What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences

by Steven G. Mandis

  24. A. R. Sorkin’s Too Big to Fail (New York: Penguin Press, 2009) provides a detailed timeline of events that occurred as the financial system teetered on the brink of collapse. It documents a number of phone calls and other communications between Blankfein and Goldman and between Paulson and former Goldman employees, which a few people have pointed to as evidence of Goldman benefiting from its ties to government.

  Conclusion

  1. According to the New York Times, since the close of its May 1999 IPO to September 2011, Goldman’s stock has returned nearly 175 percent. The Standard & Poor’s 500-stock index over the same period has lost almost 2.9 percent; see http://dealbook.nytimes.com/2011/01/18/study-points-to-windfall-for-goldman-partners/.

  2. http://money.cnn.com/2012/07/21/news/economy/dodd-frank/index.htm.

  3. Ibid.

  4. www.followthemoney.org/press/ReportView.phtml?r=425.

  5. P. Weinberg, “Wall Street Needs More Skin in the Game,” Wall Street Journal, September 30, 2009, http://online.wsj.com/article/SB10001424052748704471504574443591328265858.html.

  6. Bear Stearns recently agreed to settle a 2009 class action suit brought by its shareholders, who lost most of their investments when the firm started to collapse, the value of their shares falling from more than $170 per share to as little as $2, although J.P. Morgan paid them $10 per share when it bought Bear Stearns. According to Tom Braithwaite and Tracy Alloway of the Financial Times, the $275 million settlement, agreed upon without any admission of wrongdoing, is “a rare example of senior Wall Street figures being held accountable for allegations of misconduct.” Certain executives and the firm itself were accused of “misleading investors about the true health of the investment bank … [The] company used its misleading models to inflate asset values and revenues and to offer the public artificially low calculations of its value at risk, an estimate of the amount a bank could lose over a single day.” The executives’ portion of the settlement will most likely be covered by insurance.

  7. C. A. Hill and R. W. Painter, “Another View: A Simpler Rein Than the Volcker Rule,” New York Times, October 28, 2011, http://dealbook.nytimes.com/2011/10/28/another-view-a-simpler-rein-than-the-volcker-rule/.

  8. Ibid.

  9. According to Jack and Suzy Welch, “In fact, soft culture matters as much as hard numbers … And yet, for some reason, too many leaders think a company’s values can be relegated to a five-minute conversation between HR and a new employee. Or they think culture is about picking which words—do we ‘honor’ our customers or ‘respect’ them?—to engrave on a plaque in the lobby. What nonsense … Look, it’s Management 101 to say that the best competitive weapon a company can possess is a strong culture. But the devil is in the details of execution. And if you don’t get it right, it’s the devil to pay.” See Jack and Suzy Welch, “Goldman Sachs and a Culture-Killing Lesson Being Ignored,” CNNMoney, April 12, 2012, http://management.fortune.cnn.com/2012/04/12/goldman-sachs-culture-values/.

  10. A senior financing banker at Goldman, who made partner in 2008, said, “Goldman looks at three things: your commercial effectiveness; your managerial and entrepreneurial skills; and your culture and values. All three are weighted equally and it is the right balance of the three combined that will determine whether you make partner or not.” However, another current partner said: “Unofficially, commercial effectiveness is above [the rest]. It helps you stand out.” See www.efinancialnews.com/story/2012-11-12/goldman-sachs-protecting-the-partnership.

  11. Jack and Suzy Welch wrote that when an employee is not behaving consistently with the principles, there needs to be a public message. “And the only antidote is that Jim and Sally need to be sent home, and not with the usual ‘They want to spend more time with their families’ BS out of the lawyers and HR, but with the truth. ‘Jim and Sally had great numbers,’ everyone needs to be told, ‘but they didn’t demonstrate the values of this company.’ We guarantee that such a public ‘diss play,’ to put it more politely, will have more impact than a hundred ‘Our values really, really matter!’ speeches by the CEO.” See Welch and Welch, “Goldman Sachs and a Culture-Killing Lesson Being Ignored.”

  12. J.P. Morgan has been criticized recently because the committee responsible for overseeing risks “wasn’t up to the task of monitoring the bank’s risk.” The committee includes, for example, Ellen Futter, head of the American Museum of Natural History, who served on AIG’s governance committee just before AIG collapsed. “Other committee members include the CEO of a defense contractor and a man who hasn’t worked on Wall Street for 25 years. What the committee’s missing that all the other big banks have: people who worked as financial risk managers.” (See J. Berman, “JPMorgan Chase Risk Management Committee Missing Bank Directors, Financial Risk Managers,” Huffington Post, May 25, 2012, http://www.huffingtonpost.com/2012/05/25/jpmorgan-chase-risk-management-committee_n_1546215.html.)

