a large variety of strategies to avoid regulatory controls (Leaver, Williams, and Ertürk 2010). Compared to other investment institutions, hedge funds are relatively small firms.

b) Organizational forms

20 In a first step we focus on the organizational forms of the firms in these four sectors.

A study by Soener and Nau (2019) on the rise of hybrid organizations used the Internal

Revenue Service’s Integrated Business Database (IBD). While these data are encompassing and historically very precise, they do not permit finer distinctions between financial sub- sectors. We therefore rely on the Orbis database and have recoded their variables on organizational forms and precise sub-sectors. We exported all active companies in the US with information on the incorporation date in the NACE rev2 category 64 (financial service activities - export date: 15/08/20) and category 66 (activities auxiliary to financial services - export date: 21/08/20). The Orbis category “financial company” is a catch-all for various different types of financial entities; therefore, we rechecked this category manually, to identify hedge funds which were wrongly classified in the “financial company” category.

Based on the Orbis variable “type of entity” we created four subsectors: private equity firm, hedge fund, bank and asset management (the latter corresponds to the Orbis category “mutual and pension fund/nominee/trust/trustee”). We categorized the “national legal form” into a binary variable (hybrid firm vs others). Hybrid firms include “Limited liability companies/corporations”, “Sole proprietorship” and all types of partnerships. The sample comprised 39,554 US financial firms of which 28,365 (71.7%) had information on the legal form.

c) Founders and top managers in 2018

To study the social characteristics of the financial elites in different sectors and types of organizations, we rely on a sample of founders, directors and managers of the 10 largest

US firms in each of the four aforementioned sectors in 2018 (Appendix A). We study both individuals who founded these firms between 1975 and 2006, and their 2018 top management cohort. For each firm we selected approximately 20 individual board members and top executives, including the founders listed in Table 3. We then collected information on these

21 individuals based on Capital IQ, Boardex and Orbis. On top of financial and accounting information on organizations, these databases list members of their managements, as well as personal characteristics such as age, gender, education, employment and board memberships.

These sources are augmented by information found in the “directories” module of Nexis Uni, in annual reports, in the press and on the internet. Our final sample is composed of 806 founders, directors and managers of the 40 biggest asset management firms, investment banks private equity firms and hedge funds.

d) Variables

The independent variables are three social attributes: gender, race and social status.

For race, we searched for pictures of the individual online and categorized the person using

US Census categories (White, Middle Eastern, Black, Asian, Indian, Native). See

Hermanowicz and Claton (2020) or Brint et al (2020) for a similar and recent coding scheme.

The underlying assumption of this coding is that race is a categorization system enforced by other people and institutions on the individual, and that the main distinction is between

“white” and “non-white”. Whenever there was a doubt, we did not code anything. The social status variable is whether the individual has a degree from an Ivy League university (either at undergraduate or graduate level). While these elite universities have become more diverse in terms of religious affiliation, race, gender and geographical origin, they continue to draw students from the most privileged class background (Karabel, 2006: 536-557)6. Therefore, we assume that attendance of an Ivy League university is an indicator of high social status.

(Domhoff 1967; Karabel, 2006; Rivera, 2016).

We include control variables to rule out confounding factors. We know that women are less likely to be represented among PhDs, as well as in business and natural sciences

(Bradley, 2000). We therefore include variables such as having an MBA, a PhD and a

6 Khan (2011) draws the same conclusions when it comes to the most prestigious feeder schools of the top universities. 22 business or science degree. In order to code these degrees, we manually constructed two dictionaries: we considered a degree in “Economics” to be business related; similarly, whenever there was term relevant to the category for example, a degree in “Politics,

Philosophy and Economics” was considered as a “business degree” because of the presence of “Economics”. Thus, categories can overlap and in effect 9% of our sample have both a business related and science related degree. If no degree was mentioned, we considered that the individual did not have a degree.

The other confounding factor is social networks: minorities tend not to reach the top of organizations or societies due to their relative lack of connections and absence of membership in elite social networks, philanthropic organizations, clubs, business associations, interest groups or policy planning networks. Based on information from

Boardex, we control for whether the individual offers any such ‘non-professional’ activities.

