A Victim or a Perpetrator?

The leaders of Goldman have certainly wanted to make money for themselves and their shareholders throughout its history. The original Goldman business principles were written in 1979 to help regulate behavior and acted as a balance between short-term greedy and long-term greedy when dealing with clients as the firm grew. In addition, the organization had many elements besides the principles that impacted behavior, from financial interdependence, to the social network of trust, to constraints on capital and dissonance. The Goldman leaders knew the values and principles, but various pressures left them with the conviction that the firm needed to grow rapidly and often caused them to make incremental decisions that were not consistent with the original meaning of the principles and values, moving the firm increasingly further from the original meaning. With conflicting organizational goals and scarce resources, the interpretation of the principles had to change and the culture had to change. This process was enabled by social normalization and structural secrecy. Complicating this drift was the sense of higher purpose that employees felt Goldman, and they themselves, served (including public service contributions), which contributed to rationalization about the deviations.

Goldman most likely will continue to pursue and maximize opportunities and undergo organizational drift, until the business is severely negatively impacted or the fines and other consequences are too high, and then perhaps the firm will readjust. It did so in the aftermath of its near bankruptcy in the stock market crash in the late 1920s, for example, getting out of the asset management business. However, the public and regulators should be concerned—not only about Goldman but also about all of the systemically important financial institutions that pose a risk to the economic system. They may be doing what is in their own and their shareholders’ best interests as they respond to pressures, incentives, and environment, but it may not be in the public’s best interests. And when the public must pay for their failures (which, as we have seen, can be breakdowns on a massive scale), they should be focused on the consequences of the organizational drift that has, is, and mostly will continue happening.

A concerning issue about the organizational drift toward a legal definition of ethics is that Goldman and the other banks have a significant influence or role in determining the legal line. For example, Goldman has reportedly spent over $15 million in lobbying related to Dodd–Frank and less than two-thirds of the regulations have been implemented.² Securities and investment firms spent more than $101 million lobbying regulators in 2011, according to the Center for Responsive Politics, a nonpartisan research group. That is on top of $103 million spent lobbying lawmakers and regulators in 2010.³ If the pressure is to maximize the opportunities, especially as banks get larger, then the legal line will be pressured to change accordingly, and not just by Goldman, but by all of the banks. And the larger the banks and the bigger the challenges of the law of large numbers, the more pressure there will be to impact the legal line.

In the 1990s I received a letter from senior executive asking me to donate money to Goldman’s political action committee (PAC). The letter explained that participation was completely discretionary and that non-participation wouldn’t negatively affect me, but many people I spoke to about it were skeptical that our bosses didn’t review the list. According to some, Goldman’s PAC and its employees have donated more than $20 million to federal political campaigns from 1999 to 2009.⁴

Can Organizational Drift Be Constrained or Managed?

Organizations must adapt to compete and be successful in achieving their organizational goals, which is what Goldman has done and will surely continue to do. At the same time the competitive, regulatory, technological, and organizational pressures that have affected the culture and the firm’s behavior will continue. Therefore, I believe ongoing drift is inevitable.

Are all organizations doomed to failure in the long run because of organizational drift combined with organizational and environmental complexity, and therefore, is Goldman also ultimately doomed? A very good question, for which I don’t have a good answer, except that, as John Maynard Keynes famously remarked, “In the long run, we are all dead.”⁵

Perhaps it is naive or idealistic or nostalgic to believe that organizations can implement ways to manage or constrain organizational drift. For an organization that is already drifting, there are many questions. What will be the catalyst for the self-evaluation? A massive failure, congressional investigation, public outcry, shareholder activism, stock price performance, or an independent chairman of the board? Why would a firm do a self-evaluation if it is widely viewed as successful by its shareholders? Who would even do the evaluation? Is such an investigation better done by an external party or internally? All are very good questions. And ones that deserve consideration and study, though unfortunately they do not seem to get as much attention as they deserve, not just for banking but organizations generally. However, some good ideas have been shared about addressing the banks specifically as a result of the financial crisis.

