October 23, 2013

Insider Analysis

In a new book, Steven G. Mandis — a banker-turned-sociologist and adjunct professor at the School — attributes Goldman Sachs’s culture change to “organizational drift.”

Simone Silverbush
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Elite and prestigious. Venomous and toxic. While Goldman Sachs’s position as a leading global bank is undisputed, descriptions of its culture tend towards two extremes. How has the company evolved to prompt those perceptions, and why?

In a new book, What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences (Harvard Business Review), Steven G. Mandis, an adjunct professor at the School (and PhD candidate in sociology at Columbia), analyzes the firm’s trajectory from 1979 to today through the dual lenses of sociologist and insider (he worked for the firm for 12 years). He also collaborated with Professor Paul Ingram on a Columbia CaseWorks case study related to the book. Here, Mandis talks to Columbia Business about his former career at Goldman, “organizational drift,” and how leaders can better understand the culture-changing undercurrents in their own organizations.

You joined Goldman Sachs after graduating from college and moved up through the ranks, ultimately serving as a portfolio manager in one of the firm’s largest proprietary trading areas. What was your impression of the culture there? Were you aware that it was in flux?

When I joined the firm in 1992, I witnessed a partnership culture; the firm hadn’t yet gone public. So all partners had personal legal liability. Investment banking advisory services was still the majority of revenue. Many of the people at the top of the firm had banking backgrounds. The firm was still primarily US focused, but beginning to grow internationally and into trading. Reflecting the unique environment, culture, and allure, in general, our compensation was below what our peers made at other firms and turnover was well below its peers; but there was also the enticement of a private partnership. So in many ways, Goldman Sachs was a different firm than it is today.

There’s a sociological process that goes on called social normalization where changes happen so slightly and so incrementally that you don’t really notice them. You’re working 100 hours a week with all these obligations and pressures; you’re not sitting around thinking about how the culture is changing. I was eating Fruit Loops and Coca-Cola for breakfast and McDonald’s for lunch and dinner, and just trying to do a good job. It’s the perspective of time and academic training — and the benefit of having also worked at McKinsey and Citi and also being a banking and trading client of Goldman and the rest of Wall Street — that helped me put the firm into perspective in this book.

In the book, you use the sociological theory “organizational drift” to account for Goldman’s trajectory. How do you define it?

If you’re on a boat, and you want to get from point A to point B, you’re not going to get to point B by just following a line; there are currents, winds, the make-up of the boat, and other factors that will impact the journey and take you away from the straight line. That’s the idea of the drift: You may have a direct vision of where you want to go, but if you look just straight at it and try to move towards it, you find that it’s a lot more complicated.

In organizational drift, instead of wind and currents there are pressures. Organizational drift moves you away from that straight line — from the meaning of your stated principles; you start to drift away from them very slowly, very incrementally. Why is that? Regulatory pressures, technological pressures, organizational pressures, and competitive pressures push organizations away from their intended courses. As a leader or a manager, you should be aware of this because you need to take these forces into account as you nail down your strategy on how to get from point A to point B.

How do you show organizational drift” at Goldman Sachs?

In 1979, senior partner John Whitehead wrote Goldman’s business principles. He wrote down a dozen principles, beginning with: We always put our clients’ interests first. At the time, that meant a duty to clients above a legal standard. There’s nothing written down that documents material change from 1979 (with the exception of providing superior returns to shareholders, which was added when the firm went public in 1999). Today the written business principles are essentially the same. But when Lloyd Blankfein was in front of Congress [in 2010] being asked about the activities of the firm, he basically answered that the firm fulfilled all of its legal duties to its clients.

There’s a big difference in those approaches. There was this higher-than-legal standard of ethics at Goldman when it was a private partnership that was geographically-concentrated, less organizationally complex, and more advisory-focused. Now it’s moved to a legal standard because it’s become larger and more complex, with an emphasis on trading. Having a standard higher than a legal one restricts growth— just like having a private partnership restricted growth. In the book I detail how and why Goldman changed — things that moved the standard from and meaning of putting clients first to a legal line. The real reason behind it is that Goldman, as it gets larger and larger, is harder to grow; you need to make adaptations to maximize growth opportunities.

The very top people at Goldman genuinely believe that they are putting their clients first. But that meaning has more of a legal sense than it did in 1979. I’m not saying whether that’s good or bad. But the change happens so slowly and incrementally that no one notices.

What can leaders of other high-growth organizations take away from the book?

I want to provoke readers to consider that even if your organization is successful, there may be changes going on underneath the surface due to pressures that may not help you achieve your organizational goals in the long-term.

Leaders can use the book to think more strategically about growth. At Goldman there were all these interesting mechanisms at work that helped the company adjust to the drift. When the firm was a private partnership, for example, growth naturally was restrained because you can only grow so fast with your own money. The firm was biased towards advisory services because it was a private partnership and had limited capital. But once it became trading-oriented, it needed capital. Once Goldman started taking money from people outside, growth could accelerate. As a private partnership it took in outside capital too — so I disprove the idea that the IPO was the reason for the change — the IPO was a result. The book helps leaders think about these types of changes that accelerate growth.

Did anything surprise you when you stepped back from the firm and took on the role of analyst and scholar?

My hypothesis going into writing the book was that the culture changed when Goldman went from a private partnership to a public corporation. But I discovered that changes were happening even as soon as the business principles were written. These pressures were there from the beginning. There were many events that happened in the 1980s and early ’90s before the IPO that were already indicating a change, and there were pressures that were pushing the firm to change its culture. My Columbia CaseWorks case study with Professor Ingram focuses on this.

It’s human nature to point to a single event or person to account for a change. But the IPO was a result of these cultural changes that were already happening and a result of the pressures that were there. Even Lloyd Blankfein being named CEO was a result of internal pressures and changes — not a cause of them. You can’t say that something changed without proving the why and the how; that was the aim of this book.