We categorized affiliations in 13 types and 30 subtypes by a combination of automatic (string matching) and manual allocation. As examples, the Council on Foreign Relations and the

World Economic Forum are coded as “policy-planning network”; the Partnership for New

York City, or the Robin Hood Foundation, are classified as “philanthropic organization”. If no information on such activities was mentioned, we considered that this person did not belong to any other organization. The final control variable is whether the person is a member of the board of directors.

The independent variables are (1) whether the individual is a founder of one of the 40 organizations and (2) whether s/he belongs to a “hybrid” organizational form or a public organizational form. We define a “hybrid” form based on research by Soener and Nau (2019).

We consider all LPs, LLPs, LLCs, private firms and holding companies as hybrid. Public companies and subsidiaries are defined as “public firms”. In general, hybrid forms are

23 younger and clustered in the hedge fund and private equity sectors, whereas the corporate forms are older and in the investment banking and asset managers sectors (Appendix A).

3. Results

3.1. The rise of hybrid firms within finance

Soener and Nau (2019), in their study on the emergence of hybrid firms, show that generally, the financial sector relies substantially on hybrid organizational forms such as LPs,

LLCs or LLPs. With our first hypothesis (H1) we add to this research by positing that there are decisive differences within the financial sector: hedge funds and private equity firms rely heavily on hybrid organizations; other sub-sectors such as banking and asset management, much less. Based on a large sample of firm level data from Orbis, including cross-sectional

2018 evidence and historical evidence on the type of legal form of financial firms, which incorporated over the period between 1975 and 2018, we are able to confirm this hypothesis.

Table 2: share of hybrid organizations according to US financial sub-sector in 2018 [Insert Table 2]

The differences are striking. Whereas in 2018 only a minority of 4% of banks are organized as a hybrid form, almost 90% of hedge funds and 75% of private equity firms are organized so. Asset management firms are divided almost equally, with 40% hybrid organizational forms.

The historical data gives important additional clues – we note that while banks have existed for centuries, the first asset management firms emerged in the 1930s, many currently dominant private equity firms in the 1980s, and important hedge funds in the 1980s and

1990s. Orbis data on incorporation year only stretches back to the 1970s, and we excised years with too few observations. Historical analysis shows that the proportion of hybrid organizations among hedge funds, private equity and asset management firms rose steeply

24 from about 1990. Only in the banking sector we do fail to observe such an increase in hybrid forms. This means that next to hedge and private equity funds, asset management has become more hybrid in recent decades, albeit capped at a lower level than hedge funds and private equity.

Figure 1: share of hybrid firms among sub-sector incorporations (1972-2018) [Insert Figure 1]

Overall, these results confirm our hypothesis that in terms of organizational forms there are major differences – a polarization – within finance. Both modern and neo-patrimonial logics co-exist in the current financial sector at the organizational level: although hedge funds and private equity have become increasingly dominated by hybrid organizational forms, asset management firms and particularly banks have remained organized as public firms.

3.2. The privilege of the founders

Our second hypothesis (H2) states that founders of new firms in the financial field are more likely to be white, male and with high social status compared to the average top managers of these firms. If we restrict the sample to those firms founded since 1975 and still among the 10 most important in their sector in 2018, we find two asset management firms

(Vanguard, founded in 1975; BlackRock, in 1988) and two (boutique) investment banks

(Evercore, founded in 1995; Centerview Partners, in 2006). In contrast, almost all of the hedge funds and private equity firms that dominate in 2018 were founded between 1975 and

2001 – with the sole exception of Warburg Pincus, founded in 1966 (Appendix A). Not all, but most, of these firms are hybrid organizations (or at least were so when founded). In particular, eight of the ten most important hedge funds in 2018 are LPs or LLCs. Also, most

25 of 2018’s dominant private equity firms were initially founded as LPs or LLCs, but in the

2000s some went public: Carlyle in 2001, Blackstone in 2005, KKR in 2007, Apollo in 2008.

