Appendix B
Analytical Framework Applied to Goldman
Diane Vaughan’s analytical causal framework examines three main pressures—environmental and organizational (for simplicity, “organizational”); regulatory; and competitive—to analyze change over time.1 In order to analyze Goldman, I utilize Vaughan’s framework and add technological pressure.
When the framework is applied to Goldman, as shown in Table B-1, the result illuminates changes more clearly over time. Even though the changes are presented in temporal sequence from 1979, when the firm’s business principles were written by John Whitehead, to today and are divided by who ran the firm or oversaw major changes, this is only for simplicity of presentation. The changes are related to each other, impact each other, and compound each other and have varying degrees of importance and significance. I selected 1979 because that is when the principles were written; 1990 because that year was when John L. Weinberg retired as senior partner (Whitehead had left in 1984); 1996 because it marked the legal structural change to a limited liability corporation; 1999 because it was the year of the IPO; and 2012 because it is the current year as this is written.
To help the reader understand the chart, I will give at least one example illuminated for each pressure.
Organizational pressure: Goldman’s legal structure changed from a private partnership with full personal liability and illiquidity until retirement, to a limited liability private company with liability capped at the capital in the firm, and finally to a public company at the IPO with the liability capped at the capital in the firm, but with liquidity for shareholders. The firm changed from being completely privately held, to taking outside private capital, to taking outside public capital. The ownership changed from 100 percent Goldman partners to around 10 percent Goldman partners.
Regulatory pressure: Goldman operated under Glass–Steagall before the law was repealed in 1999 through the Gramm–Leach–Bliley Act. In 1970, the NYSE changed a rule allowing investment banks to become public.
Competitive pressure: The tech boom, the alternatives (hedge fund and private equity) boom, foreign competitors entering the US market, and US commercial banks were all factors that increased the search for talent. This impacted Goldman’s ability to attract and retain not only the best people but also people with the same values. The firm added a new level of executives, known as managing directors, in part to offer people a comparable title. The firm changed certain business practices in order to maintain and grow market share (e.g., no hostile raids, underwriting standards requiring at least three years of profits, and no gambling clients).
Technological pressure: Technology made information more of a commodity, impacting the ability for people to add value to clients. Technology added transparency to markets, lowering profitability margins and emphasizing scale.
Under the time frames, I provide some data to illustrate the changes in business mix. It’s important to keep in mind that before 1999, Goldman was a private firm and therefore not required to make certain information public.
TABLE B-1
1979 | 1990 | 1996 | 1999 | 2012 | |
Head of firm (background)/#2* | Weinberg (banker) | Friedman (banker) | Corzine (trader) | Paulson (banker) | Blankfein (trader) |
Whitehead (banker) | Rubin (trader) | Paulson (banker)* | Thain/Thornton (banker/multi)* | Cohn (trader)* | |
Organizational characteristics | |||||
Private/public structure | Private partnership | Private partnership | Private LLC | Public corporation | Public corporation |
Investment bank (IB)/Bank | IB | IB | IB | IB | Bank |
Liability | Personal | Personal | Limited | Limited | Limited |
Ownership | 100% partners | 87.5% partners, 12.5% Sumitomo | 82.5% partners, 12.5% Sumitomo, 5% Bishops | 48% partners, 12% public, 40% other | 11.5% partners, 8% Berkshire, 80% public/other |
Compensation Partners/Nonpartners |
Fixed % cash |
Fixed % cash |
Fixed % cash |
Fixed % plus discretionary Cash and stock |
Discretionary plus fixed % Cash and stock |
Partner liquidity | Starting at retirement | Starting at retirement | Starting at retirement | Public market with vesting | Public market with vesting |
Partner election | Every 2 years | Every 2 years | Every 2 years | Every 2 years | Every 2 years |
Partner titles | Partner | Partner | MD | MD | MD |
Departnering process | Public | Public | Public | Not public | Not public |
Partner compensation philosophy | % based on tenure | % based on tenure and performance | % based on tenure and performance | % based on tenure/performance and comparables | Discretionary and % based on tenure/performance and comparables |
Employee compensation average | Below peers | Below peers | Below peers | At peers | Above peers |
Regulation | |||||
Number of business principles | 12 | 12 | 12 | 14 | 14 |
Clients’ interests first | Yes | Yes | Yes | Yes | Yes |
Shareholder returns | No | No | No | Yes | Yes |
Board | 100% partners | 100% partners | 100% partners | Majority “insiders” | Majority “outsiders” |
Banking activities | Glass–Steagall | Glass–Steagall | Glass–Steagall | Glass–Steagall repealed | Dodd–Frank |
Competition | |||||
Employees | US IBs | US IBs | US IBs | US IBs, banks, foreign banks, tech firms, hedge funds, private-equity firms | US IBs, banks, foreign banks, tech firms, hedge funds, private-equity firms |
Turnover | ~5% | ~5%–10% | ~20%–25% | ~20%–25% | ~20%–25% |
Capital | GS private | GS private | GS private | GS private | GS private |
(competitors public) | (competitors public) | (competitors public) | (competitors public) | (competitors public) | |
Clients | |||||
No-hostile policy | Yes Limited |
Yes ~20% |
No ~30% |
No ~40% |
No 40%–50% |
International | |||||
HF dedicated group | No | No | No | No | Yes |
PE dedicated group | No | No | No | Yes | Yes |
GSAM | No | Yes | Yes | Yes | Yes |
Average tenure of CEO | ~8 years | ~7 years | ~6 years | ~6 years | ~5 years |
Returns | |||||
IB % revenues | >50% | ~50% | ~30%–35% | ~30%–35% | ~10%–15% |
Prop % revenues | <10% | <10%–20% | ~20%–30% | ~60%–70% | ~50% |
Technology | |||||
Voice mail | No | Limited | Yes | Yes | Yes |
No | No | Limited | Yes | Yes | |
Credit derivatives | No | No | Limited | Yes | Yes |
Note: This table is based on publicly filed information and general consensus of estimates from interviews. Much of the information has not been reported by Goldman, especially prior to Goldman, is subjective, and requires varoius assumptions and interpretation.
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