What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences
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So has the culture at Goldman changed or not? And if so, why and how? It strains credulity to think that the firm’s culture could have changed so dramatically between 2006, when the firm was so generally admired, and 2009, when it became so widely vilified. Once I decided that these questions were worth investigating—whether Goldman’s culture had changed and, if so, how and why—I chose to start from 1979, when John Whitehead, cochairman and senior partner, codified Goldman’s values in its famous “Business Principles.” As many at Goldman will point out, those written principles are almost exactly the same today as they were in 1979. However, that doesn’t necessarily mean adherence to them or that the interpretation of them hasn’t changed. What I’ve discovered is that while Goldman’s culture has indeed changed from 1979 to today, it didn’t happen for a single, simple reason and it didn’t happen overnight. Nor was the change an inexorable slide from “good” to “evil,” as some would have it.
There are two easy and popular explanations about what happened to the Goldman culture. When I was there, some people believed the culture was changing or had changed because of the shifts in organizational structure brought on by the transformation from private partnership to publicly traded company. Goldman had held its initial public offering (IPO) on the NYSE in 1999, the last of the major investment banks to do so. In fact, this was my initial hypothesis when I began my research. The second easy explanation is that, whatever the changes, they happened since Lloyd Blankfein took over as CEO and were the responsibility of the CEO and the trading-oriented culture some believe he represents.
I found that although both impacted the firm, neither is the one single or primary cause. In many ways, they are the results of the various pressures and changes. The story of what happened at Goldman after 1979 is messy and complex. Many seemingly unrelated pressures, events, and decisions over time, as well as their interdependent, unintended, and compounding consequences, slowly changed the firm’s culture. Different elements of its culture and values changed at different times, at different speeds, and at different levels of significance in response to organizational, regulatory, technological, and competitive pressures.
But overall, what’s apparent is that Goldman’s response to these pressures to achieve its organizational goal of being the world’s best and dominant investment bank (its IPO prospectus states, “Our goal is to be the advisor of choice for our clients and a leading participant in global financial markets.” Its number three business principle is “Our goal is to provide superior returns to our shareholders.”) was to grow—and grow fast.9 Seemingly unrelated or insignificant events, decisions, or actions that were rationalized to support growth then combined to cause unintended cultural transformations.
Those changes were incremental and accepted as the norm, causing many people within the firm not to recognize them. In addition, the firm’s apparent adherence to its principles and a strong commitment to public and community service gave Goldman employees a sense of higher purpose than just making money. That helped unite them and drive them to higher performance by giving their work more meaning. At the same time, however, it was used to rationalize incremental changes in behavior that were inconsistent with the original meaning of its principles. If we’re principled and serve a sense of higher purpose, the reasoning went, then what we’re doing must be OK.
Since 1979, Goldman’s commitment to public service has ballooned in both dollar amounts and time, something that should be commended. But this exceptional track record prevents employees from fully understanding the business purpose of this service, which is expanding and deepening the power of the Goldman network, including its government ties (the firm is pilloried by some as “Government Sachs”). Some at Goldman have even claimed that having many alumni in important positions has “disadvantaged” the firm.10
For example, a Goldman spokesman was quoted in a 2009 Huffington Post article as saying, “What benefit do we get from all these supposed connections? I would say we were disadvantaged from having so many alumni in important positions. Not only are we criticized—sticks and stones may break my bones but words do hurt, they really do—but we also didn’t get a look-in when Bear Stearns was being sold and with Washington Mutual. We were runner-ups in the auction for IndyMac, in the losing group for BankUnited. If all these connections are supposed to swing things our way, there’s just one bit missing in the equation.” The spokesman added that government agencies have bent over backward to avoid any perception of impropriety, explaining that when the firm’s executives would meet with then-Treasury Secretary Paulson, “it was impossible to have a conversation with him without it being chaperoned by the general counsel of Treasury.”11
The vast majority of the employees, who joined Goldman decades after the original principles were written, do not really know the original meaning of the principles. Always putting clients’ interests first, for instance, originally implied the need to assume a higher-than-required legal responsibility (a high moral or ethical duty) to clients. At the time, the firm was smaller and could be more selective as it grew. However, over time, the meaning slowly shifted (generally unnoticed) to implying the need to assume only the legally required responsibility to clients. As the firm grew, the law of large numbers made it harder for Goldman to be as selective. A legal standard allowed Goldman to increase the available opportunities for growth.