We have identified 63 founders of all the top financial firms created between 1975 and 2006 and compared them with the top management of financial firms in 2018. These individuals were typically young as founders, aged 36.4 years on average.

Table 3: founders of largest finance firms in 2018 sample [Insert Table 3]

Notice that a majority of founders have worked in large (investment) banks before starting their own business: the founders of Apollo worked at Drexel Burnham Lambert, the founders of KKR at Bear Sterns, the founders of AQR Capital at Goldman Sachs, the founders of

Blackrock at First Boston or Lehmann. Others worked in smaller investment banks, other investment firms (Robert M. Bass Group or D.E Shaw) or in a specific business sector (such as the EnCap founders, who all worked in oil related banks or firms, or the founders of

Renaissance who were both mathematics professors). In other words, these founders were active in a sector undergoing rapid transformations. Traditional banking (based on community, trust and organized in partnerships) was being replaced by strategies increasingly based on scientific skills, meritocratic promotion mechanisms and bureaucratic principles

(Morrison and Wilhelm 2007). It is notable that the founder teams often worked together, for the same bank, even in the same departments within a bank (resembling Godechot’s (2007)

“hold-ups”)7. This means that neo-patrimonial elements such as trust, a common work culture, loyalty and social similarities are of fundamental importance to the founding of these financial firms. An examination of the positions founders occupy just prior to becoming entrepreneurs shows that most occupy middle to upper management positions (team leader, head of department, vice president, partner or even chief officer) and often lead particularly 7 This rule is confirmed by the odd exception: the founders of Carlyle all worked in very different sectors. 26 “innovative” or “promising” departments within these large banks. Given their typically rather young age, many founders seem to have advanced rapidly to occupy positions with responsibility and potential.

Even though our data gives little insight into the motivations of these founders to quit modern bureaucratic banks, extant literature often provides anecdote about tensions and conflicts: we know for example that there were “rising tensions” between the three founders of KKR and Bear Stearns, or that there was a conflict between Larry Fink and First Boston8.

Figure 2: share of men, white and Ivy League graduates in the sample [Insert Figure 2]

As expected from our hypothesis, founders form a very specific cohort possessing the characteristics of the powerful in a very concentrated way (Useem and Karabel 1986). 97% of financial firm founders are white men. Exceptions include Susan Wagner and Barbara

Novick from BlackRock, as well as Orlando Bravo (Hispanic) and John Liew (Asian) from

Thoma Bravo and AQR management, respectively. Almost 60% of founders have an Ivy

League degree, compared with 46% (hybrid) and only 37% (public firms) of other cohorts in our sample.

However, this over-representation may be due to confounding factors such as type of education (which is particularly gendered) and social networks. We therefore modelled a binary state of being a founder (DV = 1) compared to a non-founder (DV = 0) with the independent and control variables previously discussed. Figure 3 presents a coefficient plot of a set of logistic regression models displayed in Appendix B. Coefficients are expressed as average marginal effects (Mood 2010).

Figure 3: probability of males, whites and Ivy League graduates to be a founder 8 Larry Fink was laid off by First Boston because he lost 100 million dollars in 1986; Leon Black left Drexel Burnham Lambert, when his former boss Michael Milken was indicted for racketeering and fraud; Ray Dalio was considered too rebellious and was laid off by Wall Street Brokers (Jakobs, 2016: 193) 27 [Insert Figure 3]

Model 1 (in gray) tests hypothesis two (H2) without controls, Model 2 (in black) with education and social network controls. Model 1 shows that being male, white and with a high social status is indeed associated with being a founder compared to a non-founder. Two of these results hold when adding education and social network variables. Males and whites have 7% and 5% higher (respectively) chance of being a founder. The Ivy League variable becomes non-significant when we add controls. Nevertheless, the overall evidence indicates that founders are a more privileged group than other financial elites in 2018.

3.3 Recruitment and promotion based on trust

Our third hypothesis posits that hybrid financial firms have a higher likelihood of having men, whites and people with a higher social status at their helm than public corporations. Figure 2 shows the proportion of males, whites and graduates of Ivy League universities in public and hybrid firms next to founders. We observe that men consist of 88% of hybrid firm leaders and 78% of public firm leaders, a statistically significant difference.