  13. According to Jack and Suzy Welch, “An organization’s culture is not about words at all. It’s about behavior—and consequences. It’s about every single individual who manages people knowing that his or her key role is that of chief values officer, with Sarbanes–Oxley-like enforcement powers to match. It’s about knowing that at every performance review, employees are evaluated for both their numbers and their values …” See Welch and Welch, “Goldman Sachs and a Culture-Killing Lesson Being Ignored.”

  14. Jack Welch with Suzy Welch, Winning (New York: HarperCollins, 2005).

  Appendix A

  1. Scott A. Snook, Friendly Fire: The Accidental Shootdown of U.S. Blackhawks over Northern Iraq (Princeton, NJ: Princeton University Press, 2002), 225.

  2. S. Dekker, Drift into Failure: From Hunting Broken Components to Understanding Complex Systems (Farnham, UK: Ashgate Publishing, 2011). Johan Bergstrøm (“Listen to Sidney Dekker Lecturing about Drift into Failure,” October 10, 2011, http://johanniklas.blogspot.com/2011/10/listen-to-sidney-dekker-lecturing-about.html.) notes, “The drift concept offers the theory of how organizational failure and success emerge in incubation periods not characterized by incomplete interaction, but by non-linear effects of local interactions in environments characterized by goal-conflicts, competition and uncertainties.”

  3. S. Dekker, Drift into Failure, 179.

  4. Ibid.

  5. Dekker, Drift into Failure, 14.

  6. Dekker, Drift into Failure, 17.

  7. Dekker, Drift into Failure, 17, 116.

  8. Snook points out that the word “drift” implies a subtle movement. He believes that detecting such movement “requires a sensitivity to the passage of time. Single snapshots won’t do.” (See Snook, Friendly Fire, 225.) All explanations assume some passage of time. One of the goals of my study is to extend it further, beyond an event.

  9. In Normal Accidents: Living with High-Risk Technologies (New York: Basic Books, 1984), Charles Perrow explains a normal accident as normal “not in the sense of being frequent or being expected … it is normal in the sense that it is an inherent property of the system to occasionally experience their interaction.”

  10. Barry A. Turner, Man-Made Disasters (London: Wykeham Publications, 1978), 85.

  11. Turner, Man-Made Disasters, 72.

  12. L. Peattie, “Normalizing the Unthinkable,” Bulletin of Atomic Scientists, no. 3 (1984): 34.

  13. E. S. Herman, Triumph of the Market: Essays on Economics, Politics, and the Media (Cambridge, MA: South End Press, 1999), 99.

  14. Ibid.

  15. D. Vaughan, The Challenger Launch Decision: Risky Technology, Culture, and Deviance at NASA (Chicago: University of Chicago Press, 1996), 61.

  16. Vaughan, The Challenger Launch Decision, xiii.

  17. Vaughan, The Challenger Launch Decision, 39.

  18. Normalization differs from Snook in that it starts in a subunit, but the subunit alters the beliefs, understandings, and practices of the whole organization. Also, the normalization of deviance is pushed forward by characteristics such as structural secrecy, organizational cu
lture, and the external competitive environment. NASA organizational culture is changed by the external environment, so NASA, formerly R&D-focused when apolitical and provided with abundant funding, becomes more like a business organization—competing for scarce resources, making deadlines. The normalization of deviance refers to people making decisions and enacting practices over time so that at the first decision they accepted a technical anomaly that deviated from expectations, then continued to use that as a base, incrementally expanding the amount of deviation they found acceptable. It is agency, shaped by organizational and environmental factors. So what happened at NASA was not drift in the way Snook defines it because drift detaches outcomes from people’s action which is different than Vaughan’s normalization. From a personal communication with Vaughan, 2013.

  19. Vaughan, The Challenger Launch Decision, 55.

  20. Vaughan, The Challenger Launch Decision, 42.

  21. Vaughan, The Challenger Launch Decision, 238. The compartmentalizing, divisive effects of rapid organizational growth are also evident in the appearance of structural and functional “silos.” The more complex an organization’s structure becomes, the more likely silos are to emerge, as the result of the division of labor. G. Tett (Fool’s Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe [New York: Free Press, 2009]) recognizes such silos as one of the big issues at a large bank, noting that the silos are widely accepted self-contained realms of activity and knowledge that only the experts in the silos can truly understand.

