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Monday, 10th August 2020
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The ‘long term view’ built Goldman Sachs, but what now? Back  
Peter Blessing reviews “Goldman Sachs - The Culture of Success” by Lisa Endlich , Warner Books stg£9.99
Without doubt, the rise of Goldman Sachs is one of the great success stories of financial services in the 20th century (and perhaps even the 21st). From selling a limited form of commercial paper 130 years ago, the firm has grown to be the world’s leading investment bank. What is all the more remarkable is that until the late 1990’s, the firm was an unlimited liability partnership, the last of its kind on Wall Street.

The firm’s story is a fascinating one and is ably told by Lisa Endlich a former Vice-President and trader at the bank. In a comprehensive yet easy to read book of almost 500 pages, the author recounts the origins and development of the firm and focuses on what she describes as its unique culture. The ‘culture of success’ was essentially that of a partnership where profits were pooled and shared on a firm wide basis. This process was at first informal but later became quite formal and encompassed features such as 360Âș reviews where staff members were reviewed by their superiors, peers and subordinates. The culture of the firm was to encourage its long term growth and emphasise client service - in this way, they built a client list other banks would kill for. Not being under short term earnings pressure, they were prepared to take a long term view - as one partner said ‘Greedy but long term greedy’. While not the most innovative of firms, it is extremely flexible and was very effective at adopting products and selling them quickly to its client base. Although there were problems, and even scandals, they faced up to them and resolved them.

As a former trader, the author provides a good description of the change in the Goldman Sachs business from the 1980’s onwards from being fundamentally an investment banking type business to one which is increasingly dominated by trading activities of various types. While this led to an increase in profitability, it also increased the risk and for many partners the reality of unlimited liability. During this period, it became increasingly obvious that the firm would have to abandon its partnership structure. Nevertheless, the commitment of many senior partners to the partnership concept was very strong even when it was against their own short term economic interest.

The author provides a very good description of the real difficulties faced by the firm in 1994 when it encountered heavy trading losses and when a number of partners left. Some of what she says is surprising and may reflect the looser control culture of a partnership- amazingly risk management was only centralised after heavy losses. She describes well the speed at which focus was regained and the transformation in its results over the following two years. Personally, I wonder had there not been an increased emphasis on trading, could it have survived as a partnership - investment banking is not particularly capital intensive.

One of the interesting features in this book from a management viewpoint is the fact that three times in its recent history, the firm was run by co-chief executives. In two cases, this structure was an unequivocal success. The first time this structure was tried, the then head of McKinsey & Co., warned that it would not work. Nevertheless, contrary to every management theory, the dual power structures worked. Unfortunately, the author does not dwell on the reason for this but it may have something to do with the partnership culture and a very flat and participative management style.

There are some weaknesses in this book. The biggest is that it is perhaps written too soon - I would be very interested in a similar work in perhaps three or four years time when it can be seen more clearly whether Goldman Sachs’ unique culture can survive in a public company. Some of the literary style is turgid and the book was quickly updated in late 1999 to reflect the change in the partnership status. It was not done in the most effective manner. For a general reader, some of the descriptions of trading operations are also somewhat complex.

Nevertheless, the book is a very readable book which I believe is of interest not just to those engaged in financial services but indeed to anyone involved in any business fundamentally based on intellectual property. The culture and success of this firm over more than a century from Marcus Goldman to Abby Joseph Cohen is well worth studying and is ably exposed by Ms. Endlich.

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