What Happened to Goldman Sachs. Steven G. Mandis
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how to think about the issues.
In the meeting with the client CEO, the Goldman vice president presented the various alternatives. He concluded by recommending that the CEO not sell the division at that time, because there was a good probability it would be worth more in the future. Then there was an awkward silence. The client CEO complimented the team for the quality of its work and then said Goldman was the only bank that did not recommend a sale. Unexpectedly, he called a few days later. He decided to wait and continue executing the business plan.
A few years later, that same division had doubled its profits, and Goldman was hired to sell the entire company.
The Goldman approach in this case was consistent with Steve Friedman’s description of Jimmy Weinberg: “He just had a great demeanor, and people would develop confidence in him because he wasn’t pandering to them, he would tell them what he thought.”38 I interviewed several Goldman clients from the 1980s, and there was a general consensus that typically Goldman did emphasize unbiased advice.
Devotion to Client Service
The values of integrity and honesty are codified in the last of Goldman’s business principles as being “at the heart” of the business. In the eyes of the partners during the Weinberg and Whitehead days, the firm’s reputation for ethical behavior was a competitive asset and crucial to the firm’s success. It was the right thing to do, and it made good long-term business sense. They recognized the value of their reputational capital.39
Integrity was the favorite word of longtime Goldman head Sidney Weinberg, and he defined it as a combination of being honest and putting the interests of clients first. As one partner observed, “Mistakes were quite forgivable, but dishonesty was unpardonable.”40 John Whitehead explains: “Our industry is one in which the services of the leading investment bankers are all pretty much the same. So, I’ve always believed that one’s reputation is extremely important and that decisions are often made according to the general reputation a firm has, not so much by the fact that they will perform a service a little cheaper and a little faster. Reputation is what matters.”41
When describing Jimmy Weinberg, Tom Murphy, former chairman and CEO of Capital Cities/ABC, said, “His clients were his friends … His whole reputation in the business world was as a person of honesty and integrity.”42
Whitehead expressed the strategy behind the philosophy this way: “We thought that if our clients did well, we would do well.”43 Together with the emphasis on maintaining a “steadfast” focus on the long term, this almost religious devotion to clients’ interests and service was largely responsible for Goldman’s success.
Gus Levy, a senior partner at Goldman from 1969 until his death in 1976, originated the maxim, mentioned earlier, that expressed the proper attitude for Goldman partners: “greedy, but long-term greedy.”44 These words helped remind partners to focus on the future, as evidenced by the nearly 100 percent reinvestment of partners’ earnings. One author interprets Goldman’s long-term greedy mantra to mean that “while the firm worked in its own interest, it did so in a manner consistent with the long-term health of its industry, business, and clients.”45 This was not purely a matter of altruism. Goldman existed to make money for its partners, not only at the moment but also for years to come. Goldman cultivated an image of responsibility, trust, and restraint by intimating that the firm held itself to a higher standard than other firms.46
The emphasis on long-term greedy also explains in part why employees were willing to work grueling hours for relatively modest wages. In the long term, if they made partner they would more than make up for the sacrifice. Lower wages in one’s early years with the firm were part of Goldman’s strategy for success—part of the business model—because the less that was paid to nonpartners, the more the partners got paid.47 Goldman got its employees to buy into long-term greedy for themselves, and the Goldman culture was distinctive enough that people wanted to work there even if they worked harder and for less money than did competitors.
Many of the partners I interviewed cautioned me that Goldman was not always all about teamwork, collaboration, and shared values. Hiring mistakes were made. Indiscretions were dealt with. Politics did enter into the picture the further one moved up, and there were sharp elbows. But in the end, the principles generally won out. People came and went, but generally the culture and principles remained. Just as the policy of not advising hostile raiders (see chapter 5) and keeping the client first were good business decisions, so was getting people to buy into a culture and a purpose—it made the partners (who were certainly greedy) more money over time and helped sustain the money machine for the next generation.
Very few people left Goldman voluntarily. When I was an analyst, in the early 1990s, a respected associate decided to leave and join his father’s business, and we had a department meeting to discuss this shocking event. The purpose of the session was to make us feel that in this one instance, it was acceptable; he was going to work with his family, and that was just barely excusable. I would have thought that many people would leave because of the lower pay than peers and the slim chances of becoming a partner. But voluntary turnover was less than 5 percent, I was told—significantly below the industry average in the 20 percent range.
Generally, Goldman bankers obsessed more about making partner and their relative compensation than they did about their absolute compensation. Their social identity was so bound up, through their socialization at the firm, with what Goldman valued, that bankers routinely turned down multiyear guaranteed contracts for significantly more money at other firms, even when the possibility that they would make partner at Goldman was, according to my interviews, less than 5 percent to 10 percent.48 After their socialization into Goldman, working at any other firm, regardless of the title or compensation, would seem to them a step down, according to many of the people I interviewed.49
Goldman bankers were also generally convinced that they were the best—that they worked at the best firm, with the best people, and with the best brand. At the same time, they were convinced that teamwork and a team relationship with clients were so important that their own value as bankers outside Goldman would be diminished. The socialization process made well-educated, thoughtful, talented people believe that Goldman made them better bankers than they could be elsewhere. Blankfein summarized the culture as “an interesting blend of confidence and commitment to excellence, and an inbred insecurity that drives people to keep working.”50 Although it seems he was talking about an insecurity that motivated people to keep working harder and longer, this inbred insecurity is a paradox.
Nostalgia
I do not want to wax nostalgically about the good old days. I did on occasion observe vice presidents and partners acting in a way that might not be considered in the best interests of clients, though those were exceptions to the rule. For example, I remember working with an associate on a project advising a company that was buying a small subsidiary of another company. The partner was extremely busy and traveling, and although we sent him our analysis and kept scheduling calls to speak to him, he always canceled our discussions. He showed up less than a few hours before our client meeting, and, based on his questions, it appeared as if he had not read anything we sent him and was not prepared. This surprised me, because usually partners were highly detail oriented and well prepared.
He asked us for our valuation analysis, the value of the synergies, and the price the seller wanted. The asking price was higher than our valuation analysis (a breakdown that is more art than science). Moreover, our estimates of the potential synergies (the cost savings and revenue enhancement resulting from the deal), which meaningfully impacted the value, were highly subjective. When we met with the client CEO, the Goldman partner claimed that he had “been poring over the numbers all day and night” and he thought that if the company could buy the business at X price (coincidentally, the asking price we’d told the partner), then it was a good deal for strategic reasons.
When he said this, the associate and I looked at each other and then looked down. I reasoned that he might have been poring over the numbers without my knowledge, or maybe he meant “the team” had been. The deal ultimately got done; Goldman was paid a fee; and the partner