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

by Steven G. Mandis

  A few times I questioned coworkers directly when I felt it was appropriate. For example, I was tangentially helping a team led by a vice president in selling a company, and when the final bids and contracts were due from all the potential buyers at the same time in a sort of sealed auction process, only one buyer submitted a bid, and the bid price was less than the amount our client was willing to sell for. It seemed to be a delicate situation, because we had little negotiating leverage to persuade the only potential buyer to pay more. Also, the bidder was a good client of Goldman’s. However, the vice president called the sole bidder and said, “We had a number of bids” and told the bidder that to win the auction, he would have to raise his bid.

  I questioned him, and based on his facial expression and the tone of his response, I don’t think he appreciated my inquisitiveness. He pointed out to me that he had said “a number of bids,” and “in this instance, the number is one.”

  Ultimately, the bidder raised his price and ended up buying the company. When the vice president told the client exactly what he had done and said, the client chuckled approvingly.52

  Then there are things I was uncomfortable with that I never raised through the proper channels—by speaking with vice presidents, partners, my big buddy, or my mentor, or by writing about the issues in “confidential and anonymous” reviews and surveys. Maybe it was because I didn’t trust the system or didn’t know how people would react. Maybe I was worried about developing a reputation as a tattletale or, worse, losing my job—something I couldn’t afford. Stories were quietly discussed and passed down—stories of people having challenged behavior or things said in confidence that got back to the wrong people, and then slowly and subtly those people would be “transitioned out.” Ironically, sometimes the guilty parties were characterized as not being team players or not embodying the culture when he or she left or was demoted. I was trying to figure out what was right and what was wrong—what was acceptable and what wasn’t—which, it seemed, wasn’t always black and white. In the story just related, the client seemed happy and the vice president didn’t “technically lie.” Technically, one could rationalize, we did put our client’s interests first.

  But, as said, these examples were exceptions. The vast majority of the time that I worked in banking, the people with whom I worked did not rely on technicalities to determine what was right or wrong. I once joked to a friend that if someone found a nickel on the floor of the Goldman M&A department in 1992, he or she would go so far above and beyond what was required as to put up a “found” poster with a nickel taped to it, something that seems crazy anywhere, let alone on Wall Street. But in retrospect, “a number of bids” should have alerted me to the fact that there were multiple moralities or interpretations and that sometimes people might be obeying the letter of the law while violating its spirit, and rationalizing their behavior.53

  Old School

  At its best, Goldman enjoyed a reputation for honesty, integrity, and unquestioned commitment to serving the best interests of its clients, and at the same time enjoyed superior financial results. Critical to the firm’s success were the principles and values, both codified and uncodified, intended to guide behavior, communicate the essence of the firm, and aid in the socialization of new employees, and a partnership culture that emphasized social cohesion and teamwork. Recruitment sought to bring in people perceived to share the values, and the meaning of “long-term greedy” was taught and practiced. Sharing information and getting input from others were important, as was the socialization that the firm was a part of you and your success.

  In chapter 3, I discuss the importance of the partnership structure and explain how it supported financial interdependence and provided opportunities for productive debate and discussion—all of which also supported the Goldman culture.

  Chapter 3

  The Structure of the Partnership

  WHEN I WAS A GOLDMAN ASSOCIATE IN THE LATE 1990S, I was asked to prepare materials for and attend a meeting with a senior partner and an unhappy client. It was unclear whether the client was not happy with the firm or with the junior partner in charge of the relationship, so the junior partner was asked not to attend.

  During the meeting, the client, a CEO, said he thought very highly of Goldman but that he felt the junior partner in charge had acted inappropriately by speaking to one of his board members about something that the client felt should have been directed to him first. And when the board member called the CEO, the client was caught off guard. The client told us that if that junior partner continued to work on his Goldman banking team, Goldman would get no more business from him. At this point the senior partner, to appease the client, could easily have thrown the junior partner in charge under the bus and agreed to remove him from the team. Instead, his actions defined for me what partnership meant.

  The senior partner told the client that he had known and worked with the junior partner in question for more than fifteen years and that he had the highest respect of his clients and the other partners. There must have been, he asserted, some sort of misunderstanding. He would be willing to consider replacing the partner only if the client would agree to have a cup of coffee with the junior partner in question to discuss in person what happened. And if the client would not agree to this, he said, then there was no reason for Goldman to have a relationship with him.

  The client had paid the firm millions of dollars over the years, and now the senior partner was willing to walk away from the relationship and sacrifice future fees because his partner’s integrity was being questioned. That was what partnership meant at Goldman.

