What Happened to Goldman Sachs. Steven G. Mandis
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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).12 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.13
Although my study focuses on the Goldman case, this story has much broader implications. The phenomenon of organizational drift is bigger than just Goldman. The drift Goldman has experienced—is experiencing, really—can affect any organization, regardless of its success. As Jack and Suzy Welch wrote in Fortune, “‘Values drift’ is pervasive in companies of every ilk, from sea to shining sea. Employees either don’t know their organization’s values, or they know that practicing them is optional. Either way the result is vulnerability to attack from inside and out, and rightly so.”14 And leaders of the organization may not be able to see that it is happening until there is a public blow up/failure or an insider who calls it out. The signs may indicate that the culture is not changing—based on leading market share, returns to shareholders, brand, and attractiveness as an employer—but slowly the organization loses touch with its original principles and values.
Figuring out what happened at Goldman is a fascinating puzzle that takes us into the heart of a dynamic complex organization in a dynamic complex environment. It is a story of intrigue involving an institution that garners highly emotional responses. But it is more than that. It raises questions that are fundamental to organizations themselves. Why and how do organizations drift from the spirit and meaning of the principles and values that made them successful in reaching many of its organizational goals? And what should leaders and managers do about it? It also raises serious questions about future risks to our financial system.
The impressive statistics of Goldman’s many continuing successes, and of clients’ willingness to condone possible conflicts because of its quality of execution, doesn’t mean that the change in the firm’s culture doesn’t pose dangers both for Goldman and for the public in the future. For one thing, if Goldman’s behavior moves continually closer to the legal line of what is right and wrong—a line that is dangerously ambiguous—it is increasingly likely to cross that line, potentially doing damage not only to clients but to the firm, and perhaps to the financial system (some argue the firm has already crossed it). We have seen several financial institutions severely weakened and even destroyed in recent memory due to a drift into unethical, or even illegal, behavior, even though this is often blamed on one or a few rogue individuals rather than on organizational culture. Obviously this would be a terrible outcome for the many stakeholders of Goldman. However, Goldman is hardly an inconsequential or isolated organization in the economy; it is one of the most important and powerful financial institutions in the world. Its fate has serious potential consequences for the whole financial system. This doesn’t go for just Goldman, but for all of the systemically important financial institutions.
I am not arguing or predicting that Goldman’s drift will inevitably lead to organizational failure, or an ensuing disaster for the public (although there are those who believe that this has already happened), I am saying that the organizational drift is increasing that possibility. This is why it’s important to illuminate why and how the organizational drift has come about.
A Little History
In considering how and why Goldman’s interpretation of its business principles has changed, it’s important to consider some key aspects of the firm’s history, and why the principles were written.
According to my interviews with former Goldman co-senior partner John Whitehead, who drafted the principles, there was something special about the Goldman culture in 1979, one that brought it success and kept it on track even in tough times. He thought codifying those values, in terms of behaviors, would help transmit the Goldman culture to future generations of employees. The business principles were intended to keep everyone focused on a proven formula for success while staying grounded in the clear understanding that clients were the reason for Goldman’s very existence and the source of the firm’s revenues.
Whitehead emphasized the fact that he did not invent them; they already existed within the culture, and he simply committed them to paper. He did so because the firm was expanding faster than new people could be assimilated in 1979, and he thought it was important to provide new employees a means to acquire the Goldman ethic from earlier generations of partners who had learned by osmosis. Though by no means the force in the market the firm is today, Goldman