how they built and grew the business globally and added new practices while trying to preserve a distinct culture. McKinsey provided me the context of a large, global, growing advisory firm. McKinsey emphasized “client impact” over “commercial effectiveness” in evaluating its partners. With McKinsey, I also gained exposure to many other financial institutions, along with their senior management teams, their processes, and their cultures, and this exposure also helped put my experiences at Goldman—and the reaction of its management teams to various pressures—into context. Lastly, I had hired and worked with McKinsey as a client, and am able to compare that experience as a client versus being a client of other firms, including Goldman.
Subtle Changes Made Obvious
To give you a better sense of the shift I noticed and the organizational drift I’m talking about, I want to offer a set of comparative stories—“before” and “after” snapshots—to illuminate the differences. They illustrate the shift in the client-adviser relationship as well as in Goldman’s practice of putting the clients’ interests first.
This post-1979 historic commitment to always putting clients’ interests first and signifying more then a legal standard is demonstrated by a 1987 event. Goldman stood to lose $100 million, a meaningful hit to the partners’ personal equity at the time, on the underwriting of the sale of 32 percent of British Petroleum, owned by the British government. The global stock market crash in October had left other investment banks that had committed to the deal trying to analyze their legal liability and their legal rights to nullify their commitment, but Goldman stood firm in honoring its commitment despite the cost and despite Goldman’s legal claims. Senior partner John L. Weinberg explained to the syndicate, “Gentlemen, Goldman Sachs is going to do it. Because if we don’t do it, those of you who decide not to do it, I just want to tell you, you won’t be underwriting a goat house. Not even an outhouse.”30
The decision was not a simple matter of altruism. The principle of standing by its commitment had long-term economic benefits for Goldman. Weinberg was able to see beyond a short-term loss, even a large one, and to consider Goldman’s longer-term ambition to increase its share of the privatization business in Europe. That could be achieved only by living up to its commitments to clients, even beyond the legal commitment. His decision was consistent with the standard of the original meaning of the first principle: “Our clients’ interests always come first.” In addition, it illustrates the nuance between “long-term greedy” and “short-term greedy.”
More than twenty years later, this standard of commitment to clients beyond legal responsibility has largely been lost. Goldman policy adviser and former SEC chairman Arthur Levitt has challenged the “clients first” principle because “it doesn’t recognize the reality of the trading business.”31 He points out that Goldman’s sales and trading revenues outstrip those of the advisory businesses, financing, and money management, and there are no clients in sales and trading—only buyers and sellers. There should be transparency, Levitt suggests, but no expectation of a “fellowship of buyers and sellers that will march into the sunset” together. Goldman should stop using “clients first” in promoting itself, Levitt argues, because of the conflicts inherent in trading—the natural and ever-present tension between buyers and sellers.
This argument hit home for me when I compared one of my first experiences as an analyst at Goldman with my later experience as a Goldman client. When I was a first-year financial analyst in 1992, I was assigned to work with Paulson and a team of investment bankers to advise the Chicago-based consumer goods company Sara Lee Corporation. The project was to review Sara Lee’s financial and strategic alternatives related to a particular management decision. Paulson was demanding, and he instructed us to leave no stone unturned.
We worked 100-hour weeks, fueled by Froot Loops and Coca-Cola for breakfast and McDonald’s hamburgers and fries for lunch and dinner. We performed all sorts of financial analysis, trying to make sure we thought of every possible alternative and issue. We also collected ideas from all the experts Goldman had. In the end, we had a presentation book 50 to 70 pages long for the client, plus another 100-page backup book. We made sure that every i was dotted and t was crossed, every number corresponded to another number, every financial calculation was accurate, and every number that needed a footnote had one. Perfection and excellence were expected—not only by Paulson but also by everyone else at the firm—no matter the personal sacrifice.
At Sara Lee’s offices, all five of us from Goldman, including Paulson, waited anxiously to go into the meeting. When we were ushered into the boardroom, we took seats across the table from Sara Lee’s CEO, John H. Bryan, who would one day join the board of Goldman. After saying our hellos, we started putting our material out on the table. However, Paulson sat down next to Bryan, across the table from the rest of the Goldman team. After Paulson made some introductory remarks, speaking to Bryan as if no one else was in the room, we started presenting our analysis, the pros and cons of the alternatives, and our recommendations. (I had no speaking role; I was at the meeting in case someone asked any questions about the numbers. This was customary at Goldman—to watch and learn.)
Throughout the meeting, Paulson asked questions that he felt should be on Bryan’s mind, challenging us—grilling us, really—and posing follow-up questions to Bryan’s own. I wondered, Which one is the client—Bryan or Paulson? That’s when I learned an important lesson: they were one and the same. To Paulson, and therefore to Goldman, Bryan was not a client; rather, he was a friend. This was Goldman’s first business principle in action. In that meeting, Paulson embodied the spirit of that principle and of Goldman at its best. He didn’t just walk a mile in the client’s shoes; he ran a marathon. This rigor of service, along with his Midwestern work ethic and values, led not only to his own many professional successes but also to the many successes for his clients and for the firm he would one day lead.
Flash-forward to 2008. After I left Goldman and my partners and I decided to review strategic alternatives for our firm, I moved to the other side of the table as a Goldman banking client. After interviewing several investment banks, I voted to hire Goldman because it had the best overall team, knowledge about the markets, understanding of how to present our firm, and access to the key decision makers at potential buying firms. However, I noticed a contrast with my early years at Goldman. I certainly did not feel as though anyone from Goldman was looking at things from my perspective in the same way Paulson had at Sara Lee. No Goldman banker sat on my side of the table and raised the questions I should have been considering. In fact, I was concerned that Goldman cared more about its larger and more important clients that might consider buying our firm (and would remain Goldman clients) than about us. I had the same sense with most of the other banks that pitched for the assignment. Maybe I held Goldman to a higher standard. When we hired Goldman, I requested that John S. Weinberg—the grandson and son of former Goldman senior partners, and someone I had worked for at Goldman—help oversee the project. I felt he embodied the spirit and standards that had been in effect when I had joined the firm. Goldman was highly professional and extremely capable, but for some reason the shift was enough for me to want John S. Weinberg involved. (For more information about the Weinberg family and other key Goldman partners, see appendix F.)
The Study
While my experiences at Citigroup and McKinsey, as well as in helping build a firm, combined with distance, time, and maturity, helped put my experiences at Goldman into perspective, my insider experience also made me aware of how difficult it can be to perceive this kind of change from within, even though examples such as these may seem to suggest that the change should be obvious. Also, recognizing that change had occurred and understanding why and how that’s the case are very different propositions. This is why the perspective from sociological theory is so helpful. Personal perspective isn’t enough.
The analysis of Goldman that I offer here is based on established sociological approaches to studying organizational change, behavior, and innovation, an approach I’ve learned at both the sociology department and the business school at Columbia University. It doesn’t come naturally to me. Having been a banker, consultant, and investor, typically I try to understand problems quantitatively. Those in the financial industry seem to share this trait, because they have a certain comfort with quantifying things and using numbers and metrics