resulted in the mix of business also shifting over time, with trading becoming more dominant, which carried its own impetus for change. The growing complexity of the company’s business also led both to more structural secrecy and to more potential for conflicts of interest. At the same time the external environment was also rapidly changing and impacting the firm.
These and many other changes, added up over time, caused Goldman to drift from the original interpretation of the firm’s principles, most notably from the first principle of always putting clients’ interests first. As the firm got larger and growth became more challenging because of the law of large numbers, there was even more pressure to change the standards to allow the maximum opportunities. Those within Goldman were unable to appreciate the degree of change at the time, and are unable to now, due in part to a process of normalization of the deviance from the firm’s principles that occurred as those changes unfolded. That blindness (or willful blindness) to the degree of change was enabled in part by rationalization and also by the sense that the firm serves a higher purpose because of the good works of the firm and its alumni, which mitigated against recognition from within that the firm was engaging in conflicts.
Whether or not this process of drift is a harbinger of potential failure at the firm is an open question. Certainly there is reason to worry that the many interdependent and compounding pressures that led Goldman to slowly change and adopt its new standard of ethics from one that was a higher than legal requirement to meeting only the legal requirements will combine with its increasing size, more complexity, and greater interrelatedness, and the consequences will be an increasing risk of conflicts and organizational failure.
Since Goldman plays such a prominent role in the economy, as do other investment banks, this is an urgent issue for further exploration. Maybe even more so because I believe that Goldman is becoming even more important and powerful in our economic system. Goldman almost went bankrupt in the late 1920s, was struggling in 1994, and took government money directly and indirectly in order to hold off possible collapse in 2009 (Goldman denies this), even despite the profits or protection (depending on one’s view) from the infamous “hedging” bets taken against toxic mortgage assets. Many other financial firms disappeared, of course; the economy was near collapse, and taxpayers were left with an enormous bill. I hope the analysis in this book can demonstrate that sociology can contribute to the public understanding and debate about risks in the system.
I also hope the book will help leaders and managers consider the dangers that can accompany the responses to organizational, competitive, technological, and regulatory pressures in striving to meet organizational goals.
Finally, I hope the book is an interesting journey inside Goldman, with which I’ll also seek to answer a handful of questions that continue to nag other observers: why Goldman performed so well (relatively speaking) during the financial crisis, what role Lloyd Blankfein and the trading culture he is associated with played in the change, and why clients continue to flock to Goldman.
This book isn’t intended as a history of Goldman—there are several authors who have admirably tackled that job (and without which this study would not be possible)—but I have also included a Goldman timeline and short biographies on selected Goldman executives in the appendices to help a reader unfamiliar with Goldman’s history or people.
Part One
HOW GOLDMAN SUCCEEDED
Chapter 2
Shared Principles and Values
IN 1979, GOLDMAN CO-SENIOR PARTNER JOHN WHITEHEAD wrote down the firm’s principles “one Sunday afternoon.” Whitehead explained, “In the first draft, there were ten principles, and somebody told me that it looked too much like the Ten Commandments, so I made it into twelve. I believe it’s up to fourteen now, because the lawyers got hold of it and they’ve changed a few words and added to it a little bit.”1 Although he helped bring in deal after deal and helped make strategic decisions for Goldman, Whitehead said that committing the firm’s values to words on paper was his greatest contribution.2 More than anything else, it was a statement about the perceived power of the codified values to nourish and support the partnership culture.3
From my interviews with those who were partners in the 1980s, it is apparent that all of them thought the principles reflected the culture and agreed with and relied upon them, which they believed allowed the firm to be less hierarchical than its peers.4 Although many firms now have codified principles of ethical behavior (some more revered than others), Whitehead’s commandments were revolutionary for the Wall Street at the time.5 The principles promoted cohesiveness in a firm with decentralized management, among Goldman partners who were owners and managers of businesses.
The list of twelve principles was approved by the management committee—which is responsible for policy, strategy, and management of the business and is chaired by the head of the firm—and was then distributed to every Goldman employee. A copy was sent to each employee’s home as well to help family members understand and cope with the long hours and extensive travel demanded of their loved ones.6 Whitehead’s hope was that family members would be proud of their association with an ethical firm that espoused high standards, and that employees—especially new partners with heavy travel schedules—would feel less guilty about spending so much time away from home.7 Goldman managers were expected to hold quarterly group meetings for the sole purpose of discussing the firm’s values and principles as they applied to the group’s own business.8 When I started at Goldman in 1992, it was typical, when introducing ourselves and the firm in initial meetings with clients, to include the “Firm Principles” on the first page of the presentation (essentially a sales pitch), letting the clients know what differentiated Goldman from its competitors.9
By the time of the tech boom in the late 1990s, the practice of managers holding regular meetings to specifically discuss the principles seems to have been discontinued, although they were certainly discussed in general meetings and in training sessions. One current Goldman partner told me that the principles are still talked about and discussed.10 They have not been abandoned, but he believes they are not as revered as they once were. He told me he could not recall seeing the principles hanging on the walls like they used to, although they can be found in annual reports and on Goldman’s website. However, the partner explained that with the recent regulatory and legal scrutiny, along with media attention, there is a renewed focus and more training sessions on the business principles.
Goldman’s principles were modified slightly over the years when, as Whitehead put it, the lawyers got hold of them. I also remember when a fellow analyst wrote a memo in 1992 pointing out grammar and punctuation errors in the principles and sent it to a member of the management committee. I believe a few of his recommended changes were made. As mentioned earlier, the most significant modification to the list of principles, made just before Goldman went public, was the addition of the principle related to returns to shareholders, which was given prominence by being listed third.
Here are the principles (as updated, now including fourteen):
1 Our clients’ interests always come first. Our experience shows that if we serve our clients well, our own success will follow.
2 Our assets are our people, capital and reputation. If any of these is ever diminished, the last is the most difficult to restore. We are dedicated to complying fully with the letter and spirit of the laws, rules and ethical principles that govern us. Our continued success depends upon unswerving adherence to this standard.
3 Our goal is to provide superior returns to our shareholders. Profitability is critical to achieving superior returns, building our capital, and attracting and keeping our best people. Significant employee stock ownership aligns the interests of our employees and our shareholders.
4 We