In accommodating this shift, those within Goldman, including senior leaders, increasingly relied on the rationalization that its clients were “big boys,” a phrase implying that clients were sophisticated enough to recognize and understand potential risks and conflicts in dealing with Goldman, and therefore could look out for themselves. And in cases when the firm was concerned about potential legal liability, it even had clients sign a “big boy letter,” a legal recognition of potential conflicts and Goldman’s various roles and risks by the client in dealing with Goldman. This is in keeping with Goldman’s general explanation of its role in the credit crisis: it did nothing legally wrong, but was simply acting as a “market maker” (simply matching buyers and sellers of securities), and it responsibly fulfilled all its legal obligations in this role. This argument is also reflective of a shift in the firm’s business balance to the dominance of trading, as generally the interpretation of the responsibilities to a client are more often legal in nature, with required legal disclosures and standards of duty in dealing in an environment in which there is a tension in a buying and selling relationship of securities in trading, versus a more often advisory relationship in banking.
It’s important to note in examining the change at Goldman that, as we’ll explore, certain elements of the firm’s organizational culture from 1979, like strong teamwork, remain intact enough that the firm is still highly valued by clients and potential employees and was able to maneuver through the financial crisis more successfully than its competitors. The slower and less intense change in certain elements is a factor in why many at Goldman seem to either miss or willfully ignore the changes in business practices and policies. Also complicating the recognition of the changes is that some of them have helped the firm reach many of its organizational goals.
While many clients may be disappointed and frustrated with the firm, and many question both its protection of confidential client information and its rationalizations for its various roles in transactions, at the same time they feel that Goldman has the unique ability to use its powerful network and gather and share information throughout the firm, thereby providing excellent execution relative to its competitors. As for ethics, many clients reject Goldman’s general belief that it is ethically superior to the rest of Wall Street; nonetheless, many clients consider ethics only one factor in their selection of a firm, albeit one that may make them more wary in dealing with Goldman than in the past.
The frustration with the kind of analysis I’ve undertaken is that it’s tempting to ask who or what event or decision is responsible. We want to identify a single source—something o
r someone—to blame for the change in culture. The desire is for a clear cause-and-effect relationship, and often for a villain. The story of Goldman is too messy for that kind of explanation. Instead, we need to ask what is responsible—what set of conditions, constraints, pressures, and expectations changed Goldman’s culture.
One thing I learned in studying sociology is that the organization and its external environment matter. The nature of an organization and its connection to the external environment shape an organization’s culture and can be reflected through changes in structure, practices, values, norms, and actions. If you get rid of the few people supposedly responsible for violations of cultural or legal standards, when new ones take over the behavior continues. We need to look beyond individuals, striving to understand the larger organizational and social context at play.
I don’t intend my analysis as a value judgment on Goldman’s cultural change. I purposely set aside the question of whether the change was overall for the better or worse. My primary intent is to illuminate a process whereby a firm that had largely upheld a higher ethical standard shifted to a more legal standard, and how companies more generally are vulnerable to such “organizational drift.”
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This is the story of an organization whose culture has slowly drifted, and my story demonstrates why and how. The concept of drift is established, but still developing, in the academic research literature on organizational behavior (what I refer to as organizational drift is sometimes described as practical drift or cultural drift).12 Organizational drift is a process whereby an organization’s culture, including its business practices, continuously and slowly moves, carried along by pressures, departing from an intended course in a way that is so incremental and gradual that it is not noticed. One reason for this is that the pursuit of organizational goals in a dynamic, complex environment with limited resources and multiple, conflicting organizational goals, often produces a succession of small, everyday decisions that add up to unforeseen change.13
Although my study focuses on the Goldman case, this story has much broader implications. The phenomenon of organizational drift is bigger than just Goldman. The drift Goldman has experienced—is experiencing, really—can affect any organization, regardless of its success. As Jack and Suzy Welch wrote in Fortune, “‘Values drift’ is pervasive in companies of every ilk, from sea to shining sea. Employees either don’t know their organization’s values, or they know that practicing them is optional. Either way the result is vulnerability to attack from inside and out, and rightly so.”14 And leaders of the organization may not be able to see that it is happening until there is a public blow up/failure or an insider who calls it out. The signs may indicate that the culture is not changing—based on leading market share, returns to shareholders, brand, and attractiveness as an employer—but slowly the organization loses touch with its original principles and values.
Figuring out what happened at Goldman is a fascinating puzzle that takes us into the heart of a dynamic complex organization in a dynamic complex environment. It is a story of intrigue involving an institution that garners highly emotional responses. But it is more than that. It raises questions that are fundamental to organizations themselves. Why and how do organizations drift from the spirit and meaning of the principles and values that made them successful in reaching many of its organizational goals? And what should leaders and managers do about it? It also raises serious questions about future risks to our financial system.
