Throughout the meeting, Paulson asked questions that he felt should be on Bryan’s mind, challenging us—grilling us, really—and posing follow-up questions to Bryan’s own. I wondered, Which one is the client—Bryan or Paulson? That’s when I learned an important lesson: they were one and the same. To Paulson, and therefore to Goldman, Bryan was not a client; rather, he was a friend. This was Goldman’s first business principle in action. In that meeting, Paulson embodied the spirit of that principle and of Goldman at its best. He didn’t just walk a mile in the client’s shoes; he ran a marathon. This rigor of service, along with his Midwestern work ethic and values, led not only to his own many professional successes but also to the many successes for his clients and for the firm he would one day lead.
Flash-forward to 2008. After I left Goldman and my partners and I decided to review strategic alternatives for our firm, I moved to the other side of the table as a Goldman banking client. After interviewing several investment banks, I voted to hire Goldman because it had the best overall team, knowledge about the markets, understanding of how to present our firm, and access to the key decision makers at potential buying firms. However, I noticed a contrast with my early years at Goldman. I certainly did not feel as though anyone from Goldman was looking at things from my perspective in the same way Paulson had at Sara Lee. No Goldman banker sat on my side of the table and raised the questions I should have been considering. In fact, I was concerned that Goldman cared more about its larger and more important clients that might consider buying our firm (and would remain Goldman clients) than about us. I had the same sense with most of the other banks that pitched for the assignment. Maybe I held Goldman to a higher standard. When we hired Goldman, I requested that John S. Weinberg—the grandson and son of former Goldman senior partners, and someone I had worked for at Goldman—help oversee the project. I felt he embodied the spirit and standards that had been in effect when I had joined the firm. Goldman was highly professional and extremely capable, but for some reason the shift was enough for me to want John S. Weinberg involved. (For more information about the Weinberg family and other key Goldman partners, see appendix F.)
The Study
While my experiences at Citigroup and McKinsey, as well as in helping build a firm, combined with distance, time, and maturity, helped put my experiences at Goldman into perspective, my insider experience also made me aware of how difficult it can be to perceive this kind of change from within, even though examples such as these may seem to suggest that the change should be obvious. Also, recognizing that change had occurred and understanding why and how that’s the case are very different propositions. This is why the perspective from sociological theory is so helpful. Personal perspective isn’t enough.
The analysis of Goldman that I offer here is based on established sociological approaches to studying organizational change, behavior, and innovation, an approach I’ve learned at both the sociology department and the business school at Columbia University. It doesn’t come naturally to me. Having been a banker, consultant, and investor, typically I try to understand problems quantitatively. Those in the financial industry seem to share this trait, because they have a certain comfort with quantifying things and using numbers and metrics to hold people accountable. This approach is also followed by many regulators, policy makers, and economics and finance professionals. They focus on quantitative measures—such as imposing regulatory capital requirements or limiting activities to certain percentages—as the best way to prevent other crises.
The quantitative approach is reasonable, but it is not complete. Those trying to regulate Goldman and similar financial institutions have focused relatively little on the social activity, structures, and functions of their organizational culture—the hallmarks of the sociological approach—and I believe this focus will help get us closer to the root of the issues.
This book is based on my doctoral dissertation in sociology at Columbia, work that I started in 2011. It is the result of more than 100 hours of semistructured interviews with over fifty of Goldman’s partners, clients, competitors, equity research analysts, investors, regulators, and legal experts.32 I also researched business school case studies, news reports, and books about Goldman; quotations from those sources are peppered throughout the book. In addition, I analyzed publicly available documents filed by Goldman with the SEC (including financial data), congressional testimony, and legal documents filed in lawsuits against Goldman.