  Today, Goldman, a public company for more than a dozen years, states on a document on its website, “Our culture is rooted in our history as a partnership when business decisions were conducted by consensus.” In a diagram on a page titled “The History of Our Culture: Our Governance Foundation,” the partnership culture is shown at the center of Goldman’s structure, guiding behavior through formally stated business principles and corporate governance practices.1 Surrounding this are four quarter-circles—labeled “Values,” “Ownership,” “Teamwork,” and “Public Service”—connected, respectively, with arrows suggesting their relationships. Clearly, Goldman’s leaders recognize how important the partnership legacy is to the firm’s success. (See appendix H.)

  The elements of its value system were embodied in the firm’s organizational structure of ownership and culture. Because the two things went hand-in-hand, both were inextricably bound with the concept and practice of partnership. Values, public service, teamwork, and ownership were interconnected.

  Goldman’s partnership structure helped create and sustain its culture in several ways, including:

  A formal process through which people became partners (or left the partnership)

  A social network based on mutual trust and financial interdependence2

  Opportunities for disagreement and discussion that informed decision making (“dissonance”)

  Ownership of the firm by its partners

  Having personal capital at risk

  Although each of these structural characteristics is discussed sequentially here, they are interrelated.

  The Goldman Career Path

  When I started in investment banking in 1992, Goldman typically hired new college graduates as financial analysts. Financial analysts, who made a two-year commitment to the firm, did very junior work, usually supporting more-senior people. In their third year, excellent performers were sometimes offered an opportunity to stay for a year, and top performers might be invited to work in another group or geographic region of interest. However, to become an associate, the next step on the typical career path at Goldman, one had to leave, attend business school or law school, and then apply to return as an associate. Occasionally, financial analysts were directly promoted to associate, meaning that no graduate school or reapplication was necessary (that’s the path I was invited to take).

  Associates were typically hired
right out of top business schools or law schools, and most of them spent their summer vacations working at Goldman, thereby allowing the firm to make sure there was a cultural as well as a performance fit. Associates did financial analysis but also spent time with clients and thinking more broadly about what was required for the client. After four years (if they hadn’t been transitioned out of the firm or to another group), most associates were automatically promoted to the title of vice president (“executive director” outside the United States). Vice presidents spent most of their time with clients and reviewed work done by analysts and associates. Typically, VPs worked with partners on larger deals or with larger clients. One way Goldman maintained its culture was through an elaborate employee review process begun in the early 1990s.3 The anonymous 360-degree reviews were so extensive, even for analysts completing their first year, that they sometimes filled a binder the size of a phone book. As many as twenty people (managers and peers) contributed to the meticulous preparation, which included quantitative rankings, areas for comments, and also a self-review and statement of goals. The review meeting, conducted annually, was scheduled far enough in advance of decisions about compensation that it was not a discussion about compensation, but rather about performance and improvement.

  When I gave reviews as a business unit manager, people typically asked where they ranked in their class. By sitting in on reviews and in training sessions about giving reviews, I had learned to maneuver the discussion to methods for improvement and not relative class rankings or compensation. My understanding was that employees were supposed to leave the review feeling positive but, at the same time, with some degree of insecurity, knowing that they had things to work on, though no one ever formally discussed with me the rationale for (and the consequences of) delivering this mix of positive and negative messages. In my experience, most people heard only the negative message, thus socializing the idea that they needed the firm more than the firm needed them. We also had less-formal six-month reviews, especially with more junior employees, to give timely feedback for improvement.

  Reviews became more sophisticated, quantitative, and professionalized during my years at Goldman. When I started in 1992, I never heard of a policy or ritual to cull the bottom 5 to 10 percent of a class. The classes were very small, and there seemed to be little differentiation among the members. However, as classes became larger and some people were viewed as stronger than others, Goldman seemed to informally adopt the 5 to 10 percent policy (a policy often credited to Jack Welch, then CEO of General Electric). People who did not perform well enough were told in the annual review that they were in “the bottom quartile,” which at Goldman was interpreted as a professional way of saying one should start looking for a job elsewhere. At the time, Goldman tried not to fire people outright but instead to give messages tactfully through reviews and compensation so that people could find another job. The trick in many ways was to convince the people not in the bottom quartile, but in the middle of their class, that they were on track for partner so that they were motivated, stayed focused, and did not leave. Though nearly all professionals at Goldman thought they were on the partnership track, in the back of their minds, typically they knew the chances were slim. Nonetheless they stayed.4

  Typically, it took four to six years as a vice president in investment banking to be considered seriously for partnership election. The election process served as a sort of “up or out” mechanism, because being up for partnership a few times and not making it was essentially a public message about one’s future with the firm. Being denied partnership too many times could damage one’s external market value, so getting turned down for partnership the first time presented a difficult decision. One rejection could be rationalized, but failure to make partner two or three times was far more difficult to explain away to a potential employer, and by then one’s compensation and responsibilities probably reflected diminished prospects at Goldman.

