11. To my knowledge Goldman is the only Wall Street firm that has had the same general principles for such a long time. My interviews with people from competing firms revealed that most firms that had a set of written principles have changed them significantly or abandoned them over time, as the firms underwent mergers and consolidations. In some cases, principles were routinely revised with each change in top management. McKinsey & Company, considered by many to be a world-class professional services organization, has a similar list of principles, and they can be found framed and hanging on some partners’ walls and posted on the company website. According to interviews, McKinsey’s values and principles are very well understood: they are discussed, breathed, and lived every day, from the first day of employment. They include putting the client’s interest ahead of the firm’s, behaving as professionals, keeping client information confidential, telling the truth as McKinsey sees it, and delivering the best of the firm to every client as cost effectively as possible. Citigroup also has a list of principles posted on its website, although interviewees have never seen or heard anyone discuss them during a meeting with clients. Citi’s four key principles are common purpose, responsible finance, ingenuity, and leadership.
12. Whitehead, A Life in Leadership, 110.
13. The firm’s stance on balancing family and work responsibilities changed dramatically after the Whitehead era, as evidenced by a couple of anecdotes. An out-of-state partner who passed on his first annual partners’ meeting and dinner dance to be home for his daughter’s birthday received a call from Sidney Weinberg, complimenting the partner for having the right priorities; his wife received roses. When the same issue arose years later, “Friedman let the same partner know that skipping partners’ meetings was not looked upon kindly.” (See Lisa Endlich, Goldman Sachs—The Culture of Success [New York: Simon & Schuster, 2000], 121.)
14. Whitehead, A Life in Leadership, 110.
15. Because of the many mergers, it is difficult to identify when and whether other firms had stated business principles. However, my interviews with competitors and Goldman partners indicates that if they had them, no one took them as seriously or clung to them as much as Goldman. Most agreed: no firm has had them for as long as Goldman has.
16. When I refer to a current Goldman partner, I mean someone elected into the partnership compensation program (PCP). Goldman is no longer a private partnership, and internally those elected into the PCP are referred to as partner or PMD (partner managing director) to distinguish them versus those managing directors not in the partnership participation program.
17. I am reminded of an article I read about the UBS trading fraud not being a system failure, but rather a cultural failure. The general claim was that UBS had gone through so many mergers and had grown so quickly that it had no defining culture. I found the article insightful. In my experience it is challenging even for insiders to design foolproof systems to catch fraud, because the complexity is too great. See J. B. Stewart, “Common Sense: At UBS, It’s the Culture That’s Rogue,” New York Times, September 24, 2011, www.nytimes.com/2011/09/24/business/global/at-ubs-its-the-culture-thats-rogue.html?pagewanted=all.
18. B. Groysberg and S. Snook, “Leadership Development at Goldman Sachs,” Case 9-406-002 (Boston: Harvard Business School, 2007).
19. I. Ross, “How Goldman Sachs Grew and Grew, Fortune, July 9, 1984, 158.
20. Milton C. Regan (Eat What You Kill: The Fall of a Wall Street Lawyer [Ann Arbor, MI: University of Michigan Press, 2004], 86–87) provides a concise account of the short-lived Water Street Corporate Recovery Fund.
21. C. D. Ellis, The Partnership—The Making of Goldman Sachs (New York: Penguin, 2008), 304.
22. “As a long-time employer of choice for elite undergraduates and MBAs, Goldman was able to select from a broad array of talented applicants for the traits it preferred” (see B. Groysberg and S. Snook, “Leadership Development at Goldman Sachs”).
23. In Organizational Culture and Leadership (4th ed. [San Francisco: Jossey-Bass, 2010], 231–232), Schein discusses the importance of culture carriers. Culture does not survive if the main culture carriers depart and if a critical mass of the members leave.
24. C. Harper and A. Choudhury, “Sidney Weinberg, Goldman Sachs Senior Director, Dies at 87,” Bloomberg, October 6, 2010, http://www.bloomberg.com/news/2010-10-06/goldman-sachs-senior-director-sidney-j-weinberg-jr-dies.html.