Also, whites compose a greater proportion of hybrid firm leadership (91%) than public firm leadership (87%), but this difference is statistically significant only at the 10% level. We also observe that Ivy League graduates are in higher proportion in hybrid firm leadership compared to public firm leadership (45% vs. 36%, p<0.05).

To avoid confounding issues, we ran a logistic regression, with DV = 1 (if the individual is a hybrid firm leader), or 0 (public firm leader). Results are shown in Figure 4

(for details see Appendix C).

Figure 4: Probability of being male, white and Ivy League in hybrid organizations

28 [Insert Figure 4]

Model 1 (in gray) tests H3 without controls, Model 2 (in black) with education and social network controls. According to the first model, managers who are male, white and enjoy a high social status have a higher likelihood to be selected into the leadership of a hybrid firm compared to a public firm. The ethnicity attribute is weaker and not statistically significant at p<0.10. But these results hold (or are reinforced) when adding education and social network variables: the coefficients stay high, and the ethnicity variable becomes significant at the 5% level. Males, whites and Ivy League graduates have an 11% higher chance of belonging to the leadership of a hybrid firm compared to public firms. These results endorse our hypothesis three (H3). Individuals in hybrid organizations seem to be promoted according to trust networks favoring high status white men.

It is useful to illustrate the neo-patrimonial hypothesis with a few specific examples of organizations. For each of the 40 firms we computed the relative frequency of men, whites and graduates of Ivy League universities (Figure 5 and 6).

Figure 5: firm composition in terms of proportion of whites and males [Insert Figure 5]

In Figure 5, hybrid organizations tend to be clustered in the upper right corner of the diagram.

Firms such as Renaissance Technologies, EnCap or David Kempner Capital Management are completely dominated by white males. Organizations in which white males are

(comparatively) less frequent are located on the left and lower-left part of the figure, including numerous public mutual funds and investment banks such as Bank of America, T.

Rowe Price, State Street, Citi Group or Morgan Stanley.

Figure 6: firm composition in terms of proportion of men and high status individuals

29 [Insert Figure 6]

In Figure 6, we see a stronger relationship between the frequency of men and high status individuals. Hybrid organizations again dominate the upper right parts of the figure. Male graduates from Ivy League universities dominate the leadership of private equity firms such as Bain Capital or Warburg Pincus, and also boutique investment bank partnerships such as

Centerview Partners. Organizations with comparatively fewer Ivy League alumni as top managers or directors are, again, publicly organized asset management firms and investment banks, including Bank of America, JP Morgan Chase, Wells Fargo and State Street.

3.3. Discussion

Our findings deliver several clear conclusions. First, that hybrid forms of organization have not increased uniformly across the financial sector over the last 30 years. They have increased in certain sub-sectors (hedge funds and private equity), yet remain less important in asset management and insignificant in investment banking. As a consequence, hybrid forms contribute to a polarization of the finance industry – cleaving it into bureaucratic and neo- patrimonial poles. Based on the hypothesis that these opaque and traditional financial organizations have been founded by high status challengers, furnished with both the necessary resources and a sense their social status was threatened by finance sector modernization, we have demonstrated that founders have been significantly more white, male and endowed with high social status. We argue that these characteristics are then perpetuated and reinforced by recruiting and promoting mechanisms based on trust and loyalty, typical of patrimonialism and distinct from processes in bureaucratic firms.