  22. Vaughan, The Challenger Launch Decision, 67. In the Challenger case, Vaughan points out that the NASA culture changed when the politics of the space shuttle program changed. The culture of the organization did not drift slowly over time. The organization culture impinged upon decision making for practices that changed over time, and the normalization of deviance was a cultural belief in the work group that was spread throughout the organization—in relation to one particular component. Snook’s argument in practical drift is that the practices drifted over time.

  23. Vaughan, The Challenger Launch Decision, 273.

  24. Vaughan’s theory and framework were laid out in her 1985 book, Controlling Unlawful Organizational Behavior: Social Structure and Corporate Misconduct (Chicago, University of Chicago Press, 1985). The normalization of deviance and culture and institutional theory in The Challenger Launch Decision expanded on that original framework because Challenger gave her different data. Diane Vaughan first described structural secrecy in 1983.

  25. Vaughan, The Challenger Launch Decision, 15. Perhaps Goldman had an advantage over many of its peers in this regard, because it had clear norms in its business principles; problems arose when behavior started to shift away from those norms.

  26. Technology, technically, is still an organizational characteristic in Vaughan’s framework because the capability is internal to each organization. One also could logically address technology as a separate component within Vaughan’s competitive environment category, as everyone was using the same devices to stay in the competition and therefore it became normative, so it fits both those central concepts. However, I believe that technology should be extracted out of organization or competition as its own factor in order to analyze and monitor it more closely. Technology is playing such an important role in organizational change, and is changing so rapidly, that I believe for this case it was helpful to isolate it.

  27. There are other sociological processes and theories that I considered for my framework, such as societal pressures. There has been some discussion about whether to include society as a factor in the framework, and if so, how that might be accomplished. Organization scholars have incorporated it as environment or institutions, paring it down from the more global term, society. Aldrich wrote Organizations and Environments in the 1970s (Englewood Cliffs, NJ: Prentice Hall, 1979), and A. L. Stinchcombe wrote “Social Structure and Organizations” in 1965 (J. G. March, Handbook of Organizations [Chicago: Rand McNally & Co., 1965], 142–193). More recently, Sagiv and Schwartz (“Cultural Value in Organizations: Insights for Europe,” European Journal of International Management 1 [2007]: 176–190) argue that the surrounding society, the personal value priorities of organizational members, and the nature of the organization’s primary tasks influence organizational culture because organizations operate under societal pressure. In other words, organizations must comply with norms and values of societies. Further, organizations consist of individuals who introduce their own value preferences to the organization, which represents the way people select actions, evaluate individuals and events, and explain their actions and evaluations—all of which shape organizational culture. Therefore, frameworks need to account for the possibility of societal pressure as well as the different natures of businesses. Sagiv and Schwartz believe no ethnographer would overlook the important variable of society.

  I think this is a very interesting idea and is just one example in which this case study could have been improved. However, I found in this case that it would be challenging for me to have a framework that included society in depth over a long period of time. In 1958, Kroeber and Parsons recommended that culture and social system (society) be analyzed as independent (“The Concept of Culture and Social System,” American Sociological Review 23, no. 5 [1958]: 582–583). This, of course, was not to say that the two systems are not related, or that various approaches to the analysis of the relationship may not be used. They thought it was often beneficial to researchers to hold constant either cultural or societal aspects of the same concrete phenomena while addressing attention to the other. For this study, I adopted Kroeber and Parsons’ recommendations because I found that in my empirical work it was too vague over long periods of time and needed to be broken into its relevant categories.

  Appendix B

  1. See Diane Vaughan, The Challenger Launch Decision: Risky Technology, Culture, and Deviance at NASA (Chicago: University of Chicago Press, 1996); and Diane Vaughan, “The Dark Side of Organizations: Mistake, Misconduct, Disaster,” Annual Review of Sociology 25, no. 1 (1999): 271–305, doi: 10.1146/annurev.soc.25.1.271.

  Appendix C

  1. “Goldman Sachs’ Revolving Door,” CBS News, April 7, 2010.

  2. http://www.nytimes.com/2008/10/19/business/19gold.html?pagewanted=all&_r=0.

  Appendix D

  1. http://www.businessweek.com/1999/99_20/b3629102.htm.

