What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences (33 page)

The deeper level of basic assumptions and beliefs that are learned responses to the group’s problems of survival in its external environment and its problems of internal integration; are shared by members of an organization; that operate unconsciously; and that define in a basic “taken-for-granted” fashion in an organization’s view of itself and its environment. They come to be taken for granted because they solve those problems repeatedly and reliably … culture … is a learned product of group experience and is, therefore, to be found only where there is a definable group with a significant history
.

From Edgar Schein,
Organizational Culture and Leadership
, 4th ed. (San Francisco: Jossey-Bass, 2010), 6–7.

8
. This definition is similar to A. L. Kroeber’s and Talcott Parsons’s suggested definition when speaking of culture more broadly than organizations:

We suggest that it is useful to define the concept of culture for most usages more narrowly than has been generally the case in the American anthropological tradition, restricting its reference to transmitted and created content and patterns of values, ideas, and other symbolic-meaningful systems as factors in the shaping of human behavior and the artifacts produced through behavior
.

From A. L. Kroeber and Talcott Parsons, “The Concepts of Culture and of Social Systems,”
American Sociological Review
23 (1958): 582.

9
. Typically, the definitions assume that culture concerns collective groups of people (not individuals), who, through their shared experiences day by day in the work environment, build a shared vision of what the organization is about and how it undertakes its purpose, and that this shared vision grows through learning how to behave for career survival and advancement. Typically, the definitions describe culture as behavior that is learned or taught and represents the general operating norms in the organization. Culture affects how people behave when no one is telling them what to do because of shared values, assumptions, and socialization experiences, which unite members and maintain a distinction from nonmembers. J. C. Collins and J. I. Porras (
Built to Last: Successful Habits of Visionary Companies
[New York: HarperBusiness, 1994], 253) note that the basic elements that distinguish the “visionary” companies they studied were present throughout the companies’ histories, “long before they became hugely successful, premier institutions.”

10
. Collins and Porras, in
Built to Last
, concluded that successful companies had decentralized management combined with a strong culture.

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.