These results are at odds with accounts that portray the evolution of capitalism as a linear dynamic of modernization, in which finance and financial markets feature as vanguards

30 of rationalization, bureaucratization and automation. We argue that for theoretical reasons, these approaches have been blind to the patrimonial zones of current finance. Scholars of social studies of finance (Beunza and Stark 2004; Knorr-Cetina and Bruegger 2002;

MacKenzie 2008), working with ethnographic methods and drawing inspiration from Science and Technology Studies, approached finance as a particular case in studying the use of technology. They examined the most technologically advanced niches within finance: electronic trading floors, globally connected computer and information networks or other heavily technology based sub-sectors like high-frequency trading. Whereas these highly modern and technologized functions are undoubtedly important parts of contemporary finance, they should not be confounded with finance as a whole. Similarly, scholars studying how financialization replays Berle and Means’ theory of ownership and control have recently concentrated on highly digitized platform-players in the asset management industry (Braun

2020; Fichtner et al. 2017). This viewpoint, though important in understanding the rise of exchange traded funds, also ignores the patrimonial aspects of finance.

Nonetheless, it would be misleading to understand neo-patrimonialism as a return to the 19th or the 17th century, or merely as a kind of functional reaction to greater market instability or uncertainty (Tobias Neely, 2018). We argue that it is important to understand neo-patrimonialism as the outcome of strategies employed by a specific social group, occupying particular positions within finance. The lion’s share of those who founded successful hybrid firms in the hedge fund and private equity sector in the last quarter of the

20th century, were formerly well placed within large investment banks. They had well developed skills in financial management and carefully built networks, giving them access to huge amounts of capital and credit. Yet they interpreted the bureaucratization of these banks, the introduction of meritocratic principles, and the higher diversity as a threat to their status.

To found a hybrid firm was a way to become an entrepreneur, to avoid control and attention

31 from regulators or the public, and to increase compensation through new forms of remuneration or tax minimization. However, such neo-patrimonial niches can only exist and function in collaboration with segments of finance which are thoroughly rationalized (such as investment banking and asset management). These firms should be seen as part of a “field”

(Fligstein & McAdam, 2012) or a “relational marketplace” (Hall 2007). Hybrid firms were not only founded by people who grew up in an investment bank milieu – they also rely heavily on the “modern” pole of finance for credit or securities services. Neo-patrimonialism is thus only possible, because it is complemented by a bureaucratic pole.

In terms of sociological theory, we argue that the modernization perspective struggles to comprehend current trends in finance-led capitalism (Savage 2009; Samman, 2019), because it assumes a linear evolution of history, from one social order to the next. This implies (1) the coherence of social orders, (2) with elements which evolve at the same pace

(3) towards a desired or disliked end-state. It gives way to “before /after” narratives, with two or more stages in the process. In the modernization interpretation of financialization, capitalism passes through such stages: finance capitalism, managerial capitalism and investor capitalism – each with its own distinct set of actors and institutional logic. Our findings show that different sets of actors carrying different logics can co-exist within the same field. It follows that finance-led capitalism can be best understood as a recombination of bureaucracy and neo-patrimonial logics.

Conclusion

This article started from an observation: many scholars in the sociology of finance see financialization as a continuation of modernization – or even the technological vanguard of modern capitalism. Others argue that financialization has led to a return to former stages of capitalism that we can call neo-patrimonial. Our new analysis of this apparent paradox relies on the argument that from the 1970s onwards, specific, highly placed challengers within

32 finance developed “neo-patrimonial strategies” to secure what they felt “entitled to”. To study this, we conceived a new, granular analysis of the rise of hybrid organizations in the

US, investigated the profile of the founders of these firms and examined the social characteristics of top-management teams of the 40 most relevant US finance firms in 2018.

Using logistic regression modelling we demonstrate that founders, directors and top managers of LLCs and LLPs – disproportionately represented in hedge funds and private equity – are significantly more male, white and endowed with higher social status. Two illustrative figures then characterize the 40 top finance firms in terms of the extent of their patrimonialism.

Our first contribution concerns the relationships between organizations and inequality.

Observers continue to argue that contemporary Wall Street merely recruits the “best and the brightest”, and as a result, the financial sector would become vigorously meritocratic and blind to gender, race or social status. Others show that gender and race, for instance, remain important contemporary barriers to accessing top positions in finance (Ho 2009; Tobias

Neely 2018). Our contribution shows that both arguments can be right: finance may be both open and closed to outsiders, depending on the type of organizations in which individuals evolve. Structural theorists of discrimination suggest that bureaucracy tends to inhibit such practices, whereas recruitment based on informal networks enhances it (Dobbin et al. 2015;

Reskin and McBrier 2000). Certainly, our results show that “elite white men” are over- represented in hybrid organizations that are collegial and opaque to public scrutiny.

