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9-406-002 R E V : M A R C H 2 2 , 2 0 0 7 ________________________________________________________________________________________________________________ Professors Boris Groysberg and Scott Snook and Senior Researcher David Lane, Global Research Group, prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2005 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. B O R I S G R O Y S B E R G S C O T T S N O O K Leadership Development at Goldman Sachs Our people have driven Goldman Sachs’ success for 130 years through sustained, superb execution across a range of markets and products. The best way to maintain that advantage is by recruiting, training and mentoring people as we always have—one at a time, with great care. We want Goldman Sachs to be a magnet for the very best people in the world—from new graduates to senior hires. At the same time, we are focusing on developing our very deep bench of talented people and improving and extending our skills. We are, for instance, placing young leaders in demanding positions that stretch their abilities. We are also devoting more time and attention to the formal training and development of leaders, particularly senior leaders. — Henry M. Paulson, “Letter to Shareholders,” Goldman Sachs, 1999 Annual Report Late on the evening of November 7, 1999, a small cadre of senior leaders huddled around a conference table on the 22nd floor of 85 Broad Street, deep in the heart of New York City’s financial district. The heady atmosphere and high-octane blend of intensity, anticipation, and quiet professionalism were not unusual for one of the world’s most storied investment banks. Tonight, however, eleven of Goldman Sachs’ finest were working not on a major acquisition or IPO, but on a revolutionary leadership development plan for the firm. In June 1999, Goldman’s Management Committee had selected a diverse, experienced group to form the Leadership Development Advisory Committee (see Exhibit 1). Their official charter was to “assess the future training and development needs of Goldman Sachs, with particular focus on the need for a more systematic and effective approach to developing managing directors (MDs).” After six months of brainstorming, discussions with Goldman Sachs colleagues, interviewing experts, and benchmarking best practices, the Committee was scheduled to outline its plan for the Management Committee the next morning. Tonight’s meeting was a final opportunity to review their work, edit the presentation, and personally commit to the plan. They all had every reason to be confident about the presentation. However, as they pored over each slide, they couldn’t help wondering how their ideas would be received by Goldman Sachs’ most senior leadership group. Each recommendation was based on an appreciation of the firm’s rich history and culture, combined with an understanding of its evolving business strategy and insights from the extensive research the Leadership Development Advisory Committee had done. Even so, no one sitting on the Management Committee had relied on a formal leadership program to reach the top. How skeptical might they be? And while the timing seemed right to introduce such an initiative, everyone in the 406-002 Leadership Development at Goldman Sachs 2 room knew that they probably had only one chance to get it right. If this proposal was rejected, it was unlikely that an alternative leadership development plan would be implemented anytime soon. Investment Banking in the 1990s Two key trends shaped the investment banking world in the late 1990s. The booming IPO markets were generating tremendous fees for banks; and the banking industry itself was rapidly consolidating. Customers were increasingly price-sensitive, and banks were betting that competitiveness correlated directly with scale and scope. Accordingly, acquisitions in the financial- services industry increased from 62 in 1994 to 86 in 1995, 96 in 1996, and 100 in 1997.1 In 1997 alone, Morgan Stanley, a long-time rival of Goldman Sachs, merged with Dean Witter; Merrill Lynch doubled its assets under management by purchasing Mercury Asset Management; Union Bank of Switzerland merged with Swiss Bank Corp.; Travelers merged with Salomon and then Citicorp in 1998, becoming the world’s largest financial services firm by assets.2 Also in 1997, ING’s purchase of Furman signaled the start of a wave of European acquisitions of U.S. firms. Though traditionally reliant on organic growth, Goldman Sachs likewise embarked on a series of small acquisitions during the 1990s, tripling its assets under management from about $40 billion in 1993 to $125 billion in 1997. Even so, Goldman ranked fifth in size behind J.P. Morgan, Merrill Lynch, Morgan Stanley, and Smith Barney (which soon became part of Citigroup) that year.3 The sustained bull market not only boosted overall market capitalization, but it also encouraged a flood of new companies to go public. In particular, the dot-com boom and the emergence of new media, telecommunications, and technology industries fueled investment bank growth. Yet this boom had a downside for the banks: “hot” new industries placed additional stress on an already tight labor market by wooing skilled workers away from more traditional fields. The ensuing “war for talent” threatened to put a damper on the growth of professional service firms as bankers, lawyers and consultants all sought opportunity in these new industries. Many firms turned to unconventional sources to fill the staffing void, eventually hiring Ph.D. graduates, medical doctors, scientists, and others with non-traditional business backgrounds. The increasingly diverse workforce challenged the strong cultures of professional service firms that historically had preferred to grow their own talent. Time-honored, organic models of leader development were put to the test. Goldman Sachs Though Goldman Sachs remained an employer of choice for many graduates, it was not immune to broader industry dynamics. The company’s objective was growth on all fronts, both to take advantage of new opportunities and to maintain and extend its competitive position among leading full-service investment banks. The firm hired heavily to sustain U.S. growth, while continuing to develop its presence in Europe and Asia. By 