The purpose of going beyond interviews was to challenge, support, and illuminate the interviewees’ and my own conclusions. I suspect that many of the people to whom I spoke are bound by nondisclosure agreements, but I never asked. I did agree that I would keep their participation confidential and not quote them. I did not take notes during the interviews, nor did I use a recording device. The only interviewee whose name I disclose, with his permission, is John Whitehead. He worked at Goldman from 1947 to 1984. Since he wrote the original business principles, he was able to clearly describe what he meant when he wrote them and what the culture was like at the time.33
It is not my intent to glorify or vilify any individual, group, or era in Goldman’s history, although I suspect parts will be used to do so. I’ve tried not to be influenced by nostalgia for the Goldman that once was, and I’ve tried to recognize that the people I interviewed were looking back in hindsight and may have had agendas or other issues, something I tried to overcome by speaking to many different people and by balancing the interview data with other information and analysis. I’ve tried not to be affected by many people’s contempt for the firm or by the recent economic recovery. I have relied on publicly available data to confirm and disprove various claims and theories advanced by those I interviewed.34
I do not wish to assert that the change in culture at Goldman I’ve analyzed is necessarily change for the worse, or that the changes will lead to an organizational failure or a disaster (though some would argue that it does). The concept of drift, loosely defined, has often been used to study how a series of small, seemingly inconsequential changes can lead to disaster, such as the explosion of the space shuttle Challenger or the accidental shooting of two Black Hawk helicopters over Iraq in 1994 by US F-15 fighter jets. Though the change at Goldman is different in a number of regards from both of those examples, they do nonetheless offer important insights into why and how Goldman’s culture has drifted. In both cases—analyzed by Columbia University sociologist Diane Vaughan and Harvard Business School professor Scott Snook, respectively—pressures to meet organizational goals generally caused an unintended and unnoticed slow process of change in practices and the implementation of them, which in those cases led to major failures.35 Each tiny shift made perfect sense in the local context, but together they created a recipe for disaster.
My analysis also draws on the sociological literature about the normalization of deviant behavior, which illuminates processes by which a deviance away from original values and culture can become socially normalized and accepted within an organization. Another factor that clearly comes through is that Goldman’s business has become more complex, and that there is less cross-department and other communication, which contributed to what Diane Vaughan calls structural secrecy—the ways in which organizational structure, the flow of information, and business processes tend to undermine the understanding of change that may be taking place.35 (For more on these concepts and an academic study of organizational cultural drift, see appendix A.)
My argument, in essence, is that Goldman came under numerous types of pressure—organizational, competitive, regulatory, technological—to achieve growth, and that pressure, from both inside and outside of Goldman, resulted in many incremental changes. Those included changes in the structure of the firm, from a partnership to a public company, which in turn accelerated many changes already occurring at the firm. The change in structure also limited executives’ personal exposure to risk, as well as ushering in changes in compensation policies, which led to different i
ncentives. The pressure for growth resulted in the mix of business also shifting over time, with trading becoming more dominant, which carried its own impetus for change. The growing complexity of the company’s business also led both to more structural secrecy and to more potential for conflicts of interest. At the same time the external environment was also rapidly changing and impacting the firm.
These and many other changes, added up over time, caused Goldman to drift from the original interpretation of the firm’s principles, most notably from the first principle of always putting clients’ interests first. As the firm got larger and growth became more challenging because of the law of large numbers, there was even more pressure to change the standards to allow the maximum opportunities. Those within Goldman were unable to appreciate the degree of change at the time, and are unable to now, due in part to a process of normalization of the deviance from the firm’s principles that occurred as those changes unfolded. That blindness (or willful blindness) to the degree of change was enabled in part by rationalization and also by the sense that the firm serves a higher purpose because of the good works of the firm and its alumni, which mitigated against recognition from within that the firm was engaging in conflicts.
Whether or not this process of drift is a harbinger of potential failure at the firm is an open question. Certainly there is reason to worry that the many interdependent and compounding pressures that led Goldman to slowly change and adopt its new standard of ethics from one that was a higher than legal requirement to meeting only the legal requirements will combine with its increasing size, more complexity, and greater interrelatedness, and the consequences will be an increasing risk of conflicts and organizational failure.
Since Goldman plays such a prominent role in the economy, as do other investment banks, this is an urgent issue for further exploration. Maybe even more so because I believe that Goldman is becoming even more important and powerful in our economic system. Goldman almost went bankrupt in the late 1920s, was struggling in 1994, and took government money directly and indirectly in order to hold off possible collapse in 2009 (Goldman denies this), even despite the profits or protection (depending on one’s view) from the infamous “hedging” bets taken against toxic mortgage assets. Many other financial firms disappeared, of course; the economy was near collapse, and taxpayers were left with an enormous bill. I hope the analysis in this book can demonstrate that sociology can contribute to the public understanding and debate about risks in the system.
I also hope the book will help leaders and managers consider the dangers that can accompany the responses to organizational, competitive, technological, and regulatory pressures in striving to meet organizational goals.
Finally, I hope the book is an interesting journey inside Goldman, with which I’ll also seek to answer a handful of questions that continue to nag other observers: why Goldman performed so well (relatively speaking) during the financial crisis, what role Lloyd Blankfein and the trading culture he is associated with played in the change, and why clients continue to flock to Goldman.
This book isn’t intended as a history of Goldman—there are several authors who have admirably tackled that job (and without which this study would not be possible)—but I have also included a Goldman timeline and short biographies on selected Goldman executives in the appendices to help a reader unfamiliar with Goldman’s history or people.
