What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences (32 page)
Authors: Steven G. Mandis
Appendix H
Goldman’s Culture and Governance Structure
Prologue
1
. C. D. Ellis,
The Partnership—The Making of Goldman Sachs
(New York: Penguin Press, 2008), 539.
2
. See
http://www.nytimes.com/2006/11/02/business/02welch.html
and
http://www.nysun.com/obituaries/remembering-john-weinberg-of-goldman-sachs/40311/
.
Chapter 1
1
.
http://money.cnn.com/magazines/fortune/fortune_archive/2007/02/05/8399175/
.
2
. M. Taibbi, “The Great American Bubble Machine,”
Rolling Stone
, April 5, 2009,
http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405
.
3
. B. Montopoli, “Levin Repeatedly References ‘Sh**ty Deal’ at Goldman Hearing,”
CBS News
, April 27, 2010,
http://www.cbsnews.com/8 301-503544_162-20003526-503544.html
.
4
. B. Groysberg, S. Snook, and D. Lane, “The Pine Street Initiative at Goldman Sachs,” Case 9-406-002 (Boston: Harvard Business School, 2006).
5
. When one examines Goldman’s history over time, there are examples of Goldman putting its interests ahead of clients, especially Penn Central Transportation Company in 1970 and Goldman Sachs Trading Corp in 1928. However, both of these examples are before Whitehead codified the business principles in the late 1970s. So we cannot be sure as to what Goldman said to its clients before that time. I could only analyze from the principles being written. See
http://article.washingtonpost.com/2012-03-16/opinions/35447344_1_goldman-sachs-commercial-paper-younkers
.
6
.
http://money.cnn.es/magazines/fortune/mostadmired/2010/
.
7
.
http://money.cnn.com/galleries/2012/pf/jobs/1205/gallery.top-MBA-employers/index.html
.
8
.
http://hereisthecity.com/2013/01/07/mergers-acquisitions-review-financial-advisors-worldwide-ranking/
.
9
.
http://www.goldmansachs.com/investor-relations/financials/archived/other-information/ipo-prospectus-gs-pdf-file.pdf
.
10
.
http://www.huffingtonpost.com/2009/06/02/government-sachs-goldmans_n_210561.html
.
11
. Ibid.
12
. Organizational drift as I describe it is neither precisely Sidney Dekker’s “cultural drift” nor Scott Snook’s “practical drift” nor Diane Vaughan’s “normalization of deviance.” Although I draw upon many elements from each, there are not only slight differences in their work but in mine as well. Also, rightly or wrongly, their concepts of drift are often associated with organizational “failure” when examining a specific event. Organizational drift does not necessarily always lead to a recognizable event of failure.
13
. Paraphrased from
http://www.ohsbok.org.au/downloads/chapters/5_Global_Safety.pdf
.
14
. Jack and Suzy Welch, “Goldman Sachs and a Culture-Killing Lesson Being Ignored,” CNNMoney, April 12, 2012,
http://management.fortune.cnn.com/2012/04/12/goldman-sachs-culture-values/
.
15
. Lisa Endlich,
Goldman Sachs—The Culture of Success
(New York: Simon & Schuster, 2000), 18.
16
. There are some notable exceptions, including the scandal surrounding the bankruptcy of Penn Central, a client of Goldman’s, in 1970.
17
. See William Cohan,
Money and Power: How Goldman Sachs Came to Rule the World
(New York: Doubleday, 2012).
18
. The number of partners more than doubled from 75 in 1991 to 190 in 1998. In 1999, when Goldman went public, it had 221 partners. Some additional facts: The number of total employees has grown from 3,600 people in 1984 to around 30,000, representing a growth rate of around 8 percent per year. Out of 221 total partners at the IPO, less than 10 to 15 percent of the pre-IPO partners remain today, making up less than 0.1 percent of current GS employees. Earnings before tax (EBT) has grown from $50 million in 1977 to over $6 billion in 2001, which is a compounded annual growth rate of about 15 percent—while staffing was growing at 8 percent, EBT was growing at almost two times that.
19
. Goldman Sachs Group, “Letter to Shareholders,”
Annual Report
, 1999,
http://www.goldmansachs.com/investor-relations/financials/archived/annual-reports/attachments/1999-annual-report.pdf
.