25. W. D. Cohan, Money and Power: How Goldman Sachs Came to Rule the World (New York: Doubleday, 2011), 363.
26. Whitehead remarked in an interview that his starting salary at Goldman, in 1947, was $3,600 a year. He went on to say, “$3,600 a year, not $3,600 a month. And it wasn’t $3,600 a day, as they now earn.” (A. Blitz, interview with John Whitehead, 2002, http://www.hbs.edu/entrepreneurs/pdf/johnwhitehead.pdf.)
27. Endlich, Goldman Sachs, 20.
28. Ellis, The Partnership, 561.
29. Ellis, The Partnership, 558.
30. In A Life in Leadership (p. 72), Whitehead recalls his experiences as a recruit: “After meeting with the two partners in charge of investment banking at the firm, I sat down with the top brass, a rather imposing group of older men who seemed very worldly to a business neophyte like me. For much of the afternoon, they peppered me with questions that often left me tongue-tied. But I must have handled myself adequately because a few days later, I received word that I had been accepted for employment at Goldman, Sachs & Co.” Looking back on his experiences recruiting others, he writes, “Even after I was a senior partner, I spent a lot of time twisting the arms of twenty-year olds, and that was very likely one of the most important things I did” (p. 110).
31. Robert Steven Kaplan, What to Ask the Person in the Mirror: Critical Questions for Becoming a More Effective Leader and Reaching Your Potential (Boston: Harvard Business Review Press, 2011), 60.
32. Whitehead, A Life in Leadership, 111.
33. Endlich, Goldman Sachs, 21.
34. Cohan, Money and Power, 231.
35. To ensure the acculturation of the teamwork and other values at Goldman, the organization “grew” its own talent by using entrenched recruitment and training programs. “Out of 1,500 applicants one year, only 30 individuals were given jobs; they were the ones with the brains, humor, motivation, confidence, maturity, and, needless to say, an inclination to play on the team.” (R. D. Freedman and J. Vohr, “Goldman Sachs/Lehman Brothers,” Case Studies in Finance and Economics, C49 [New York: Leonard N. Stern School of Business, 1991, rev. 1999]).
36. Cohan, Money and Power, 232.
37. 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), 8.
38. “John L. Weinberg,” The Telegraph, August 11, 2006, http://www.telegraph.co.uk/news/obituaries/1526056/John-L-Weinberg.html.
39. Goldman moved into its new headquarters building, “a 43-story super-green tower of glass and steel located directly across from the World Trade Center in Battery Park” in 2009 (from Cohan, Money and Power, 242). It has “cool modern art, a bike path, and a sick gym” (from “Goldman Employees Are Psyched to Move into Their Awesome New Building,” Business Insider, December 4, 2009, http://www.businessinsider.com/goldman-employees-are-psyched-to-move-into-their-awesome-new-building-2009-12). However, the building does not bear a vanity address, and “the name of the firm appears nowhere on the exterior, or in the lobby, or even on the uniforms of the security personnel or the badges given to visitors. Forty-three stories tall and two city blocks long, the Goldman building appears to have been designed in the hope of rendering the company invisible.” Goldman’s low profile preceded the firm’s recent reputational and legal difficulties, so the design of its headquarters building is completely consistent with its “obsession with being extremely powerful and utterly inconspicuous” (from P. Goldberger, “Shadow Building,” The New Yorker, May 17, 2010, http://www.newyorker.com/arts/critics/skyline/2010/05/17
/100517crsk_skyline_goldberger#ixzz1xQltbdUd).
40. In The Partnership, Ellis (p. 565) relates a discussion John Whitehead led in the late 1970s on the danger of arrogance creeping into the culture. When he asked the audience for a way to prevent arrogance at Goldman, one young banker facetiously offered this advice: “Hire mediocre people.” There was a certain truth to the young banker’s statement. Goldman hired people who were accustomed to excelling, who had done so all their lives—in the classroom, on the playing field, in almost any endeavor they attempted. No one was used to failing.
