MOTIVATING THE REST BY CHALLENGING THE BEST

Jet aircraft pilots know that a certain deadly combination of airspeed, glide angle, and throttle is a recipe for a crash landing. When they’re in this position, just a little more power brings down the nose and accelerates their rate of descent. The pilot’s position is called ‘behind the (power) curve’ because a marginal increase in power does not create the expected uplifting effect.

A number of companies these days find themselves somehow ‘behind the power curve’. Short-term operating results are not adequate, nor is the long-term competitive position. More pressure on people does not improve the company’s performance; instead, the rate of descent accelerates. Interestingly, in that case, companies usually focus on mediocre performers and attempt to bring them up to a certain ‘acceptable’ level.

They should take a different approach. The best individual performers are generally the most strongly motivated. Singling them out should reinforce their efforts to excel and motivate others to aim for excellence, too. In other words, pick out the stars and inspire them to achieve even greater things. Set challenging improvement goals for ‘great’ performers. Usually, ‘good’ performers are inspired by the improvement goals of the best of the best, and, as a result, their performance will also improve. But whatever the response, it must be selective and more than incremental. Pouring on a little more power won’t work.

Productivity can best be improved not by striving to bring mediocre players up to speed, but by pushing the best, for example, highly talented youngsters, to raise their standards of excellence. Enter: mentoring — a highly effective motivator. As a young and ambitious Ph.D. student and already a serious equity trader, I was in awe when I met some of my mentors, Nobel laureates like Bob Solow and John Nash. There’s nothing quite like meeting and being challenged by ‘living libraries’, the peak of the pyramid. It’s like putting a jet engine in an already fast Porsche 911.

Apart from mentoring, three other core factors influence the productivity of the best of the best, and, consequently, the rest:

1. Always challenge the status quo. Any company that does not continuously and systematically challenge long-held assumptions about its people — too often ‘sacred cows’ — is probably missing an opportunity to improve productivity.

2. A clear definition of what ‘extraordinary employees’ truly are. Without a clear statement that defines ‘excellent’ people, chances are the company’s main assets will be underutilized.

3. A strong linkage between the company and its clients. It’s always difficult to ensure high asset utilization if the linkage is weak. Alignment between the company’s capabilities — essentially, the talent of people — and the needs, priorities, and expectations of clients is crucial.

More details are available at www.pieterklaasjagersma.com/on-becoming-extraordinary.

GOLDMAN SACHS — THE BLUEPRINT FOR LEADERSHIP

Warren Buffett once said to a group of managers of Salomon Brothers in the aftermath of the trading scandal that shook the investment bank in 1991: “If you lose dollars for the firm by bad decisions, I will be very understanding. If you lose reputation for the firm, I will be ruthless.” (Source: J. Fuerbringer, New York Times, August 27, 1991).

A strong reputation has a shelf life, and in today’s fast-changing world, it can fade quickly. Reputation — built on admiration, excellence, and status — is like water, always flowing somewhere. As a business asset, it is definable, measurable, and, interestingly, always improvable.

With this in mind, a new multi-year study set out to identify the most respected wholesale banks operating in Europe. The goal was to create the equivalent of a Pulitzer Prize for wholesale banking — that is, for banks providing commercial, corporate, and/or investment banking services. Reputation is to strong performance as chicken is to egg. It’s not always clear which begets which, but it’s hard to have one without the other. Business clients rent the reputations of their banks.

To come up with the definitive list of elite wholesale banks in Europe, over 4,000 C-level executives and senior managers from Fortune Global 500 and Forbes Global 2000 companies nominated their top banks operating in Europe (i.e., European and non-European banks). Banks were rated on six key success factors: [1] client centricity, [2] external engagement, [3] competitiveness, [4] quality of leadership and employees, [5] innovativeness, and [6] business model efficiency and effectiveness (indicators include the bank’s agility, client responsiveness, and reliability).

The study, independently conducted, aimed to identify the wholesale banking practices most respected by C-level executives and senior managers. It focused exclusively on banks providing commercial, corporate, and/or investment banking services. Since C-level executives and senior managers are among the most knowledgeable people in business, their verdict yields the true ‘A list’. It’s hard to imagine a more critical judge.

Recently, the report “Goldman Sachs — The Blueprint for Leadership” was published. It is the definitive report card on Goldman Sachs’ reputation and performance, as seen through the eyes of this influential group of decision-makers. “Goldman Sachs — The Blueprint for Leadership” focuses exclusively on the firm — independently, systematically, comprehensively. It offers unique data and dozens of actionable insights and recommendations for Goldman Sachs, its peers, investors, and other stakeholders.