Part One
HOW GOLDMAN SUCCEEDED
Chapter 2
Shared Principles and Values
IN 1979, GOLDMAN CO-SENIOR PARTNER JOHN WHITEHEAD wrote down the firm’s principles “one Sunday afternoon.” Whitehead explained, “In the first draft, there were ten principles, and somebody told me that it looked too much like the Ten Commandments, so I made it into twelve. I believe it’s up to fourteen now, because the lawyers got hold of it and they’ve changed a few words and added to it a little bit.”1 Although he helped bring in deal after deal and helped make strategic decisions for Goldman, Whitehead said that committing the firm’s values to words on paper was his greatest contribution.2 More than anything else, it was a statement about the perceived power of the codified values to nourish and support the partnership culture.3
From my interviews with those who were partners in the 1980s, it is apparent that all of them thought the principles reflected the culture and agreed with and relied upon them, which they believed allowed the firm to be less hierarchical than its peers.4 Although many firms now have codified principles of ethical behavior (some more revered than others), Whitehead’s commandments were revolutionary for the Wall Street at the time.5 The principles promoted cohesiveness in a firm with decentralized management, among Goldman partners who were owners and managers of businesses.
The list of twelve principles was approved by the management committee—which is responsible for policy, strategy, and management of the business and is chaired by the head of the firm—and was then distributed to every Goldman employee. A copy was sent to each employee’s home as well to help family members understand and cope with the long hours and extensive travel demanded of their loved ones.6 Whitehead’s hope was that family members would be proud of their association with an ethical firm that espoused high standards, and that employees—especially new partners with heavy travel schedules—would feel less guilty about spending so much time away from home.7 Goldman managers were expected to hold quarterly group meetings for the sole purpose of discussing the firm’s values and principles as they applied to the group’s own business.8 When I started at Goldman in 1992, it was typical, when introducing ourselves and the firm in initial meetings with clients, to include the “Firm Principles” on the first page of the presentation (essentially a sales pitch), letting the clients know what differentiated Goldman from its competitors.9
By the time of the tech boom in the late 1990s, the practice of managers holding regular meetings to specifically discuss the principles seems to have been discontinued, although they were certainly discussed in general meetings and in training sessions. One current Goldman partner told me that the principles are still talked about and discussed.10 They have not been abandoned, but he believes they are not as revered as they once were. He told me he could not recall seeing the principles hanging on the walls like they used to, although they can be found in annual reports and on Goldman’s website. However, the partner explained that with the recent regulatory and legal scrutiny, along with media attention, there is a renewed focus and more training sessions on the business principles.
Goldman’s principles were modified slightly over the years when, as Whitehead put it, the lawyers got hold of them. I also remember when a fellow analyst wrote a memo in 1992 pointing out grammar and punctuation errors in the principles and sent it to a member of the management committee. I believe a few of his recommended changes were made. As mentioned earlier, the most significant modification to the list of principles, made just before Goldman went public, was the addition of the principle related to returns to shareholders, which was given prominence by being listed third.
Here are the principles (as updated, now including fourteen):
Our clients’ interests always come first. Our experience shows that if we serve our clients well, our own success will follow.
Our assets are our people, capital and reputation. If any of these is ever diminished, the last is the most difficult to restore. We are dedicated to complying fully with the letter and spirit of the laws, rules and ethical principles that govern us. Our continued success depends upon unswerving adherence to this standard.
Our goal is to provide superior returns to our shareholders. Profitability is critical to achieving superior returns, building our capital, and attracting and keeping our best people. Significant employee stock ownership aligns the interests of our employees and our shareholders.
We take great pride in the professional quality of our work. We have an uncompromising determination to achieve excellence in everything we undertake. Though we may be inv
olved in a wide variety and heavy volume of activity, we would, if it came to a choice, rather be best than biggest.
We stress creativity and imagination in everything we do. While recognizing that the old way may still be the best way, we constantly strive to find a better solution to a client’s problems. We pride ourselves on having pioneered many of the practices and techniques that have become standard in the industry.
We make an unusual effort to identify and recruit the very best person for every job. Although our activities are measured in billions of dollars, we select our people one by one. In a service business, we know that without the best people, we cannot be the best firm.
We offer our people the opportunity to move ahead more rapidly than is possible at most other places. Advancement depends on merit and we have yet to find the limits to the responsibility our best people are able to assume. For us to be successful, our men and women must reflect the diversity of the communities and cultures in which we operate. That means we must attract, retain and motivate people from many backgrounds and perspectives. Being diverse is not optional; it is what we must be.
What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences Page 5