For example, Peter Weinberg, who is the grandson of senior partner Sidney Weinberg and nephew of senior partner John L. Weinberg, and is a former Goldman partner, made a proposal in a September 2009 Wall Street Journal op-ed that focused on incentives. He proposed a “10/20/30/40” compensation plan under which “junior employees would receive regular competitive pay, but senior employees would be paid as follows: 10 percent of annual compensation in cash now; 20 percent of annual compensation in cash later; 30 percent of annual compensation in stock now (with a required holding period); and 40 percent of annual compensation in stock later.” Now means immediately at the end of a compensation period. Later means after a period during which a cycle can be evaluated and the award maintained or adjusted accordingly. The other main aspect of his plan was that the people who manage trading or asset management businesses should have some of their own capital at risk in the business. Weinberg’s proposal is based on the premise that success should be viewed in hindsight and wealth creation should occur on the back end, to ensure that “through-the-cycle compensation [is] linked to through-the-cycle value creation. Requiring those who manage a business or fund to have some of their own money invested in it would “better align the pocketbooks of Wall Street with the pocketbooks of financial markets and our economy.”⁶

Assuming that the banks won’t be broken up or forced back to private partnerships, I would suggest examining ideas on locking up capital for longer similar to Peter Weinberg’s, but perhaps complementing them with a greater emphasis on organizational elements. I would examine some sort of quasi partnership-partner compensation plan with an election for banks.

A partnership compensation plan could offer a degree of financial interdependence if it had a greater emphasis on fixed percentages of profits versus discretionary compensation for those in the partnership plan. That might lead the partners to place a greater emphasis on the whole enterprise than on themselves or their group. Financial interdependence and personal liability—forcing those in the partnership to disproportionately share in fines, settlements, compliance or risk management failures, or certain losses with shareholders—might make risk management and ethical standards a higher priority and reemphasize a social network of trust while creating an environment for dissonance.⁷

In discussing the ramifications of the personal liability of executives having been limited, a retired Goldman partner rhetorically questioned, why is it that when one person or a handful of senior persons at the firm does something bad that costs the shareholders and possibly puts the public at risk, that one person gets fired (maybe with some clawbacks of compensation) but the managing directors of the entire firm don’t have their compensation significantly affected? Another person I interviewed suggested that if Goldman partners collectively had to disproportionately pay the $550 million settlement with the SEC out of their bonus pool, or if J.P. Morgan had a partnership structure and the partners together had to disproportionately pay the losses from the “London whale,” perhaps they collectively would take stronger action to prevent such behavior. He pointed out that when Goldman paid settlements related to Robert Maxwell, all the partners paid, not just the one responsible for the relationship, and the firm went back retroactively to those who were partners at the time for payments. Enacting individual clawbacks that hold one person accountable has taken away the emphasis on organizational elements of financial interdependence and social networks of trust by which the executives could be holding each other accountable and self-regulating.

Some critics of the banks have suggested that bankers who do not like the idea of increasing their personal liability or risk “should look at the portraits on the wall of their predecessors who, as partners of the very same firms, worked and prospered under such a personal liability rule every day of their lives.”⁸

The regulatory focus on the banks has been on quantifiable and measureable factors like minimal capital requirements and certain business restrictions. These are important; however, they alone will not address the issues of the banks, including Goldman. This may be in part because these regulations typically have some ambiguity and motivated organizations with a certain culture can seek to circumvent the spirit of the regulations.

As I mentioned before, this study is much more than a case study on Goldman, or even systemically important, publicly traded banks. It has much broader implications for organizations generally. This sociological study opened my eyes to the organizational elements as they relate to a culture and the importance of understanding them as they relate to organizational, competitive, technological, and regulatory pressures. The organizational elements help form the culture, the incentives and behavior—they can help a firm be “long-term greedy.” In addition, organizational elements can help constrain or manage organizational drift.

Lessons Learned

As I consider what I’ve learned about Goldman, and the sociological theory that supports my analysis and conclusions, I am mindful that this book has implications that resonate beyond Goldman. The following summary should help leaders and managers think about the organizational drift that has, is, and will be happening at their own organizations.