Our second contribution relates to the integration of organization and elite theories.

These theorists rarely mutually engage, despite the fact that most business activities take place in corporations owned and controlled by very specific groups within society. We take inspiration from works by Stearns and Allen (1996) and Palmer and Barber (2001) to integrate such diverse views as the organizational sociology of Fligstein (1990) and the corporate elite theory of Mizruchi (1982). We demonstrate that there is an interaction

33 between the organizational form and elite reproduction: hybrid firms tend to favor traditional elites, while public firms seem to diminish their top tier representation. We suggest a social mechanism – the relative importance of trust networks – as well as the historical process behind this fact: the rise of hybrid firms in some financial subsectors since the 1970s.

Our third and final contribution concerns the evolution of capitalism and the place financialization has within this history. We show that we should neither understand capitalism as a linear modernization, nor recent developments as a mere return to 17th or 19th century structures. Our understanding of the temporality of capitalism combines both linear and cyclical dynamics. Our results suggest that we must conceptualize contemporary, financial capitalism as a recombination of both modern and traditional elements.

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42 Figures and Tables

Table 1: The recombination perspective

Type of narrative Capitalism is Capitalism is Capitalism is both traditional modern Institutional logics Patrimonialism Bureaucracy Neo-patrimonialism Organizational Partnerships Public firms Hybrid firms form Elite reproduction Family ties & Meritocracy & relative Trust networks & homogeneity heterogeneity homogeneity Typical financial Early investment Investment banks, Hedge funds, private segment banks asset managers equity firms

recombination

43 Table 2: share of hybrid organizations according to US financial sub-sector in 2018

% corporate forms % hybrid forms Total Hedge funds 12.5 87.5 480 Private equity firms 25.0 75.0 2,641 Asset management 60.0 40.0 24,081 Investment banks 95.7 4.3 1,163 Total 57.4 42.6 28,365

44 Figure 1: share of hybrid firms among sub-sector incorporations (1972-2018)

45 Table 3: founders of largest finance firms in 2018 sample

Age at Former Name Firm founding Former firm department Former position Robert G. Select Equity Atchinson Adage Harvard Management Co Group Senior VP Phillip Thomas Gross Adage 41 Harvard Management Co Partner Peter A. Brooke Advent 55 TA Associates Founder Joshua Harris Appollo 25 Drexel Burnham Lambert M&A Marc J. Rowan Appollo 28 Drexel Burnham Lambert M&A MD & head of Leon David Black Appollo 39 Drexel Burnham Lambert M&A M&A International John Hannan Appollo 36 Drexel Burnham Lambert finance Co-director High-yield Craig Cogut Appollo 35 Drexel Burnham Lambert division Arthur Bilger Appollo 27 Drexel Burnham Lambert Corporate finance Head of CF Michael Gross Appollo 28 Drexel Burnham Lambert M&A High-yield Anthony Ressler Appollo 30 Drexel Burnham Lambert department Senior VP John Mihn Soo Asset Liew AQR 31 Goldman Sachs Management Vice President Asset Krail, Robert John AQR 31 Goldman Sachs Management Vice President David Gary Asset Kabiller AQR 34 Goldman Sachs Management Vice president Asset Cliff Asness AQR 32 Goldman Sachs management Team-leader Mitt Romney Bain Capital 37 Bain & Co Partner T. Coleman Andrews Bain Capital Bain & Co Partner Eric Kriss Bain Capital 35 Bain & Co Partner Seth Andrew Klarman Baupost 25 Mutual shares fund Internship Laurence Douglas Fixed income MD and Co- Fink Blackrock 35 First Boston, Blackstone division Head Mortgage Head of Trading, Robert S. Kapito Blackrock 31 First Boston, Blackstone securities VP M&A, fixed Susan Wagner Blackrock 27 Lehman, Blackstone income Barbara Novick Blackrock 28 First Boston, Blackstone Financial Ben Golub Blackrock 32 First Boston, Blackstone Engineering Vice President Investment Hugh Frater Blackrock 33 Lehman Brothers Banking Investment Managing Ralph Schlossstein Blackrock 38 Lehman Brothers Banking director Keith Anderson Blackrock 29 Stephen Schwarzman Blackstone 38 Lehman M&A MD Institutional Head of Raymond T. Dalio Bridgewater 27 Shearson Hayden Stone Futures department Daniel A. D’Aniello Carlyle 41 Marriot corporation M&A Vice president William E. Conway Carlyle 38 MCI Communications CFO David M. Rubenstein Carlyle 38 Own law practice Law Stephen Crawford Centerview Morgan Stanley CFO Blair Wayne Investment Effron Centerview 44 UBS Investment Bank. banking Vice Chairman