More details are available at www.pieterklaasjagersma.com/reports/goldman-sachs-3.

GOLDMAN SACHS' REPUTATION RULES

Today, reputation is no longer one challenge among many; it has become ‘the’ challenge, especially in professional services businesses.

Goldman Sachs’ continued success hinges on cultivating a reputation that maximizes client, shareholder, and stakeholder value. Apart from dozens of other insights, this was just one of the takeaways from an extensive multi-year study analyzing the experiences and perceptions of more than 4,000 C-suite executives and senior managers from Fortune Global 500 and Forbes Global 2000 companies. The study examined the peak of the pyramid in European wholesale banking — that is, banks providing commercial, corporate, and/or investment banking services in Europe. Goldman Sachs was one of Europe’s top players.

A bank’s corporate reputation should always be anchored in six key success factors:

1. An excellent client strategy fueling both client satisfaction and loyalty, embedded in a ‘client-driving’ rather than a ‘client-driven’ approach — that is, an approach focused on proactively shaping client needs, priorities, and expectations.

2. An external engagement strategy prioritizing ongoing, mutually beneficial, and superior interactions with all essential external stakeholders: from clients to communities.

3. A competitive strategy enhancing the bank’s distinctiveness in its key business dimensions versus direct and indirect competitors, resulting in uniqueness, first and foremost, in the eyes of the bank’s most important clients, shareholders, and other relevant stakeholders.

4. A professional (people) development strategy focused on promoting excellence, fostering a collaborative mindset within the bank, and building a smooth-running ‘leadership-followership’ engine.

5. An innovative culture encouraging the systematic development of new products and services that strengthen and deepen client relationships.

6. An effective and efficient business model focused on enhancing the bank’s [1] client responsiveness, [2] organizational agility and resilience, [3] clarity and transparency of product/service offerings, [4] reliability and predictability as a business partner, and [5] alignment with evolving market dynamics (for example, geopolitical, regulatory, and other impactful forces).

By focusing on these success factors collectively, banks can improve or revitalize key aspects of their performance and prominence. In today’s banking industry, reputation isn’t just one facet of the game — it ‘is’ the game.

For more details about Goldman Sachs’ research results, please visit www.pieterklaasjagersma.com/reports.

THE GOLIATH SYNDROME IN INVESTMENT BANKING

Most rivalries are hard-fought, drawn-out battles. But there are exceptions — blitzkriegs in which market shares trade hands with spectacular speed and redoubtable industry leaders are worsted by underdog rivals almost overnight. Think of Tesla in the car industry (a few years ago) and boutique investment banks in the banking industry.

What causes this David and Goliath phenomenon? Are the Goliaths stupid, or prone to be caught napping? Of course not. It was their very excellence that left them open to successful competitive attack. This mastery — and the skill and asset commitments necessary to achieve it — makes leaders vulnerable to attack from rivals shrewd enough to aim at a chink in Goliath’s armor.

Usually, established leaders — focused on maintaining internal consistency and maximizing economies of scale and scope — have used the same overall business approach to serve client segments with divergent requirements. However, when the client segment-to-segment differences are sufficiently great, this strategy is dangerous. It invites rivals to move in with differentiated approaches tailored to the needs of particular segments — hence the rise of boutique banks in M&A.

With less costly business models, more time for clients due to less red tape, and by tailoring their service to the needs of their target client segments with a razor-sharp focus on M&A, boutique investment banks have grabbed a sizable share of the market. Meanwhile, the business model commitments of leaders are so interlocked that it takes them years to marshal their forces when challenged by new competition. Apart from the fossilization of their erstwhile winning business approach, fundamental changes in regulation undermine those winning formulas, too. Vested interests and other roadblocks to change take shape.

So, how can established players navigate this situation? Sticking to the status quo risks suffering the same fate as Goliath.

The secret is to seed new forests while harvesting the old — a strategy Morgan Stanley implemented effectively and on time. BlackRock is pursuing a similar strategy of entering the private lending market, exemplified by its acquisition of HPS, part of BlackRock’s near $30 billion private markets M&A spree in 2024. This intricate process takes foresight and courage.

In real life, Goliath can win, but letting no assumption go unchallenged is crucial. Key success factors are: [1] courage (the willingness to embrace new opportunities), [2] foresight (where in-depth analytics meets world-class intuition), [3] synergy (regarding established capabilities and reputations), [4] enough time (transformation takes time), and [5] comprehensive analyses (it is essential to step back and take a long and analytical look at the forces that drive future client needs, priorities, and expectations).