21
. When Goldman faced criticism about reserving over $16 billion for its employee compensation, just a year after it received $10 billion from the government, Blankfein said at a conference: “We participated in things that were clearly wrong and have reason to regret … we apologize” (see
http://dealbook.nytimes.com/2009/11/17/blankfein-sorry-for-goldmans-role-in-crisis/
). Shortly after, the firm said it would spend $500 million to help small business growth (see
http://business.time.com/2009/11/18/goldman-sachs-tries-to-make-ammends/
). Blankfein also wrote a letter to Congress stating, “While we regret that we participated in the market euphoria and failed to raise a responsible voice, we are proud of the way our firm managed the risk it assumed … ” (see
http://dealbook.nytimes.com/2009/06/16/goldman-regrets-market-euphoria-that-led-to-crisis/
.)
22
.
http://money.cnn.com/2010/04/27/news/companies/goldman_sachs_hearing/index.htm
.
23
. Goldman Sachs Group,
Report of the Business Standards Committee
, n.d.,
www.GoldmanSachs.com/Business Standards
.
24
. See
http://www.nytimes.com/2010/05/19/business/19goldmanquestions.html?pagewanted=all&_r=0
. The full question and the full answer are: “3. On the topic of putting clients first, Goldman’s Mortgage Compliance Training Manual from 2007 notes that putting clients first is ‘not always straightforward’ because the firm is a market maker for a wide variety of companies, and because the firm’s traders are in a position to gather and use information from a variety of sources— a mosaic constructed of all of the pieces of data received, is how the manual describes it. How does the firm, in practice, address this nuance? And what does Goldman mean by ‘not always straightforward’?” Goldman’s response: “We strive to provide all our sales and trading clients with excellent execution. This manual recognizes that like many businesses, and certainly all our competitors, we serve multiple clients. In the process of serving multiple clients we receive information from multiple sources. This policy and the excerpt cited from the training manual simply reflects the fact that we have a diverse client base and gives our sales people and traders appropriate guidance.”
25
. Greg Smith, “Why I Am Leaving Goldman Sachs,”
New York Times
, March 14, 2012,
http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?pagewanted=all
.
26
. Edgar Schein writes, “Where incongruities exist between espoused values and basic assumptions, scandal and myth explosion become primary mechanisms of culture change. Nothing will change until the consequences of the actual operating assumptions create a public and visible scandal that cannot be hidden, avoided, or denied … [I]t is usually discovered that the assumption by which the organization was operating had drifted toward what was practical to get the job done, and those practices came to be in varying degrees different from what the official ideology claimed.” See Edgar Schein,
Organizational Culture and Leadership
, 4th ed. (San Francisco: Jossey-Bass, 2010), 291.
27
.
http://www.cnbc.com/id/49368892
.
28
. Securities and Exchange Commission, “Alternative Asset Management Acquisition Corp, EX-99.2,” 2008,
http://www.secinfo.com/dr66r.t1Fx.b.htm
.
29
. The Institutional Clients Group—which includes global banking, global markets, global transaction services, Citi Private Bank, Citi Capital Advisors, and Citi Investment Research & Analysis—had about $35 billion in revenues in 2010. ICG is essentially what was Salomon Brothers plus Citibank’s corporate and investment banking businesses; it does not include Citigroup’s credit cards or the retail branch network.
30
. See
http://www.sec.gov/Archives/edgar/data/1393816/000089109208003155/e3206ex99-1.htm
. Ultimately the deal did not close.
31
. Endlich,
Goldman Sachs
, 18.
32
. This and other Levitt quotations in this paragraph are from C. Harper and E. Schatzke, “Goldman Should Stop Saying Clients Come First, Levitt Says,”
Bloomberg
, March 29, 2012,
http://www.bloomberg.com/news/2012-03-29/goldman-should-stop-saying-we-put-customers-first-levitt-says.html
.
33
. Whereas a structured interview has a formal, limited set of questions, a semistructured interview is flexible, allowing new questions to be brought up during the interview as a result of what the interviewee says. The interviewer in a semistructured interview generally has a framework of themes to be explored. I received approval from an institutional review board (IRB) at Columbia for my interview processes and procedures, interviewee consent process, and confidentiality of interviewees and study data.
34
. During our discussions Whitehead did not comment on Goldman, including its culture or leadership, after 1984. I referred to public sources as they relate to Whitehead’s views after 1984.
