What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences (34 page)

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.

13
. In hindsight, from a sociologist’s perspective, it is clear that too many partner additions or departures would have an impact on Goldman’s interdependent social network of trust, but I hesitate to suggest that the partners themselves were fully aware of or concerned about all the potential consequences or rationales at the time.

14
. For a discussion of closure, see R. Burt,
Brokerage and Closure: An Introduction to Social Capital
(Oxford, UK: Oxford University Press, 2007).

15
. Ibid.

16
. Burt’s research shows that social networks create competitive advantages in and for organizations. The basic idea is that better-connected people have more social capital; as a result, they gain certain advantages. Burt’s social structure theory suggests that, when there is a gap between two individuals with complementary resources or information and the two are connected through a third individual, the gap (or hole) is filled, creating an important advantage for the third individual as well as for the organization. A company’s competitive advantage is a matter of access to the structural holes in the markets: obtaining information that allows it to make deals and connecting buyers and sellers, borrowers and lenders. The partnership provides that access by tying partners together financially, socially, and culturally. Trust is also important, and a partnership structure creates that foundation as a result of the partner screening and election process and the intertwining of partners’ financial interests. Goldman’s partnership structure provided the opportunity to connect diverse parts of an enterprise. When Goldman connected private banking with investment banking or a portfolio manager in commodities with a trader in equity derivatives, the firm played the role of the
gaudius tertius
, “the third who benefits.” In
Brokerage and Closure
, Burt suggests that the
gaudius tertius
is typically an individual, but the concept can be expanded to apply to organizations as well—especially in the case of a partnership wherein the partners are financially interdependent and benefit together. The “third” party may not control the relationship but still benefits by controlling the information flow between the two parties it brings together.

17
. “I’ve always been a team player and, by now, I’d become a fierce partisan of Goldman Sachs. I liked being a part of a storied institution that held so much promise.” See John C. Whitehead,
A Life in Leadership: From D-Day to Ground Zero
(Princeton, NJ: Princeton University Press, 2005), 88.

18
. C. D. Ellis,
The Partnership—The Making of Goldman Sachs
(New York: Penguin, 2008), 189.

19
. A
social network
is a social structure made up of a set of actors (such as individuals or organizations) and the ties between them (such as relationships, connections, or interactions). Trust developed from the familiarity that Goldman partners had with each other by virtue of having worked together for a long time and from having undergone the same partnership election process. Trust is built up as a part of socialization and shared experiences.

20
. See K. Kuwabara, “Cohesion, Cooperation, and the Value of Doing Things Together: How Economic Exchange Creates Relational Bonds” (
American Sociological Review
76 [2011]) for an extended discussion of this type of network. He shows that integrative and two-way exchange lead to cooperation, and joint action produces or reinforces cohesion. In
Foundations of Social Theory
(Cambridge, MA: Belknap Press of Harvard University Press, 2010) J. S. Coleman discusses the cliquish nature and density of partnership networks. R. Reagans, E. Zuckerman, and B. McEvily, in “How to Make the Team: Social Networks vs. Demography as Criteria for Designing Effective Teams” (
Administrative Science Quarterly
49 [2004]: 101–133), look at the power of networks and cohesion.

21
. W. D. Cohan,
Money and Power: How Goldman Sachs Came to Rule the World
(New York: Doubleday, 2010), 474.

22
. M. Graham, “Top 10 Commandments of Business Growth,”
Overdrive: The Official Blog of the Entrepreneurs’ Organization
, January 31, 2011,
http://blog.eonetwork.org/2011/01/top-10-commandments-of-business-growth/
.

23
. A partner explained that cross-selling is important to Goldman’s profitability and return on equity especially relative to those of its peers. There is a fixed infrastructure cost of being in business, so if banking/M&A can notify and introduce a cross-border deal to the foreign exchange desk as part of a full solution, then the customer acquisition costs to obtain the deal would be zero and the profits would flow straight to the bottom line. In addition, the company could benefit from favorable foreign exchange pricing by avoiding a public, competitive auction, because the information had to be kept confidential.

24
. See Joel M. Podolny, “A Status-Based Model of Market Competition” (
American Journal of Sociology
98, no. 4 [1993]: 839, 851), for a discussion of a status-based model of market competition.

25
. Although it is often overlooked, Goldman made diversity of people, including women and minorities, a priority throughout my time at the firm. However, like most Wall Street firms, Goldman struggled to attract, develop, and retain women and minorities, and they tended to represent a smaller percentage of the senior ranks. Goldman, as in many things, continued to improve throughout my tenure, and many senior partners and others put a lot of emphasis on diversity. Although Goldman has many programs for recruiting, career development, and advancement to promote diversity, like most Wall Street firms it has been sued several times for discrimination. According to Goldman, in 2010 women constituted about 29 percent of its vice presidents, 17 percent of its managing directors, 14 percent of its partners, and about 13 percent of members of its management committee. These percentages may be among the highest on Wall Street. However, diversity of people was not nearly as strong as diversity of ideas. A little-noticed provision in the Dodd–Frank legislation tries to address those low percentages. Section 342 mandates gender and racial hiring quotas for the financial services industry.