What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences (2 page)

Chapter 1

What Happened

G
OLDMAN IS GOING STRONG” DECLARED THE TITLE OF A
Fortune
article in February 2007. “On Wall Street, there’s good and then there’s Goldman,” wrote author Yuval Rosenberg. “Widely considered the best of the bulge-bracket investment firms, Goldman Sachs was the sole member of the securities industry to make [
Fortune
’s] 2006 list of America’s Most Admired Companies (it placed 18th).”
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Rosenberg argued that what distinguished the firm was the quality of its people and the incentives it offered. “The bank has long had a reputation for attracting the best and the brightest,” he wrote, “and no wonder: Goldman made headlines in December for doling out an extraordinary $16.5 billion in compensation last year. That works out to an average of nearly $622,000 for each employee.” And as if that weren’t enough, “[i]n the months since our list came out, Goldman’s glittering reputation has only gotten brighter.”

But only two years later, Goldman was being widely excoriated in the press, the subject of accusations, investigations, congressional hearings, and litigation (not to mention late-night jokes) alleging insensitive, unethical, immoral, and even criminal behavior. Matt Taibbi of
Rolling Stone
famously wrote, “The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”
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Understandably it seemed that angry villagers carrying torches and pitchforks were massing just around the corner. (In 2011, the Occupy Wall Street protest movement would begin.) The public and politicians grew particularly upset at Goldman as allegations surfaced that the company had anticipated the impending crisis and had shorted the market to make money from it. (Goldman denies this.) In addition, there were allegations that the firm had prioritized selling its clients securities in deals that it knew were, as one deal was described by an executive in an e-mail, “shitty”—raising the question of whether Goldman had acted unethically, immorally, or illegally.
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Particularly agonizing for some employees were accusations that Goldman no longer adhered to its revered first business principle: “Our clients’ interests always come first.” That principle had been seen at the firm as a significant part of the foundation of what made Goldman’s culture unique. And the firm had held up its culture of the highest standards of duty and service to clients as key to its success. A partner made this point as part of a 2006 Harvard Business School case, saying “Our bankers travel on the same planes as our competitors. We stay in the same hotels. In a lot of cases, we have the same clients as our competition. So when it comes down to it, it is a combination of execution and culture that makes the difference between us and other firms … That’s why our culture is necessary—it’s the glue that binds us together.”
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Some critics asserted that Goldman’s actions in the lead up to the crisis, and in dealing with it, were evidence that the firm’s vaunted culture had changed. Others argued that nothing was really new, that Goldman had always been hungry for money and power and had simply been skillful in hiding it behind folktales about always serving clients, and by doing conspicuous public service.
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Meanwhile, many current and former employees at Goldman vehemently assert that there has been no cultural shift, and argue that the firm still adheres as strictly as ever to its principles, including always putting clients’ interests first. They cite the evidence of the firm’s leading market share with clients and most-sought-after status for those seeking jobs in investment banking.
How
, they ask,
could something be wrong, when we’re doing so well?
In fact, while in
Fortune
’s 2006 list of America’s Most Admired Companies, Goldman placed eighteenth, in 2010, after the crisis, it placed eighth,
⁶
and in 2012, Goldman ranked seventh in a survey of MBA students of firms where they most wanted to work (and first among financial firms).
⁷
And even with all of the negative publicity, Goldman has maintained its leading market share with clients in many valued services. For example, in 2012 and 2011, Goldman ranked as the number one global M&A adviser.
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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.
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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.
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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.”
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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 or 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.”

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
).
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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.
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