March 23, 2012 12:25 PM
The Goldman Culture
Posted by Steven Harper
After 12 years at Goldman Sachs, 33-year-old Greg Smith decided he’d seen enough. He resigned via a letter published on the op-ed page of The New York Times because, as he put it, “The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.”
Let’s do what lawyers do best: distinguish him away as irrelevant and move on.
The Times op-ed describes Smith as former executive director and head of the firm’s U.S. equity derivatives business in Europe, the Middle East, and Africa. After Smith’s public condemnation of Goldman, CEO Lloyd Blankfein and President Gary Cohn sent employees a memo saying that he was one of 12,000 vice presidents out of 33,000 employees. He reportedly earned $500,000 last year, which would put him far down the Goldman food chain.
Analogizing to a big law firm, Smith would probably be the equivalent of a nonequity partner. That doesn’t make his observations irrelevant or wrong, but context matters.
As for what Goldman stands for, what did Smith think the firm was when he joined it in 2000? A charitable institution? It seems unlikely that the radical transformation he depicts occurred only after Blankfein and Cohn took over in 2006. After all, they rose to the top for reasons relating to the firm’s culture and values.
Case closed. Move on.
Any big-law analogies?
Not so fast. If Goldman has accelerated in a particular direction, it’s not alone. In that respect, some parallels between trends at Goldman and the prevailing big-law model are interesting:
At the top of Goldman, traders displaced traditional investment bankers over time. That entailed a shift from long-term thinkers to short-term profit-maximizers. Once in power, Blankfein (a former commodities trader) surrounded himself with “like-minded executivesâ€”’Lloyd loyalists,'” the Times reported in 2010.
Transactional attorneys have similarly risen to lead many big law firms. Along the way, they have absorbed the business school mentality of corporate clients. Dissent is not always a cherished value.
â€”Resulting culture changes
Goldman’s determination to represent all sides of a deal recently became the subject of Delaware chancellor Leo Strine’s highly critical opinion of the firm. Likewise, large law firms have perfected techniques to maximize their representational flexibility. Those techniques have been essential to the remarkable growth that many firms have experienced.
Goldman’s leverage ratio is stunning: 442 partners out of more than 33,000 employees. As a group, large law firms have pulled up ladders, widened the top-to-bottom range within equity partnerships, and doubled attorney-to-equity partner leverage ratios since 1985.
Goldman’s partners are famously rich. Many big-law equity partners now enjoy seven- and even eight-figure incomes previously reserved for media celebrities, professional athletes, corporate CEOs, and, yes, their investment banker clients.
Yet the most important question involves mission. Smith’s op-ed suggests that Goldman has become focused on squeezing money out of clients. Along the same lines, The Wall Street Journal reported last year on “Big Law’s $1,000-Plus an Hour Club“â€”senior partners who command four-figure hourly rates from clients. The story quoted Weil, Gotshal Manges’s bankruptcy leader Harvey Miller: “The underlying principle is if you can get it, get it.”
Miller is certainly consistent. A year earlier, he was resisting discount requests from the court-appointed monitors in the Lehman and GM bankruptcies:
“If you had cancer and you were going into an operation, while you were lying on the table, would you look at the surgeon and say, ‘I’d like a 10 percent discount’? This is not a public, charitable event.”
(Miller’s concluding line is ironic. At the time his firm had already billed $16 million for the GM bankruptcy, which “public” taxpayer money was facilitating. Through January 31, 2012, Lehman ran up a $383 million tab at Weil Gotshal. Meanwhile, Weil recently reported average profits per partner of more than $2.4 millionâ€”an all-time high.)
Attitudes such as Miller’s are pervasive. It’s easy to single him out because he’s been publicly blunt about what he believes. Greg Smith’s indictment was his way of revealing truth as he saw it. Sometimes statements from those at the top of large law firms allow the truth to reveal itself for all to see. Often, it’s not pretty.
Steven J. Harper is an adjunct professor at Northwestern University and author. He recently retired as a partner at Kirkland Ellis, after 30 years in private practice. His blog about the legal profession, The Belly of the Beast, can be found at www.thebellyofthebeast.wordpress.com. A version of the column above was first published on The Belly of the Beast.
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