  After 1986, when Goldman’s primary competitor, Morgan Stanley, went public, Goldman was the only comparable firm that was a partnership and still used the title “partner.” Partnership election happened every two years. Until 1996, when the firm changed to a limited liability corporation (LLC) and adopted the title managing director, the progression was from analyst to associate to vice president to partner. Unlike now—when titles have proliferated at Goldman and on the rest of Wall Street—the head of a department or specialty area in the early 1990s typically was a partner. That was it—only four titles (analyst, associate, vice president, and partner)—making Goldman a very flat organization.5 The cubicles where analysts and associates sat were right next to the partners’ offices, and they worked directly with the partners and shared assistants. In fact, some partners tried to sit in cubicles to make themselves more accessible and approachable. They abandoned this approach because the partners had so many meetings with so many people it distracted the junior people around them. Also, the junior people who sat next to the partners felt their personal lives and comings and goings were becoming too transparent. One banking partner instituted trading desks instead of cubicles in his department to facilitate communication. This approach didn’t work, either, for much the same reasons.

  Being a partner at Goldman was one of the most sought-after positions on Wall Street in part because of partners’ prestige and because Goldman partners generally were the highest-paid people on Wall Street. A Goldman partnership was “about as close to a sure thing as there is anywhere in the business world—a ticket to wealth and prestige.”6 Partners tended to manage departments or work with the most important clients and had responsibilities other than working on deals. For example, in the M&A department several partners would have to agree to sign something called a fairness opinion, a document issued by Goldman to a public company’s board of directors stating that the M&A transaction in question was “fair from a financial point of view” to shareholders. This “opinion” gave the board members confidence in the deal and was thought to protect them if they were to be sued or their judgment was questioned by shareholders.

  Issuing an opinion was risky, because it could be challenged in court and Goldman could be subjected to legal and financial liability. In fact, Goldman’s IPO prospectus stated, “Our exposure to legal liability is significant,” citing “potential liability for the ‘fairness opinions’ and other advice we provide to participants in corporate transactions.” Before the IPO, the partners personally shared this liability. (After converting to a LLC and the IPO, partners did not have personal liability in the event of a successful lawsuit; any financial consequences would be borne by the firm and not the private partnership.) So partners in the trading business had to trust that the M&A partners were being very careful and thoughtful in issuing fairness opinions.

  The Partnership Prize

  Compensation can certainly send a message, but typically it is a private message to the employee from the company. Partnership, however, is a public recognition of the value of one’s contribution and ability to uphold the principles. It worked together with the culture to motivate people to accept lower compensation and work grueling hours. In addition, it served as a mechanism related to financial interdependence.

  In a 2009 op-ed letter about the debate over bonuses and Wall Street pay, Peter Weinberg, son of Jimmy Weinberg and nephew of John L. Weinberg, described Goldman partnership and financial interdependence this way:

  The only private partnership I can talk about authoritatively is the one in which I was a partner from 1992 to 1999, when the firm went public: Goldman Sachs. Partners there owned the equity of the firm. When elected a partner, you were required to make a cash investment into the firm that was large enough to be material to your net worth. Each partner had a percentage ownership of the earnings every year, but the earnings would remain in the firm. A partner’s annual cash compensation amounted only to a small salary and a modest cash return on his or her capital account. A partner was not allowed to withdraw any capital from t
he firm until retirement, at which time typically 75%–80% of one’s net worth was still in the firm. Even then, a retired (“limited”) partner could only withdraw his or her capital over a three-year period. Finally, and perhaps most importantly, all partners had personal liability for the exposure of the firm, right down to their homes and cars. The focus on risk was intense, and wealth creation was more like a career bonus rather than a series of annual bonuses.7

  The partners knew an elected partner’s actions and performance would reflect on them, and if they made an unwise choice, that could have serious financial and reputational consequences for them all. Partners also had to believe that transferring a percentage of profits from themselves to incoming partners would be advantageous—that the potential dilution of their own wealth and the added risk were worth the potential gain.

  Consequently, the Goldman partnership process was carried out in painstaking detail, and that was generally understood throughout the firm. Partnership election was taken seriously, as shown by the personal involvement of senior executives. The partners judging a candidate’s merit and suitability were the very people with whom the candidate would be financially interdependent if granted partnership. Written nominations were solicited from the partners; from those nominations, the partnership committee created a preliminary list of potential candidates.8

  During the months preceding partnership elections, it was difficult to get time with the partners because they had so many phone calls and meetings about candidates. Goldman held its partnership elections every two years rather than annually, in part because the process was so arduous and time-consuming.