What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences (9 page)

A Social Network of Trust

While the partnership election at Goldman was grueling, partnership offered camaraderie to those who made it.
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A retired partner explained to me that there were regularly heated disagreements among partners over business decisions. He felt the partners were in fact like a family or club. As in many families, the partnership was “dysfunctional” and had “black sheep”; there might be questions of motives or agenda; and sometimes there were even sharp elbows or personality mismatches, but there was a good deal of trust and familiarity among the members.

Most partners had spent their entire careers at the firm, and many senior partners had mentored the newer partners over years. They had gone through the same election process and knew how tough it was to make partner and how demanding the job was. Partners had outings together as well as annual dinners. Many lived in the same suburbs. Generally, they knew each other well. Some ties were stronger than others because of business school friendships, experience in working in the same department or the same part of the world, or location in the same neighborhoods. However, all of them were financially interdependent and needed to trust one another. Several partners agreed when I interviewed them that the phrase “social network of trust” was a fitting description.
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In 1994, a partner, addressing a gathering of new partners, highlighted the relationship between the partnership structure and the cultural view it promoted: “We own this business … We are partners—emotionally, psychologically, and financially. There can be no borders between us, no secrets.”
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Partners also created stronger networks because of the trust. Building a network involves connecting the dots, or rather connecting Goldman people to each other and to important people outside the firm. Almost a decade before he crafted the firm’s business principles, John Whitehead wrote a set of guidelines for the investment banking services area, one of which was, “Important people like to deal with important people. Are you one?”
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Gaining access to important people requires introductions from people willing to make the call. Partners were more willing to do that for the partners who were in their social network of trust and with whom they had financial interdependency.

For example, an investment banking partner explained to me that he was at ease connecting fellow partners to his contacts outside the firm, more so than connecting a vice president or regular managing director. Partners, he said, wouldn’t leave the company and take the relationship to a competitor. He trusted his partners in private banking to use good judgment and not to put his investment banking relationship at risk. This kind of trust made it easy to offer multiple perspectives to help a client. It also aided the firm in
cross-selling
: providing a full solution to clients. For example, Goldman might provide the merger advice to sell a company, and then the M&A partner would introduce a Goldman private banking partner to help the client manage the proceeds from the sale.
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“Cross-selling” significantly improves a firm’s financial performance, maximizing revenue opportunities.

A virtuous reinforcement loop was erected; partnership was enhanced by the trust fostered by the social network and financial interdependence, and the social network was enhanced by the trust.
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Productive Dissonance

The emphasis on shared values in the Goldman partnership model might lead to the impression that the Goldman culture was rigid, monolithic, and intolerant of diverse opinions. Generally this was not the case. Although the partners held common values and many of them came from similar backgrounds, Goldman recognized that different people had different ideas and perspectives and that a diversity of people and ideas was important to the firm’s vitality and productivity.
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Diversity was also important in its making the right decisions and giving clients the best service and judgment. Such diversity of experiences and expertise gave Goldman the flexibility to deal with constant change.

Goldman promoted cross-function communication and organizational cohesion through rotational programs for employees into other departments and regions and firmwide committees consisting of people from different departments.
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This “small-world network” of people who built ties, had financial interdependence, and trusted one another led to innovation and high performance. Committees drew together partners or potential partners from different areas to work together on partnership election, capital commitments, risk, culture, lifestyle, brand, and more. These committees, together with partnership meetings, served as places of exchange like those Ronald Burt describes as essential for optimizing the number of brokerage opportunities for networks.
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This practice created valuable networks, as well as a systematic, structured way to bring people together to discuss ideas, challenge each other, and seek solutions.
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Goldman’s flat organizational structure also encouraged people to interact, bringing their diverse opinions to the table.
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The biennial change in partnership, with a balance of new partners joining and old partners leaving, kept the ideas fresh, but generally it did not introduce so many differences that cohesion was lost.
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Goldman’s partnership culture allowed for disagreement in part because the partners have a stake in more than only their own areas of responsibility. They were financially interdependent. Banking partners had nothing to do with trading and vice versa, but trading partners were affected if a banking partner hurt the reputation of the firm, and banking partners were affected if trading partners didn’t properly manage risk, because they are risking the capital of all the partners. In a typical big bank, by contrast—one without a partnership ownership structure—compensation is based primarily on departmental and individual performance (and peer group compensation averages); what others do or think in another department or divison is typically of little concern to anyone else, because one’s own bonus is not materially threatened. The lack of financial interdependence typically limits the amount of productive disagreement you find at most Wall Street firms. Even with compensation in stock vesting over years, the attitude is much different because what one does typically has limited impact on the earnings or stock price of the entire firm.