  Appendix E

  1. J. Creswell and B. White, “The Guys from ‘Government Sachs,’” New York Times, October 17, 2008, http://www.nytimes.com/2008/10/19/business/19gold.html?pagewanted=all&_r=0.

  Appendix G

  1. D. Vaughan, “The Dark Side of Organizations: Mistake, Misconduct, and Disaster,” Annual Review of Sociology 25, no. 1 (1999): 271–305, doi: 10.1146/annurev.soc.25.1.271.

  2. Allan Sloan, “An Unsavory Slice of Subprime,” Washington Post, October 16, 2007, http://www.washingtonpost.com/wp-dyn/content/article/2007/10/15/AR2007101501435.html.

  3. Andrew Clark, “Success Shines Unwelcome Spotlight on to Goldman Sachs,” The Guardian, December 21, 2007, http://www.guardian.co.uk/business/2007/dec/21/goldmansachs.useconomy.

  4. M. Taibbi, “The Great American Bubble Machine,” Rolling Stone, April 5, 2010, http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405.

  5. “Mergers & Acquisitions Review,” Thomson Reuters, 2011, http://dmi.thomsonreuters.com/Content/Files/4Q11_MA_Financial_Advisory_Review.pdf.

  6. G. Smith, “Why I Am Leaving Goldman Sachs,” New York Times, March 14, 2012, http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?pagewanted=all.

  Acknowledgments

  I would like to thank the faculty, graduate students, and administrators at the Department of Sociology at Columbia University, and in particular Professor David Stark, my thesis adviser and mentor, and Professor Josh Whitford, the director of graduate studies, for their training, support
, and advice. In addition, I would like to thank the faculty and administrators, as well as my MBA and Executive MBA students, at Columbia Business School for their encouragement.

  I want to thank my agent, Susan Rabiner, who, together with my editor at Harvard Business Review Press, Tim Sullivan, saw my PhD dissertation for what it was—a book not just about Goldman Sachs, but a book that brings business and finance together with sociology to improve the study of management, sociology, and public policy. They understood my vision and helped make it a reality.

  Thank you to those I interviewed. I would love to recognize your contributions, patience, and time on an individual basis, but I want to respect your privacy.

  Many professionals, professors, students, classmates, research assistants, and friends helped with my training and/or the book. Many thanks to Gary Ashwill, Red Ayme, Peter Bearman, Erin Brown, Soman Chainani, Manu Chander, Sidney Dekker, Helena Ding, Yige Ding, Erin Dolias, Nate Emge, Gil Eyal, Michelle Fan, Stephani Finks, Joe Gannon, Jie Gao, Kyle Gazis, Katrin Giziotis, Angel Gonzalez, Angelito Gonzalez, Simon Gonzalez, Ryan Hagen, Kathryn Harrigan, Charles Harrison, Simon Head, Jon Hill, Gailen Hite, Karen Ho, Paul Ingram, Jane Jacobi, Sam Johnson, El Kamada, Ko Kuwabara, Nan Liu, Emily Loose, Yao Lu, Evangelos Lyras, Donald MacKenzie, Jeff Madrick, Kinga Makovi, Yarden Mariuma, Joanne Martin, Charles Masson, Debra Minkoff, Carlos Morei, Joy Nee, Olivia Nicol, James O’Shea, Neni Panourgia, Christina Perez, Allison Peter, Damon Phillips, Katherine Phillips, Joyce Plaza, Paula Reid, Ernesto Reuben, Tim Rich, Nan Rothschild, Jonathan Salky, Krista Schult, Hersche Shintre, Hana Sromova, Richard Swedberg, Noriyuki Takahashi, Matthias Thiemann, Mathijs de Vaan, Diane Vaughan, Oliver Wai, Karl Weber, Joanne Willard, Sang Won, Stacy Xing, and Xu Zang.

  I would like to thank those who have researched and written about Goldman Sachs over the years, because without their diligent work it would have been impossible to write my PhD dissertation. Many are cited in my work and some are not, but I want to specifically acknowledge a few: Justin Baer, William Cohan, Susanne Craig, Charles Ellis, Lisa Endlich, David Faber, Richard Freedman, Boris Groysberg, Jonathan Knee, Susan McGee, Bethany McLean (who was in my Goldman 1992 M&A analyst class), Gretchen Morgenson, Andrew Serwer, Scott Snook, David Ross Sorkin, Louise Story, Matt Taibbi, Gillian Tett, Jill Vohr, the US Senate Subcommittee on Investigations, and the US Securities and Exchange Commission.