41. Cohan, Money and Power, 225.
42. Ellis, The Partnership, 187.
43. Harper and Choudhury, “Sidney Weinberg.”
44. In Gatekeepers: The Professions and Corporate Governance (Oxford, UK: Oxford University Press, 2006, 2, 3), John Coffee studied the role played by gatekeepers in corporate governance in acting as “a reputational intermediary to assure investors as to the quality of the ‘signal’ sent by the corporate issuer.” Gatekeepers include securities analysts, auditors, attorneys, investment bankers, credit rating agencies, and so on. He describes how reputational capital “can be placed at risk by the gatekeeper’s vouching for its client’s assertions or projections.”
45. Ellis, The Partnership, ix.
46. Blitz, interview with John Whitehead, 2002.
47. Harper and Choudhury, “Sidney Weinberg.”
48. Blitz, interview with John Whitehead, 2002.
49. The long-term perspective associated with success in investment banking began to lose importance as the firm’s business mix shifted toward trading. Reputational capital also starts to lose significance as a concept in a trading environment. In trading, one side provides a price, and the other side thinks it is either too high or too low. If it is low enough, they do business together. It is price that matters, not relationships. But in banking, it takes years to develop a relationship to the point that the client is willing to share confidential information, and a reputation for integrity matters a great deal (paraphrased from Endlich, Goldman Sachs, 18).
50. Today, Goldman’s focus is on “the long-term prosperity of our clients, shareholders, employees, and the communities we serve.” Shareholders, employees, and communities now rank alongside clients, and the long-term focus is supported by compensation policies and promotion processes, and not by values. Also, much of the restricted stock issued to named executive officers (NEOs) cannot be transferred for a five-year period; when Goldman was a partnership, the restriction was in effect until the partner retired. See N. Lindskoog, Long-Term Greedy: The Triumph of Goldman Sachs (Appleton, WI: McCrossen, 1998), 20.
51. Joel M. Podolny, in “A Status-Based Model of Market Competition” (American Journal of Sociology 98, no. 4 [1993]: 851, 839), cites industry research supporting the idea that “a higher-status firm can retain an employee of a given level of quality at a more favorable compensation arrangement for the firm.” He points out that “if an employee does indeed value the status of her workplace, she should be willing to accept a lower wage or salary to work for a higher-status firm than for a lower-status one.”
52. McKinsey & Company is also successful at getting recruits and employees to buy into long-term greedy while earning less as partners earn more. Diane Vaughan, in Controlling Unlawful Organizational Behavior: Social Structure and Corporate Misconduct (Chicago: University of Chicago Press, 1985, 70), offers a particularly descriptive simile for this phenomenon: “The luster of future financial rewards binds members to the organization like a pair of golden handcuffs securing their continued affiliation with the firm.”
53. Harrison C. White’s work on identity and control is relevant in explaining what, from the outside, looks like self-sacrificing ignorance of a harsh reality: “Membership in a group presumes, as the norm, lack of questioning. Character is a suitable term for what membership is to reflect.” See Harrison C. White, Identity and Control: How Social Formations Emerge (Princeton, NJ: Princeton University Press, 2008), 45.
54. In The Accidental Investment Banker: Inside the Decade That Transformed Wall Street (New York: Random House, 2006, 88–89), Jonathan Knee writes, “Any moves, even in many cases a move from being just a vice president at Goldman to being a partner somewhere else—which might well include a multi-year contract providing for guaranteed compensation above what could conceivably be secured at Goldman—usually represented a step down in the social pecking order.… But from a brand perspective, Morgan Stanley was a reasonably close second.”
55. Groysberg and Snook, “Leadership Development at Goldman Sachs,” 6.
56. I may have been too junior and inexperienced to notice or see other things at that time, and, as I gained experience, I might have noticed more. Or maybe there was more. In retrospect, when thinking about the deal, I remember that we did not have to write a fairness opinion, which provides legal liability to Goldman for its advice. I now wonder whether this had anything to do with the approach. I discuss this issue in chapter 3.
57. In hindsight, this made me think about the influence clients have on culture and behavior. The vice president could have told the potential buyer that there was a minimum price, and, to get a deal done, it was the price that needed to be reached. I should have asked why we didn’t speak to the client about approaching the buyer in that way.