The impressive statistics of Goldman’s many continuing successes, and of clients’ willingness to condone possible conflicts because of its quality of execution, doesn’t mean that the change in the firm’s culture doesn’t pose dangers both for Goldman and for the public in the future. For one thing, if Goldman’s behavior moves continually closer to the legal line of what is right and wrong—a line that is dangerously ambiguous—it is increasingly likely to cross that line, potentially doing damage not only to clients but to the firm, and perhaps to the financial system (some argue the firm has already crossed it). We have seen several financial institutions severely weakened and even destroyed in recent memory due to a drift into unethical, or even illegal, behavior, even though this is often blamed on one or a few rogue individuals rather than on organizational culture. Obviously this would be a terrible outcome for the many stakeholders of Goldman. However, Goldman is hardly an inconsequential or isolated organization in the economy; it is one of the most important and powerful financial institutions in the world. Its fate has serious potential consequences for the whole financial system. This doesn’t go for just Goldman, but for all of the systemically important financial institutions.
I am not arguing or predicting that Goldman’s drift will inevitably lead to organizational failure, or an ensuing disaster for the public (although there are those who believe that this has already happened), I am saying that the organizational drift is increasing that possibility. This is why it’s important to illuminate why and how the organizational drift has come about.
A Little History
In considering how and why Goldman’s interpretation of its business principles has changed, it’s important to consider some key aspects of the firm’s history, and why the principles were written.
According to my interviews with former Goldman co-senior partner John Whitehead, who drafted the principles, there was something special about the Goldman culture in 1979, one that brought it success and kept it on track even in tough times. He thought codifying those values, in terms of behaviors, would help transmit the Goldman culture to future generations of employees. The business principles were intended to keep everyone focused on a proven formula for success while staying grounded in the clear understanding that clients were the reason for Goldman’s very existence and the source of the firm’s revenues.
Whitehead emphasized the fact that he did not invent them; they already existed within the culture, and he simply committed them to paper. He did so because the firm was expanding faster than new people could be assimilated in 1979, and he thought it was important to provide new employees a means to acquire the Goldman ethic from earlier generations of partners who had learned by osmosis. Though by no means the force in the market the firm is today, Goldman had grown and changed a great deal from its early days and its size, complexity, and growth were accelerating.
Goldman Sachs was founded in 1869 in New York. Having made a name for itself by pioneering the use of commercial paper for entrepreneurs, the company was invited to join the NYSE in 1896. (For a summary timeline of selected events in Goldman’s history, see appendix G.)
In the early twentieth century, Goldman was a player in establishing the initial public offering market. In 1906, it managed one of the largest IPOs of that time—that of Sears, Roebuck. However, in 1928 it diversified into asset management of closed end trusts for individuals who utilized significant leverage. The trusts failed as a result of the stock market crash in 1929, almost causing Goldman to close down and severely hurting the firm’s reputation for many years afterward. After that, the new senior partner, Sydney Weinberg, focused the firm on providing top quality service to clients. In 1956, Goldman was the lead adviser on the Ford Motors IPO, which at the time was a major coup on Wall Street. To put Goldman’s position on Wall Street in context at the time, in 1948 the US Department of Justice filed an antitrust suit (U.S. v. Morgan [Stanley] et al.,) against Morgan Stanley and eighteen investment banking firms. Goldman had only 1.4 percent of the underwriting market and was last on the list of defendants. The firm was not even included in a 1950 list of the top seventeen underwriters. However, slowly the firm continued to grow in prestige, power, and market share.
The philosophy behind the firm’s rise was best expressed by Gus Levy, a senior partner (with a trading background) at Goldman from 1969 until his death in 1976, who is attributed with a maxim that expressed Goldman’s approach: “greedy, but long-term greedy.”15 The emphasis was on sound decision-making for long-ter
m success, and this commitment to the future was evidenced by the partners’ reinvestment in the firm of nearly 100 percent of the earnings.16
Perhaps surprisingly, although it’s had many triumphs, over its history Goldman has had a mixed track record.17 It has been involved in several controversies and has come close to bankruptcy once or twice.
Another common misperception among the public is that today Goldman primarily provides investment banking services for large corporations because the firm works on many high-profile M&A deals and IPOs; however, investment banking now typically represents only about 10 to 15 percent of revenue, substantially lower than the figure during the 1980s, when it accounted for half of the revenue. Today, the majority of the revenues comes from trading and investing its own capital. The profits from trading and principal investing are often disproportionately higher than the revenue because the businesses are much more scalable than investment banking.
Even though the firm was growing when Whitehead wrote the principles, its growth in more recent years has been even more accelerated, particularly overseas. In the early 1980s the firm had a few thousand employees, with around fifty to sixty partners (all US citizens), and less than 5 to 10 percent of its revenue came from outside the United States. In 2012, Goldman had around 450 partners (around 43 percent are partners with non-US citizenship) and 32,600 employees.18 Today about 40 percent of Goldman’s revenue comes from outside the United States and it has offices in all major financial centers around the world, with 50 percent of its employees based overseas.