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 had grown and changed a great deal from its early days and its size, complexity, and growth were accelerating.
Goldman Sachs was founded in 1869 in New York. Having made a name for itself by pioneering the use of commercial paper for entrepreneurs, the company was invited to join the NYSE in 1896. (For a summary timeline of selected events in Goldman’s history, see appendix G.)
In the early twentieth century, Goldman was a player in establishing the initial public offering market. In 1906, it managed one of the largest IPOs of that time—that of Sears, Roebuck. However, in 1928 it diversified into asset management of closed end trusts for individuals who utilized significant leverage. The trusts failed as a result of the stock market crash in 1929, almost causing Goldman to close down and severely hurting the firm’s reputation for many years afterward. After that, the new senior partner, Sydney Weinberg, focused the firm on providing top quality service to clients. In 1956, Goldman was the lead adviser on the Ford Motors IPO, which at the time was a major coup on Wall Street. To put Goldman’s position on Wall Street in context at the time, in 1948 the US Department of Justice filed an antitrust suit (U.S. v. Morgan [Stanley] et al.,) against Morgan Stanley and eighteen investment banking firms. Goldman had only 1.4 percent of the underwriting market and was last on the list of defendants. The firm was not even included in a 1950 list of the top seventeen underwriters. However, slowly the firm continued to grow in prestige, power, and market share.
The philosophy behind the firm’s rise was best expressed by Gus Levy, a senior partner (with a trading background) at Goldman from 1969 until his death in 1976, who is attributed with a maxim that expressed Goldman’s approach: “greedy, but long-term greedy.”15 The emphasis was on sound decision-making for long-term success, and this commitment to the future was evidenced by the partners’ reinvestment in the firm of nearly 100 percent of the earnings.16
Perhaps surprisingly, although it’s had many triumphs, over its history Goldman has had a mixed track record.17 It has been involved in several controversies and has come close to bankruptcy once or twice.
Another common misperception among the public is that today Goldman primarily provides investment banking services for large corporations because the firm works on many high-profile M&A deals and IPOs; however, investment banking now typically represents only about 10 to 15 percent of revenue, substantially lower than the figure during the 1980s, when it accounted for half of the revenue. Today, the majority of the revenues comes from trading and investing its own capital. The profits from trading and principal investing are often disproportionately higher than the revenue because the businesses are much more scalable than investment banking.
Even though the firm was growing when Whitehead wrote the principles, its growth in more recent years has been even more accelerated, particularly overseas. In the early 1980s the firm had a few thousand employees, with around fifty to sixty partners (all US citizens), and less than 5 to 10 percent of its revenue came from outside the United States. In 2012, Goldman had around 450 partners (around 43 percent are partners with non-US citizenship) and 32,600 employees.18 Today about 40 percent of Goldman’s revenue comes from outside the United States and it has offices in all major financial centers around the world, with 50 percent of its employees based overseas.
Once regulations were changed in 1970 to allow investment banks to go public on the NYSE, Goldman’s partners debated changing from a private partnership to a public corporation. The decision to go public in an IPO was fraught with contention, in part because the partners were concerned about how the firm’s culture would change. They were concerned that the firm would change to being more “short-term greedy” to meet outside stock market investors’ demands versus being “long-term greedy,” which had generally served the firm so well. The partners had voted to stay a privately held partnership several times in its past, but finally the partners voted to go public, which it did in 1999. Goldman was the last of the major investment banking firms to go public, with the other major holdout, its main competitor Morgan Stanley, having done so in 1986. In their first letter addressing public shareholders in the 1999 annual report, the firm’s top executives wrote, “As we begin the new century, we know that our success will depend on how well we change and manage the firm’s rapid growth. That requires a willingness to abandon old practices and discover new and innovative ways of conducting business. Everything is subject to change—everything but the values we live by and stand for: teamwork, putting clients’ interests first, integrity, entrepreneurship, and excellence.”19 They specifically stated they did not want to adjust the firm’s core values, and they included putting clients’ interests first and integrity, but they knew upholding the original meaning of the principles would be a challenge and certain things had to change.
Although the principles have generally remained the same as in 1979, there was one important addition to them around the time of the IPO—“our goal is to provide superior returns to our shareholders”—which introduced an intrinsic potential conflict or ambiguity between putting the interests of clients first (which was a Goldman self-imposed ethical obligation) and those of outside shareholders (which is a legally defined duty), as well as the potential conflict of doing what was best for the long term versus catering to the generally short-term perspective from outside, public market investors. There’s always a natural tension between business owners who want to make the highest profits possible and clients who want to buy goods and services for as low as possible, to make their profits the highest possible. Being a small private partnership allowed Goldman the flexibility to make its own decisions about what was best in its own interpretation of long term in order to help address this tension. Having various outside shareholders all with their own time horizons and objectives, combined with Goldman’s legal duty to put outside shareholders’ (not clients’) priorities first, makes the