46 Robert Alan Investment Head of Global Pruzan Centerview 42 DresdnerKleinwortW’stein banking IB Adam Chinn Centerview 45 Wachtell, Lipton, Rosen & Katz Partner Marvin H. Davidson Davidson Kempner Thomas L. Davidson High-yield Kempner Kempner 35 First City Capital securities Vice President Real Estate Paul Singer Eliott 33 Donaldson, Lufkin Jenrette Division Attorney David B. Miller Encap 38 MAZE Exploration Inc Co-CEO Gary R. Petersen Encap 42 Energy Banking Group Senior VP D. Martin Phillips Encap 34 Energy Banking Group Senior VP Robert L. Zorich Encap 38 Trust Company of West Senior VP Investment Roger C. Altman Evercore 39 Lehman, Blackstone banking MD David Offensend Evercore 40 Lehman Brothers Austin Beutner Evercore 35 Blackstone Partner Henry Robert Kravis KKR 32 Bear Stearns Corporate finance Partner George R. Roberts KKR 32 Bear Stearns Corporate finance Partner Jerome Kohlberg KKR 51 Bear Stearns Corporate finance Israel A. Englander Millenium 41 Jamie Securities Co Partner/ founder Ronald Shear Millenium Amex Daniel Saul Och Och-Ziff 33 Goldman Sachs Property Trading Head of PT Howard L. Morgan Renaissance 37 University of Pennsylvania Mathematics Professor James Harris Simons Renaissance 44 Stony Brooks University Mathematics Professor Orlando Bravo Thoma Bravo 38 Morgan Stanley M&A Golder, Thoma, Cressey, Co-Founder & Carl Dee Thoma Thoma Bravo 58 Rauner Private equity MD James Coulter TPG 33 Robert M. Bass Group David Bonderman TPG 50 Robert M. Bass Group COO William S. Price TPG 37 GE Capital Strategic planning Vice president David Siegel Two Sigma 40 Tudor (D.E Shaw) CTO and MD John Albert Overdeck Two Sigma 32 D.E. Shaw and Amazon MD Mark Pickard Two Sigma John C. Bogle Vanguard 46 Wellington Chairman