The disagreement at Goldman was described by several Goldman partners as valuable.
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Rob Kaplan indicated that “irritating, distracting, and uncomfortable” discussions were “extremely good medicine for a healthy organization.”
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For example, one seemingly contentious relationship was that between senior executive John F. W. Rogers, considered by many to be one of the firm’s most powerful people, and Lucas van Praag, Goldman’s public relations spokesman from 2000 to 2012. Jack Martin, CEO of the PR firm Hill and Knowlton, said that he had seen the two “disagree aggressively, but that at the end of the day they [came] together as one.”
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Although others may see friction between Rogers and van Praag as unhealthy, Blankfein expressed confidence in them and asserted that “dissent and disagreement is healthy.”
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Whitehead described how he and his co-leader, John L. Weinberg, strove to maintain an environment conducive to productive disagreement within the management committee: “We met every Monday morning. We had an agenda, we went down the agenda, we made decisions as a group, and John and I tried not to dominate the committee because we wanted their input. It was very important to have the input of everybody on the management committee. There were seven of us, then nine of us, and then eleven. It got bigger as the firm’s diversity grew.”
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A Harvard Business School case study about Goldman’s training found that Goldman used the Socratic method to explore questions through discussion and debate. One senior manager described a typical discussion: “That was a good argument. But next time, it would actually be really interesting if you also added these three things.”
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One partner expressed his delight in this learning environment: “Goldman Sachs when I started was a fantastic place to be planted and grow. They treated me the right way, encouraged me the right way … It’s a Socratic, collaborative style. Bouncing things off of each other is fun, and you encourage that at every turn.”
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According to a former management committee member, the dialogue was predicated on collaboration: “We were always taught that the odds are high you’ll have better outcomes with a shared work effort than with that of a single individual. At Goldman Sachs it’s pretty rare that an additional perspective doesn’t give you a better outcome. As problems become more complex, the ability for a single individual to have the best perspective declines dramatically.”
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David Stark, a Columbia University sociologist, argues that
dissonance
, or friction, over competing values promotes an organizational reflexivity that makes it easier for a company to change and deal with market uncertainty.
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Dissonance prevents
groupthink
: what happens psychologically when a group is so concerned with maintaining unanimity in the face of opposition that alternatives and options fail to be identified or properly evaluated.
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Stark notes that dissonance can become resonance, a “dangerous form of cognitive interdependence,” when too many people overlook a key issue, giving “misplaced assurance” to those who think similarly.
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A partnership structure seems to mitigate against this phenomenon in part because of the financial interdependence and social network of trust among partners. One researcher explained this effect well in describing the era of the private investment banking partnerships as one in which “no one could take excessive risk with the firm’s capital, because of the vigilance of the partners. If Partner A wasn’t comfortable with a new business or a new client, Partner B would have to convince him of the merits of the business—and to do so, partner B would have to go well beyond the argument that it would generate a lot of short-term fees.”
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Stark points out that the “ability to keep multiple evaluative principles in play and to exploit the resulting friction of their interplay” is a competitive advantage. Organizations typically try to avoid the perplexing situations that arise “when there is principled disagreement about what counts,” when, in fact, they should embrace such situations and “recognize that it is legitimate to articulate alternative conceptions of what is valuable, what is worthy, what counts.”
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Partners I interviewed generally agreed that this is a good description of the productive dissonance that characterized Goldman’s partnership culture model.

Goldman excelled at adapting to change and dealing with market uncertainty not so much because of specific individuals but because the organization’s partnership structure and culture sustained ongoing and productive discussion and disagreement. Stark notes that when faced with uncertainty, “instead of concentrating their resources for strategic planning among a narrow set of senior executives or delegating that function to a specialized department, heterarchical firms [flat organizations or those with a limited hierarchy] embark on radical decentralization in which every unit becomes engaged in innovation.”
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Therefore, hierarchical firms—those with a long chain of command—are less supportive of innovation and entrepreneurship. Dissonance—supported by the flat organizational structure that facilitated interaction and information transfer, and the financial interdependence of partnership that fostered trust and aligned interests—gave Goldman a significant competitive advantage. Based on my interviews, dissonance of this degree did not exist at most Wall Street firms, because there was no financial interdependence, earnings were distributed, or the partnership was dominated by a few individuals, decreasing the financial interdependence. Goldman’s culture of debate took on special significance during the credit crisis, as discussed in a later chapter.

If dissonance encourages entrepreneurship, innovation, or flexibility in meeting competitive pressure, why was Goldman in the 1980s not considered innovative? For the most part, Goldman had a long history of watching and waiting while others did the innovating; then it moved in with an improved or enhanced version. Whitehead said, “[As] far as new products were concerned, I never felt that we had to be first when we did something. We had a reputation for being absolutely first-class in everything we did, but we didn’t have to be first with every idea. In fact, I enjoyed it when our competitors had the new idea and tried it out first.”
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Whitehead pointed out to me another reason Goldman was not the first to innovate: constrained capital limited what the firm was willing and able to do, something that changed as it first began raising more outside capital and then accelerated when it went public. It took bigger financial risks and grew more quickly. When I discussed innovation with partners and competitors, most said they did not see Goldman as an innovator in the 1980s and early 1990s, but they thought that dissonance added to the firm’s superior financial and competitive performance and allowed it to get to the best answers for the firm and for clients.

When I asked Whitehead about the perception of Goldman in the 1980s of not being an innovator, he pointed out a nuance that many people were missing: Goldman’s strength was not a matter of investing in and potentially taking new risks by developing new products per se. Instead, its strength lay in the ability for people to come together as an organization to figure out how to change and adapt and market products that were better for clients, no matter who created them. To Whitehead, that practice was as innovative as developing products or investing in innovations that might not work or benefit clients—but much harder to execute because of the barriers to getting people to work together, and a lot less risky.

Another significant innovation in the late 1980s and early 1990s was the heavy use of the emerging technology of voicemail, adopted much earlier and used more effectively at Goldman than at other firms. Voicemail helped improve coordination and teamwork, because multiple people could be given information simultaneously and they could hear the tone of a message. The technology resulted in better execution for clients and gave Goldman a competitive advantage. Goldman continued to rely on voicemail heavily even after it had e-mail capability, because e-mail lacked the inflection and expressive capacity of the human voice and was less effective in maintaining the firm’s social network.

Goldman people responded quickly to voicemail (and later e-mail messages) because the culture demanded that they do so. A quick and comprehensive response was and still is the norm; it would be culturally unacceptable not to respond as soon as possible. No matter the hour, you can get a partner or junior person on the phone to help you think about a problem or speak to a client. That was true when I was at Goldman, and my interviews confirm it is still the expectation.

Many people from other firms were (and are) shocked at the speed and amount of information shared, often mentioning their need to adjust to Goldman’s urgent voicemail (e-mail) culture.