1999, almost half of all Goldman Sachs employees were domiciled outside the United States, and a substantial number had been with the firm for two years or less. (See Exhibit 2 for selected financial data.) Goldman’s business activities in 1999 were divided into three segments: investment banking, trading and principal investments, and asset management and securities services. Investment banking activities comprised financial advisory and underwriting. Financial advisory entailed advising companies on mergers and acquisitions, divestitures, corporate defense activities, restructurings, and spin-offs. Underwriting included public offerings and private placements of equity and debt securities. Trading and principal investments facilitated client transactions, but also Leadership Development at Goldman Sachs 406-002 3 included taking proprietary positions through market-making in, and trading of, fixed-income and equity products, currencies, commodities, swaps and other derivatives. Principal investments primarily represented revenue from merchant-banking investments. Asset management and securities-service activities fell into three categories: asset management, securities services, and commissions. In asset management, Goldman provided a broad array of investment advisory services to a diverse client base. Securities services included prime brokerage, financing services and securities lending, and matched-book business.a Commissions included agency transactions for clients on major stock and futures exchanges, revenues from the increased share of the income, and gains derived from merchant-banking funds.4 History5 Founded in 1869 on lower Manhattan’s Pine Street as a broker of promissory notes, Goldman Sachs grew its capital from $100,000 in 1880 to $1.0 million in 1904. In 1906, the firm entered the underwriting business. Sidney Weinberg, who rose from the position of porter’s assistant in 1907 to senior partner in 1930, spent the Depression and early postwar decades rebuilding from the huge losses of the 1929 crash by cultivating contacts and pursuing only America’s leading corporations as clients. His efforts paid off with the $650 million Ford Motor Company IPO in 1956, at that time the largest public offering on record. This and subsequent high-profile transactions sustained Goldman’s reputation as the leading U.S. investment bank, with performance consistently at or near the top of the league tables. In 1998, for example, Goldman ranked first in worldwide completed mergers and acquisitions, with 335 deals worth $958 billion. Goldman ranked third in common stock offerings, with 75 issues worth $16 billion, and third also in IPOs, with 26 issues worth $3.4 billion. Sidney Weinberg was succeeded in 1969 by Gus Levy, who pioneered block trading on Wall Street. Levy died in 1976 without a named successor, and the two leading candidates for the position—John Weinberg and John Whitehead—agreed to run the firm jointly. On their watch, Goldman returned to many of the senior Weinberg’s central principles: long-term relationships (over short-term profits) and steady, safe growth (over risk-taking). Whitehead reinstated Monday morning Management Committee meetings to discuss leading strategic issues, and instituted as Goldman’s corporate code a list of fourteen business principles emphasizing teamwork, integrity, reputation, talent, and quality (see Exhibit 3). Whitehead and Weinberg also led the globalization of the firm. Finally, Weinberg stressed client service as the firm’s overarching purpose. Burgeoning egos were kept in check by his familiar remark, “Clients are simply in your custody. Somebody before you established the relationships, and somebody after you will carry them on.”6 Upon Whitehead’s departure for government service in 1984, Weinberg promoted Stephen Friedman and Robert Rubin to co-head Goldman’s fixed-income division. The pair became co-chairs of the firm in 1990, where they distinguished themselves by making partners’ compensation more dependent upon performance and by initiating Goldman’s first lateral hiring efforts in order to offset employee defections to the booming hedge-fund business. In an effort to further link partners’ pay to their performance, and to create a new source of developmental feedback, Goldman instituted 360- degree performance reviews in the early 1990s. The early 1990s also saw Goldman Sachs venture beyond its role as corporate agent to risk its own capital for high returns. This approach returned early dividends—earnings nearly doubled between 1990 and 1992, funding the opening of new offices in Frankfurt, Milan, and Seoul. But in 1994, substantial investment and trading losses, along with Friedman’s departure (Rubin had left in 1992), a Books were matched when the distribution of maturities of assets and liabilities were equal. 406-002 Leadership Development at Goldman Sachs 4 precipitated the loss of about 45 partners and their capital. Jon Corzine was elevated from head of fixed income to senior partner and named the head of investment banking, Henry M. (Hank) Paulson, as president. Corzine and Paulson immediately reduced employee headcount and costs by slashing pay and bonuses, stabilizing the firm by the end of 1995. They also put restrictions on the withdrawal of partners’ capital, and replaced Goldman’s traditional partnership structure of unlimited liability with one that named the firm as general partner and named individual partners and equity holders as limited partners. This upheaval and other periodic crises obscured Goldman’s secular growth through the 1980s and 1990s. This growth was multi-faceted—by product, geography, earnings, and headcount. As one long-time employee recalled: When I came to Goldman Sachs [in the 1970s], we had no business outside the United States. We had no non-U.S. passport holders. We were totally a New York firm with 1,400 people, 40 partners, and $40 million in capital. When I became partner in 1984, there was only one partner outside the United States, and that was the American who ran the London office. In the early 1980s, Goldman Sachs’ staff grew at an annual rate of about eight percent. Over 90% of that new growth came from entry-level hires. During the same period, annual turnover averaged only about five percent, compared to typical industry turnover