• Shared values, whether codified or uncodified, tie an organization together. A firm should determine its own basic set of nonnegotiable values, the minimal constraints. Leaders, not just boards of directors, should look to the meaning of a firm’s principles to define corporate ethics and guide employees’ actions, and try to determine objective ways in which to check deviations from the original meaning (for example, attrition rates, independent client interviews, independent exit interviews with departing employees).⁹
• Social networks can create competitive advantages and improve performance. An organization should consider creating some sort of partnership or sharing that is bound by financial or other interdependence and focus on improving the trust among the group members through socialization. The election or promotion into a leadership group should put a greater emphasis on culture-carrying qualities in the process.¹⁰ Leaders and board members should also monitor changes in the nature of the members of the group, cognizant that they can have an impact on the social network.
• Financial interdependence is important as a self regulator. Leaders’ compensation should be based more on collectively generated profits and culture carrying. Leaders should disproportionately and jointly share in fines, settlements, and other negative consequences out of their compensation plan or their stock. Meaningful restrictions on leaders’ ability to sell or hedge shares should be imposed, which can lead to better self regulating and longer-term thinking.
• Public disclosure supports an organization’s values and strengthens the organization itself. An organization should consider making personnel decisions more public. When people are dismissed or specifically not promoted because of bad behavior, it should be more public. There is a value to having public signals when behavior is not acceptable. Conversely, culture carriers, those that represent the values, even if they may not be the firm’s biggest revenue producers, must be promoted as a signal of what’s important.¹¹
• Generating dissonance or perplexing situations that provoke innovative inquiry can create competitive advantages and improve performance. Having some sort of interdependence should help create an environment that supports discussion and debate. Complementing this debate is balance between groups. Getting the input of leaders from different areas or regions, who have worked together and have good working relationships, is also important in encouraging dissonance. At the board level, in many situations, an independent lead director or independent chairman can add to dissonance.
• A sense of higher purpose, beyond making money in a materialistic society, can help people make sense of their roles. A firm needs to give employees a clear understanding of its values, its social purpose, and its sense of responsibility. However, leaders need to be conscious of not using the good works of their employees or of the firm to rationalize behavior that is inconsistent with its principles.
• An organization’s culture is transmitted from one generation to the next as new group members become acculturated or socialized. It is crucial to recruit people who have the same values and socialize them into the firm’s culture. Even if this restricts growth in the short run, it is important not to undervalue recruiting, interviewing, training, mentoring, and socializing. This is also very important in international expansion.
• Organizational exceptions may address short-term issues but may cause long-term ones. Early promotions and outsized compensation can indicate that a firm is a meritocracy, but they can also encourage behavior inconsistent with principles. Leaders need to be cognizant that sometimes letting top performers go, if they do not have a long-term perspective and buy into the system, may be better for the overall organization in the future.
• The ability to make rational decisions is limited, or bounded, by the extent of people’s information. To broaden employees’ understanding, a firm should promote a tradition of teamwork and interdependence and develop future leaders by rotating them among work assignments in different departments and geographic locations. In order to reduce structural secrecy, there may be short-term opportunity costs, but the long-term benefits are significant.¹²
• Firms must think about long-term greed and what it means. Through actions and training, leaders must explain the pressures on short-term thinking and how the firm resolves the conflicts of short- and long-term goals. Potentially conflicting or confusing organizational goals, such as putting clients first while also having a duty to shareholders, require strong signals from leadership as to what is acceptable and unacceptable behavior. These nuances cannot be left to statements of principles; they must be modeled by leaders’ actions each day.
• Leaders must understand that external influences can shape the culture. For example, there are competitive, technological, and regulatory pressures. Responses to them can have unintended consequences, including drifting from principles. This can increase the probability of an organizational failure.
• An organization needs to understand to what extent models impact behavior, decisions made by business leaders, and organizational culture. For example, boards of directors of public companies should ask questions if earnings per share (EPS) estimates are too consistent with analysts’ estimates. They should ask whether the firm is managing to models or to what is in the best long-term interests of the firm.
• Leaders get too much credit and too much blame. Leaders need to uphold the firm’s shared values—and that is a key component to leadership.¹³ But too little emphasis is given to the organizational elements that shape behavior or provide an environment for leadership or change.
• An organization’s structure, incentives, and values last longer and have more impact than those of individual leaders. Usually when there is a change or loss or failure there is a tendency to blame one thing or one person, when typically there are complex organizational cultural reasons. It is the duty of leaders and board members to examine what is responsible, not who is responsible.

One of the most difficult issues in guarding against organizational drift is that adaptation is critical to the survival of an organization, and the difference between healthy adaptation and organizational drift is very, very difficult to discern. And when a business appears to be successfully reaching its organizational goals, it is especially challenging, and most likely unpopular, to start questioning whether the culture has drifted. What is the incentive to do so? But it may be precisely at this time that changes may be occurring that are setting a firm up for failure. Leadership requires a “curiosity that borders on skepticism” and that “questions are answered with action.”¹⁴ Examining your own organization will be messy, but I hope the observations from sociological analysis outlined in this book will provide useful guidelines and inspire the risk taking required to tackle the challenges.