35
. A first-person narrative is unusual in scholarly writing, and for good reason: some objective distance between the researcher and his subject is needed for an unbiased study. However, I use the first person and insert myself at certain points to provide unique information and perspectives. I think there are significant advantages to my being both an academically trained researcher and an insider; without this stance, it would not be possible, in my view, to conduct such an in-depth study because of the complexity of Goldman and the deep, embedded assumptions of the interviewees, assumptions that must be raised to consciousness to be analyzed. On the other hand, it brings academic issues and baggage, something that cannot be completely avoided. Additionally, I was concerned that revisionist history might enter into the book. I wanted to make sure that my conclusions would hold true whenever this book was written. I asked myself whether, if I had conducted this study in 2006—before the financial crisis—I would have ended with the same conclusions. Therefore, I use a framework of organizational drift to help ensure consistency in the analysis. I have donated the entire advance I received from Harvard Business Review Press for this book to educational and medical charities.
36. See D. Vaughan,
The Challenger Launch Decision: Risky Technology, Culture, and Deviance at NASA
(Chicago: University of Chicago Press, 1996); and S. A. Snook,
Friendly Fire: The Accidental Shootdown of U.S. Blackhawks over Northern Iraq
(Princeton, NJ: Princeton University Press, 2002).
37. Vaughan,
The Challenger Launch Decision
, 238.
Chapter 2
1
. A. Blitz, interview with John Whitehead, 2002,
http://www.hbs.edu/entrepreneurs/pdf/johnwhitehead.pdf
.
2
. “I believe the most important thing I did was to set down in writing what Goldman Sachs stood for. I did it out of necessity. By the early 1960s, our business was expanding so rapidly that new people were coming in faster than we could fully assimilate them … I wondered how they would ever get inculcated with the Goldman Sachs ethic, which we old hands learned over time by osmosis. We did our best to import these values in new hires through fairly extensive training sessions, but I thought it would be helpful to identify our core values—this was long before that became a vogue term—in a short document that all employees could have to read and to remember. Values like putting the customers’ interests first, emphasizing quality, and working as a team,” from John C. Whitehead,
A Life in Leadership: From D-Day to Ground Zero
(New York: Basic Books, 2005), 107.
3
. “In corporate management circles,
culture
is arguably one of the most pervasive buzzwords, often used to sum up ‘the way we do it here’—either explicitly or implicitly—and is seen as a central piece of an organization’s identity. That being said, the very term, even when used in the most general sense, has been called a ‘weasel word,’ devoid of academic legitimacy” (Chalmers Johnson, lecture, Goldman Sachs, Berkeley, CA, 1993). Eminent Japanologist Chalmers Johnson is not alone among scholars in dismissing it as a “weasel word,” devoid of academic legitimacy,
http://citation.allacademic.com/meta/p_mla_apa_research_citation/1/0/9/5/9/pages109592/p109592-4.php
.
4
.
http://www.escholarship.org/uc/item/00v999cr
.
5
. Mary Douglas, “Cultural Bias,” in Mary Douglas (ed.),
In the Active Voice
(London: Routledge, 1982), 183–254.
6
. Ibid., 183.
7
. Social anthropologist Mary Douglas defined culture as “a blank space, a highly respected, empty pigeonhole. Economists call it ‘tastes’ and leave it severely alone. Most philosophers ignore it—to their own loss. Marxists re-create it obliquely as ideology or superstructure. Psychologists avoid it, by concentrating on child subjects. Historians bend it any way they like. Most believe it matters, especially travel agents,” from Douglas,
In the Active Voice
. When it comes to the more specific term
organizational culture
, the definitions are just as multitudinous, with anthropologists, sociologists, and scholars from other disciplines struggling to describe the “ideational superstructure of a work organization” (G. Morgan,
Images of Organization
[Beverly Hills, CA: Sage, 1986], 139). Definitions of organizational culture address everything from common behavioral patterns to symbolic corporate values—e.g., Terrance Deal and Allan Kennedy,
Corporate Cultures: The Rites and Rituals of Corporate Life
(New York: Perseus, 1982); Thomas Peters and Robert Waterman,
In Search of Excellence: Lessons from America’s Best-Run Companies
(New York: HarperCollins, 1982). Of course, it is not uncommon for researchers to deploy the same terms while adhering to different connotations, thereby clouding the relevance of research results. Generally, scholars acknowledge the socially constructed role that culture plays in promulgating appropriate, productive behavior within a company. Edgar Schein, a professor emeritus of management at MIT, with the most (more than five hundred) cited articles on organizational culture, according to Google Scholar, defined organizational culture as follows: