Wednesday, February 10, 2010

How Does Goldman Do It?

Goldman Sachs, one of the best-performing and most reputable financial institutions of our times, has been in the news quite a bit lately. The firm eked out profits during the tough times of the crisis. And it had another banner year in 2009. The entire financial community has watched how it has managed compensation for all employees--from its CEO to analysts right out of college--and how it has dealt with TARP bailouts and impending regulation.

In recent weeks, news stories inquired how and why it may have been an indirect recipient of bailout payments from AIG. Its CEO Lloyd Blankstein announced it was setting aside substantial amounts of earnings for charity and it would be reasonable and fair in the bonus payouts. (During the crisis, for regulatory purposes, Goldman elected to change from being a consolidated securities firm to being a regulated bank-holding company--like Citigroup and Bank of America. It is still, in a sense, regarded as a top major investment bank.)

As most financial institutions struggled to dig out of the crisis, Goldman bounced back from a dip in 2008 to report an astounding $13 billion in earnings in 2009. Its equity capital reached $71 billion. The firm generated an impressive 22% return for shareholders--a return most companies in any industry would covet in even the best of times.

Through it all, Goldman continues to be a top-notch attraction for talent in all its businesses--for BA graduates at elite schools, who want to get inside its doors for 2-3 years, and for MBA's, who aim for a prized offer and a long-term career.

How does Goldman do it? The Goldman mystique, an entrenched and established way of doing business, and an uncanny ability to attract top talent might explain it. But there are many factors:

It's the culture, most say. It's all about capital, past performance, smarts, an obsession with teamwork, a relentless demand on the lives of employees, and a carefully crafted culture that dates back decades ago.
The culture people perceive today goes back to the days when Goldman was led by bankers such as Weinberg (father and son), Levy, and Whitehead, all of whom obsessed over their own insecurity of Goldman being a mere marginalized, commercial-paper firm. They wanted to go beyond that and created a firm that revolved around a true partnership, intellectual prowess, and a near-maniacal focus on clients.
Goldman today now has the advantage of having been one firm through those years, a private partnership that is now a public firm. It has acquired smaller firms (J.Aron, Spear Leeds). Yet it has never had to "merge" or combine or compromise the culture that was created and then came to be.
Over the years, as the firm evolved and changed itself (even going so far as to "compete" with clients), it tweaked the culture, while trying to preserve what made it special and what helped it generate substantial earnings year after year:
1. Partnership. Goldman was until the late 1990's a premier partnership. All of Wall Street coveted the award of a Goldman Sachs partnership, which brought long-term riches, although to become a partner typically required giving up an outside life. Goldman then (and some say Goldman now) demands 24/7 attention to Goldman business interests and objectives--clients, deals, investments, and risks. There was always a golden carrot at the end (the partnership); hence, people were willing to invest their lives.
2. No Stars Allowed. More than other investment banks, Goldman squelched the star system and discouraged it. It promoted pure teamwork. People were evaluated and rewarded based on contributions to team activity. For years and even today, few beyond its CEO and CFO get regular media attention. Most Goldman people become better known in their second and third careers, when they leave to take positions in government (Paulson, Rubin, Corzine, Whitehead) or take lead roles at other firms (Thain).

3. Fast-follower. Some say Goldman succeeds by not being the first out of the box, but by following others after they have made the first mistakes. Goldman watches and subsequently dives in full force. Goldman was not the first big investment firm to go public, to build a leading M&A business, to develop derivatives products, to engage in substantial proprietary trading, to expand into private banking, private equity and asset management or to spread itself across the globe. Yet in just about all those sectors, Goldman roams near the top today.
4. Clients first and foremost. Goldman's history revolves around steadfast loyalty to clients--advising them, financing them, and trading for them or with them--in all products and in all parts of the world. Clients are attended to, nurtured, and put on a pedestal. For big banks, it likely set the standard for how they advise them, assess their relationships with them or pitch services.
There have been challenges, however, in the past decade. Goldman also has businesses (proprietary trading and private equity) that compete with clients. Carefully and tenderly, Goldman has tried to do both, knowing that now and then, it might step on a toe.
5. Extraordinary talent. Recruiting talent is a top priority. For years, some banks would say they seek talent, but didn't devote resources to hiring and retaining it or couldn't get senior bankers interested in the process. The Goldman of the past decades has had an unusual resolve and special ability to attract talent from top schools. Everybody--from senior managing director to analyst--is involved. Out of this resolve to hire people who had intellectual depth and who had smarts to tackle any subject at hand came the widely known rounds of excruciating interviews. Goldman devised a long filtering process to decide who could work well within its culture.
As it expanded into new businesses, Goldman wanted people who could think, learn, and push themselves mentally. It wanted people who would bow to the goals of a team. It tested and picked smart, team-oriented people during these sessions.
In turn, it promised significant responsibility early. It promised it would focus on retaining and developing people. It also promised to share the wealth of success. In return, it demanded a lot. A Goldman career wouldn't be a walk in the park.
Through the years, as it faced challenges of new geographies, new products, and new risks, it had people smart and diligent enough to embrace them, people who also knew they would be rewarded for giving so much of themselves to the firm.
6. Managing risks. Goldman the firm takes big risks--client, market, business and investment risks. In its history, it learned not to avoid them, but to manage them quickly, systematically, and intelligently. Like all large firms, it has its occasional hiccups and losses, but seldom has it made mistakes or taken on out-sized risks that jeopardized the existence of the firm.
7. Discipline. As a fast-follower type, its culture promoted a disciplined, near-agonizing approach to getting into lines of businesses that are big profit contributors today. It didn't leap into, say, asset management, private banking or Europe operations. It watched, and it waited for the right time. With its partnership roots, it sought consensual agreement from many when it decided to launch businesses, to acquire, say, a commodities business (J.Aron), to deploy capital and talent into something new.
The Goldman culture emanates from its history and is reaffirmed by successful performance. It redefines and reshapes itself through time. Still, there are challenges.
1. Goldman, like all big banks, must continue to manage conflicts of interest in its businesses: The private-equity group might bid for a company that is also the target of one of its clients. The prop-trading group may compete with hedge funds that also process their trades through Goldman. The culture permits it to discuss and address these conflicts all the time.
2. It is not used to the headlines and publicity post-crisis. Years ago, it wasn't a household name. Today, it is. It is managing more than it ever did before how the public perceives it and how outsiders can understand its role in banking and capital markets.
3. Its way of doing business could be affected by impending financial regulation, especially any rules that attempt to separate some banking activities from proprietary trading as much as possible. It would be un-Goldman-like if it were not already assessing all possible scenarios and devising a game plan for any new regulation.

On the diversity front, give the firm credit for strides it as made in recent years. Goldman was seldom at the top of lists of companies with standout diversity programs. And through its long history of being run by partners (now managing directors), there is only a sprinkling of minorities and women among those ranks. (It was Goldman Sachs women and alumni who formed the expansive networking group, "85 Broads.")
In recent years, it seems to have confronted diversity with the same focus and discipline it has for other businesses. The firm has implemented several programs to attract top under-represented talent across all its businesses.
It is a significant sponsor to the Consortium, Toigo, MLT, and Inroads. It sponsors MBA fellowships for minorities, special networking programs for women in business, and the highly regarded "bootcamp" for MBA students in finance. The firm has worked wonders to get women and minorities excited about it before they get to b-school campuses. To its credit, it pushes them to reach for the visible, prestigious roles in investment banking, private banking and trading. At the Consortium's annual career fair, it attracts a long line of students around its booth.
In the year and years to come, all eyes will remain on Goldman Sachs.
Tracy Williams

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