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

Steven G. Mandis

Harvard Business Review Press, 2013

When I first started as a prospect researcher back in early 2007, reading news about investment firm Goldman Sachs quickly became part of my routine. A new list of Goldman partners is out? Excellent. Let me check that list for my organization’s constituents. The Wall Street Journal has run an article about partner pay? Ooh—that will help inform capacity ratings. Business Insider wrote an article about changes Goldman is making in its corporate structure? Interesting! I’ll share that with the front-line fundraisers.

During the 2008 financial crisis I watched with the whole world as Lehman Brothers, Bear Stearns, Washington Mutual, Merrill Lynch and other firms were shuttered or sold. Goldman Sachs, though, managed to come out of the financial crisis with good financial returns--but a badly tarnished reputation, accused by many of cashing in on others’ misery.

Scores of articles and books on the company have been published since. I can’t say I’ve read them all, but those I have are rather scathing portrayals of a once lauded company: a withering New York Times article-turned-book by a former employee; a 672 page tome entitled Money and Power: How Goldman Sachs Came to Rule the World; articles from 2011 when members of the Occupy Wall Street movement held a “people’s trial” with a guilty verdict in protest of the company's perceived evils. Perhaps most dramatically was an excoriating 2009 Rolling Stone article that called Goldman “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

The 2013 book What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences by former Goldman employee-turned-sociologist Steven Mandis does not conjure vampire squids. It is not a titillating and lurid exposé. Mandis instead talks of the striking changes in the firm during his tenure from 1992 to 2004 and provides a history lesson of how the bank grew from its founding by German Jewish immigrant Marcus Goldman in 1869, its 150 years as a private partnership, its 1999 IPO, and its post-crisis shift from an independent investment firm to a bank holding company in 2008.

Through what he calls “organizational drift, Mandis asserts that Goldman has incrementally shifted away from its founding principles, the first and most important of which was “our clients’ interests always come first.” Mandis believes that Goldman’s “standard of commitment to clients… has largely been lost.” His sociological viewpoint—as the book emerged from his PhD dissertation on “organizational drift” at Columbia University—is that change is difficult to detect when it is incremental, just as it is difficult for parents to notice their children age from one day to the next. And these imperceptible changes can have profound consequences.

What changed for Goldman? Mandis’ hypothesis going into his thesis was that the company’s IPO was responsible for the change in culture. Public trading brought a new kind of pressure, and a new type of ownership and financial interdependence among the partners. And nearly 60 percent of the company’s partners left within five years after the IPO. But he disproved his IPO theory during the course of his research. Goldman drifted away from its original guiding principles due to a variety of pressures: regulatory, technological, organizational, and competitive--over a very long time. One of the organizational pressures he learned about through his research was about risk. When Goldman was a small private partnership it could still be very selective in turning down clients that they didn’t think were appropriate and could easily decide not to do things they didn’t think fit with their values. But as the firm got larger and larger and was trying to grow as quickly as possible the partners made slightly different decisions. They made choices that weren’t as calculated and risk-adverse as had been typical of Goldman since its inception.

Mandis drew from the framework of work done by Diane Vaughan, a sociology professor at Columbia University who studied the Challenger space shuttle disaster. The official investigation into the disaster concluded that O-rings inside the rocket were off by a tiny fraction which caused the shuttle to explode. Vaughn studied why these O-rings were off in the first place and concluded that a variety of pressures had caused the scientists to take incremental risks and that those risks added up to an organizational failure—and to the shuttle’s explosion. Mandis is not saying that Goldman will fail or has failed, however. He instead asserts that the changes in culture, the organization drift, has increased the company’s probability of some sort of organizational failure.

At the end of his work, Mandis offers some “Lessons Learned” that he believes could be of help to those in other organizations. Some aren’t relevant to those in nonprofit development, but many resonated with me and with my place within organizations with which I have been affiliated:

- Shared values, whether codified or uncodified, tie an organization together.

- Social networks can create competitive advantages and improve performance. And organizations should consider creating some sort of partnership or sharing that is bound by financial or other interdependence and focus on improving trust among the group members through socialization.

- Public disclosure supports an organization’s values and strengthens the organization itself. An organization should consider making personnel decisions more public.

- Generating dissonance or perplexing situations that provoke innovative inquiry can create competitive advantages and improve performance.

- 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.

- 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.

- 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.

- Leaders get too much credit and too much blame . . . 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.

What Happened to Goldman Sachs may not appeal to those looking for a provocative, sensational tell-all. Those books on Goldman and other Wall Street firms do exist. This work more often than not reads like the PhD thesis that it is, thoroughly researched with a 75+ page appendix filled with copious footnotes and, in this researcher’s opinion, glorious data. What Mandis does offer in this measured, well-researched work is a better understanding about the culture and evolution at Goldman and other Wall Street firms, and more importantly, a better understanding of the consequences that can result from growth with any large organization.

- Susan Grivno