47 Figure 2: share of men, white and Ivy League graduates in the sample

48 Figure 3: probability of males, whites and Ivy League graduates to be a founder

49 Figure 4: Probability of being male, white and Ivy League in hybrid organizations

50 Figure 5: firm composition in terms of proportion of whites and males

51 Figure 6: firm composition in terms of proportion of men and high status individuals

52 Asset managers # employees Date AUM (trillion $) Type of firm n BlackRock 14’900 1988 6.8 Public company 41 Vanguard 16’600 1975 5.3 Private company 21 State Street 40’100 1792 2.5 Public company 27 Fidelity 50’000+ 1946 2.5 Private company 24 Subsidiary PIMCO 2800 1971 1.9 (Allianz) 18 Capital Group 7500 1931 1.9 Private company 9 Wellington 2200 1928 1.0 LP 23 Subsidiary Nuveen 1200 1898 0.97 (TIAA) 23 Invesco 8900 1935 0.88 Public company 17 T. Rowe Price 7000 1937 0.99 Public company 22 Total/mean/mode 151200 1930 24.74 Public company 225 (Investment) Banks # employees Date Revenue (billion $) Type of firm n JP Morgan Chase 254’000 1799 6.2 Public company 23 Goldman Sachs 36’600 1869 6.9 Public company 22 BoA Merrill Lynch 205’000 1923/1914) 4.4 Public company 28 Morgan Stanley 60’300 1935 5.1 Public company 19 Citi Bank 204’000 1812 3.9 Public company 28 Wells Fargo & Co 258’700 1852 2.0 Public company 31 Jefferies & Co 12’700 1962 1.8 Public company 18 Lazard 3’000 1848 2.8 Public company 18 Evercore 1500 1995 1.4 Public company 16 Centerview Partners 300 2006 -- LLC 33 Total/mean/mode 1036100 1900 34.5 Public company 236 Hedge Funds # employees Date AUM (trillion $) Type of firm n Bridgewater 1700 1975 0.12 LP 17 AQR Capital 1000 1998 0.18 LLC 16 Renaissance 290 1982 0.11 LLC 10 Two Sigma 1400 2001 0.06 LP 14 Millenium 2800 1989 0.04 LLC 17 Elliott 175 (2008) 1977 0.04 Holding 13 Baupost Group 42 (2012) 1982 0.03 LLC 15 Och-Ziff 350+ 1994 0.03 Public company 17 Adage -- 2001 -- LLC 10 Davidson Kempner 347 1983 0.03 LP 9 Total/mean/mode 8104 1988 0.64 LLC 138 Private Equity # employees Date AUM (trillion $) Type of firm n Carlyle Group 1600 1987 0.20 Public company 29 Texas Pacific Group -- 1992 -- LP 24 KKR 1200 1976 0.15 Public company 15 Blackstone Group 2360 1985 0.47 Public company 23 Apollo Global 250 1990 0.31 Public company 24 EnCap Investments 50 1988 LP 7 Advent International 300+ 1984 0.03 Private company 21 Warburg Pincus 500-1000 1966 0.06 LLC 35 Bain Capital 1000+ 1984 0.11 LP 14 Thoma Bravo 60 1980 0.03 LLC 15 Total/mean/mode 7570 1983 1.36 Public company 207 Appendix A: U.S sample of financial elites (N= 40 firms, n=806 individuals)

53 Appendix B: probability of being a founder vs. non founder

Model 1 (n=718) Model 2 (n=692) AME SE p AME SE p Male 0.08 0.02 p<0.001 0.07 0.02 p<0.001 Sociodemographics White 0.07 0.02 p=0.001 0.05 0.02 p=0.025 Ivy league 0.05 0.02 p=0.014 0.01 0.02 NS MBA 0.06 0.03 p=0.064 Business related degree -0.01 0.03 NS Education PhD 0.07 0.06 NS Science related degree -0.04 0.02 p=0.087 Other activities 0.03 0.03 NS Philanthropist 0.05 0.03 p=0.052 Social networks Policyplanning 0.01 0.02 NS Board member 0.00 0.02 NS NOTE. AME= Average Marginal Effects; SE= Standard Errors; NS=Non-significant at the p<0.05 level.

54 Appendix C: probability of heading a hybrid vs. public firm

Model 1 (n=718) Model 2 (n=692) AME SE p AME SE p Male 0.13 0.05 p=0.004 0.11 0.05 p=0.016 Sociodemographics White 0.10 0.06 p=0.084 0.11 0.05 p=0.042 Ivy league 0.10 0.04 P=0.007 0.11 0.04 p=0.003 MBA 0.12 0.04 p=0.007 Business related degree -0.07 0.05 NS Education PhD 0.27 0.06 p<0.001 Science related degree 0.03 0.05 NS Other activities -0.05 0.05 NS Philanthropist -0.13 0.05 p=0.011 Social networks Policyplanning -0.13 0.04 p=0.003 Board member -0.18 0.04 p<0.001 NOTE. AME= Average Marginal Effects; SE= Standard Errors; NS=Non-significant at the p<0.05 level. X

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