rates of around 20%. As hiring grew in the mid-1990s, however, Goldman’s annual turnover rose to between 20% and 25%—split about evenly between entry-level and experienced hires. (The rule of thumb among professional-service firms was that it cost about one year’s salary to replace a professional.) Rob Kaplan, global co-head of investment banking and a Management Committee member in 1999, pointed out: Most of the divisions—certainly investment banking—literally were becoming as big as the entire firm was 10 years before. Someone running a department within a division had a job as big as running a full division a decade earlier. We also were a primarily domestic firm up until the early 1980s. We really started building a substantial presence in Europe and Asia during the mid-1980s and into the 1990s. And whereas Goldman did not earn a substantial amount from its investment in overseas offices in 1995, by mid-1998, overseas offices generated 40% of Goldman’s annual pretax profit.7 Naturally, there were some growing pains. “As we globalized,” recalled one longtime staff executive, “We learned you can’t run Japan from New York. God knows we tried. But when you’re the U.S. Army, you realize that when your division commander is 12,000 miles from the Pentagon, you’ve got to let him make the decisions. That was a hard lesson to learn.” By 1996, the 172 partners concluded that they needed to increase their competitive strength by creating a new title of managing director (MD) for hundreds of vice presidents (as well as all partners), to convey the responsibility and leadership being asked of this group. MDs who were not partners received all the benefits of partnership—equal salaries and offices, for example—with the exception of an ownership stake in the firm.8 As part of their compensation, non-partner MDs received “participation shares,” the value of which was tied to the overall profitability of the firm, not to individual or department performance.9 In only a few years, the number of MDs exceeded 1,000 (see Exhibit 4, Goldman Sachs Growth). Goldman’s explosive growth and setback in 1994 led to a discussion about going public that lasted from 1996 until the eventual IPO in 1999. Arguments for going public rested primarily on the need for permanent capital. When partners retired, they took their equity in the company with them. Should a significant block of partners elect to withdraw their equity simultaneously, the firm’s capital structure could be at risk. “If you’re going to grow a big, diverse, and sprawling firm,” argued Leadership Development at Goldman Sachs 406-002 5 Kaplan, “You can’t be preoccupied with capital concerns every two years when people retire.”b Paulson defined the IPO even more broadly: “The public offering was one way of helping us manage that growth by giving us permanent capital and letting everyone be an owner of the firm. By helping us manage growth, the public offering also strengthened our culture, including the mentoring or apprenticeship process for training leaders that we’ve had for years.” But after so many years as a successful partnership, not everyone was convinced that the IPO was a good idea. As one senior executive recalled, “I thought it would radically change the culture. I had a vision that when alarm clocks went off around the world at 5:45 a.m. on May 10, 1999, 221 partners would hit the ‘off’ button on their clock radios. Why should they get up? They don’t have to work for another nanosecond.” In reality, fewer Goldman partners left than had been expected, particularly when compared to attrition rates in other investment banks that went public. Structure As the number of partners increased—the firm named 60 new partners between 1996 and 1998 alone—the decision making structure evolved as well. In 1995, Goldman replaced the 12-member Management Committee with a new, six-member Executive Committee whose members spoke for the firm as a whole. The Executive Committee’s charter extended to all issues that did not require a vote by the full partnership or a partner’s individual consent. In addition, two new 18-person committees were formed to broaden partner representation and oversee matters of strategic importance to the firm. The Operating Committee focused on promoting strategic and operational cohesion and coordination among the firm’s various divisions and locations. The Partnership Committee oversaw partnership policy, selection and practices, as well as the firm’s capital structure.10 Paulson emphasized the important role that the Partnership Committee played in dealing with cultural issues connected to the firm’s managing directors and partners. In January 1999, however, the Executive Committee was dismantled and a 15-member Management Committee was restored as the firm’s seniormost leadership group. Specific management topics were addressed by ad hoc committees. As Paulson explained, “Everybody has a day job. The committees are a night job. It may sound bureaucratic but it’s just a way of taking line people and having them focus on broader issues important to the firm.” The Training Committee, for example, defined by one influential partner as “a working group charged with considering how best to develop and retain the firm’s senior talent,” was an offshoot of the Partnership Committee. Far more than other investment banks, Goldman relied on teams of two or even three line managers to jointly lead departments and divisions. This relatively unusual practice offered several significant advantages. First, it allowed the firm to maximize the benefit of complementary skill sets. Second, having multiple “co-heads” with different lengths of service made transitions easier by guaranteeing built-in overlap. Finally, small leadership teams increased representation and ownership, and the extra leadership opportunities helped retain top players. One manager noted that Goldman was often able to field more than one senior executive to meet clients and win business: “Virtually all of the leaders of the firm spend a big part of their time in execution, in meetings with clients, working on specific fields. Having co-heads allows each to play an active business role and still have capacity to handle core management tasks.” At a more junior level, co-headships supported the development and transfer of skills