58. I worked closely with partners and senior partners, and it was a relatively flat organization, so I doubt that the behavior or culture was much different at other levels. My interviews with partners, clients, and competitors, along with news articles at the time, support that view.
Chapter 3
1. http://www.goldmansachs.com/investor-relations/corporate-governance/corporate-governance-documents/culture.pdf.
2. Interdependence exists within an organization when the actors are tied together in a meaningful manner. In Goldman’s case, there was financial interdependence among partners, who shared in one another’s profits and losses, trading risks, and reputation risks. Each partner depended on the others to make money and to work to benefit the group as a whole. Partners also trusted that the others would not put them at personal risk, would not place the entire group at risk by taking excessive financial risks, and would not engage in improper behavior that could have legal or other repercussions. Partners had an unlimited liability that would make them personally liable—down to their houses and their spouses’ cars.
3. According to interviews, before the early 1990s, the review process was less formal, because the firm was smaller and managers felt they could easily assess their employees’ performance.
4. “The key to successfully managing large numbers of highly competitive, ambitious people, it seems, is to feed their most unrealistic illusions about themselves. And the best way to keep them is to instill a subconscious belief that those illusions will be shattered when exposed to the light of the outside world. I remember particularly a leadership training course that I went to with a dozen other young vice presidents at Goldman at which we were all asked to put our heads down on the table. The facilitator asked those who believed that they were among the top one percent of their peer group to raise their hand. The bar was then lowered to the top three percent and then the top five percent. When we sat up, I discovered that I was the only member of the group who had not raised his hand. It takes a special skill to keep more than 90% of the bankers believing they are in the top five percent of their class.” (See Jonathan Knee, The Accidental Investment Banker: Inside the Decade That Transformed Wall Street [New York: Random House, 2006], 58).
5. “The culture at Goldman emphasizes a unique ‘loose-tight’ management style, where the organization is rigidly controlled at the top concerning operational procedures and overhead, yet each department is allowed autonomy concerning entrepreneurship and innovation.” See R. D. Freedman and J. Vohr, “Goldman Sachs/Lehman Brothers,” Case Studies in Finance and Economics, C49 (New York: Leonard N. Stern School of Business, 1991, rev. 1999).
/> 6. Laurence Zuckerman, “The Good life After Goldman, “New York Times, October 16, 1994, www.nytimes.com/1994/10/16/business/the-good-life-after-goldman.html?pagewanted=all&src=pm.
7. P. Weinberg, “Wall Street Needs More Skin in the Game,” Wall Street Journal, September 30, 2009, http://online.wsj.com/article/SB10001424052748704471504574443591328265858.html.
8. The partnership committee oversees personnel development and career management issues. It focuses on such matters as recruiting, training, performance evaluation, diversity, mobility, and succession planning. Together with the management committee, it is integral in selecting and compensating partners. The partnership committee was established in 1994; before that, the management committee generally performed these functions. With the establishment of the title of managing directors, the partnership committee also included elections of nonpartner managing directors.
9. Goldman still had a partner election process after the IPO, and the partner election process continues in much the same manner as it did when the firm was a private partnership.
10. Freedman and Vohr (“Goldman Sachs/Lehman Brothers”) note that “since it is their own money on the line, partners are very disciplined and profit-oriented. Nonpartner employees share this mentality because they aspire to reach partnership ranks.” Truell (1996) comments on “the financial attractiveness of senior status in Goldman, Sachs. Partnership usually brings compensation of millions of dollars a year, and has been the brass ring the firm used to draw in talent and keep its ambitious employees working long hours.” See also P. Truell, “Goldman Sachs Partners Decide Not to Sell, After All,” New York Times, January 22, 1996, http://www.nytimes.com/1996/01/22/business/goldman-sachs-partners-decide-not-to-sell-after-all.html.
11. Robert Steven Kaplan, What to Ask the Person in the Mirror: Critical Questions for Becoming a More Effective Leader and Reaching Your Potential (Boston: Harvard Business Review Press, 2011), 82.
12. P. Maher and R. Cooper, “Image and Reality at Goldman Sachs,” Investment Dealers’ Digest, October 4, 1993, 20.
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