GOLDMAN SACHS — MASTERING THE 'REPUTATION FOLLOWS VALUE' RULE

Client needs, priorities, and expectations — the issues that are most important to them — have a natural tendency to change. The overwhelming problem for incumbent players like Goldman Sachs is that reputation ‘migrates’ from outmoded business models, representing the ‘old ways of doing business’, to newer models that better align with and address clients’ most pressing concerns. Incumbent players usually find themselves trapped in rigid business models. Truths become traps — success is yesterday’s truth.

Corporate reputation by itself is a measure of the strength of a business model to create and capture value. Reputation gradually flows into business models that respond to evolving client needs, priorities, and expectations, often overlooked (or simply neglected) by established players. And although the ‘reputation migration process’ may start slowly, it gains momentum as a business model edges closer to obsolescence. Corporate reputation migration as a business concept is the process of transferring an organization’s immaterial capital (‘reputation equity’) to new — often disruptive — players.

Since the 2008/09 global financial crisis, the rate of ‘reputation migration’ has increased in the banking industry. The game has changed. The reputation once held by the erstwhile ‘masters of the universe’ now shifts towards newcomers like boutique banks, PE firms, and hedge funds.

Competing on reputation is a dynamic game, much like Go. To excel in Go, as in banking, one must grasp how specific positions and moves on the board lead to particular outcomes and subsequent countermoves.

Goldman Sachs must focus on understanding where the value in the banking industry resides today and where it will move tomorrow. Managing the ‘reputation follows value’ paradigm superbly is the name of the game. Better business models reallocate corporate reputations — it is a fundamental law. Changing client needs, priorities, and expectations — and their interaction with newcomers’ offerings built on new business models — are what trigger the migration of corporate reputations.

Consequently, Goldman Sachs must develop a dynamic, in-depth understanding of the needs, priorities, and expectations of both current and potential clients. Merely understanding their current concerns isn’t enough, according to a dataset of over 4,000 C-suite executives and senior managers from Fortune Global 500 and Forbes Global 2000 companies that participated in a multi-year study on the reputations of wholesale banks — banks providing commercial, corporate, and/or investment banking services in Europe.

Message: Goldman Sachs will not win the next competitive battle the same way it won the last one.

NEVER JUDGE A STRANGER BY THE COLOR OF HIS HAT

In classic Western films, distinguishing the good guys from the bad guys was easy — the villains always wore black hats. Similarly, in the old days of the investment banking industry, competition followed a clear narrative: clients were the good guys, rivals were the bad guys. You aimed to keep your clients happy and gave no quarter to your competitors. The lines were unmistakable.

However, in today’s business landscape, competition has become more intricate, blurring the lines between friend and foe. Now, they come in all shapes and sizes, making it challenging to discern who’s who.

Sometimes, however, foes can become friends, for example, by leveraging skills, professional relationships, or scale economies. It’s important to remember that true competitive advantage lies not just in market share, but in maximizing client value-added. Adopting a ‘share of market’ mindset demands competitive skills, while embracing a ‘share of client value-added’ mindset requires collaborative prowess.

In investment banking and other professional services businesses, success hinges on achieving the right balance between two key factors: economies of scale (market power) and distinctiveness in terms of value-added services (for more details, see the book “On Becoming Extraordinary — Star Professional Service Firms”). The trade-off between ‘reach’ (scale) and ‘richness’ (distinctiveness) defines a firm’s competitive edge. The critical question is how to leverage this ‘reach’/’richness’ dynamic. Investment banks can achieve this by forming smart partnerships. Such partnerships complement and strengthen the firm’s own proprietary assets and capabilities; they unlock new opportunities and maximize value delivered to clients. Why buy US boutique bank Greenhill when an alliance would be the smarter and (much) cheaper option, especially for Mizuho?

In contrast to its Japanese peer, SMFG is pursuing a different, more effective path with Jefferies by enlarging its stake in the American investment bank through a mutually agreed approach in which both parties leverage their geographical and product-service capabilities to deliver greater value to both firms’ clients. The underlying math isn’t that complex, according to the majority of executives and senior managers surveyed in my latest empirical study, which focuses on identifying the Rosetta Stone of outstanding investment bank management.

The key challenge for many investment banks lies in embracing a new ‘dominant logic’ — shifting from primarily intra-industry competition to a point of view that actively leverages intra-industry and inter-industry collaboration. That said, it usually takes a mental quantum leap to clear a strategic hurdle, especially in high-octane business environments. Never judge a stranger by the color of his hat.

THE POWER OF JUDGMENT IN INVESTMENT BANKING

The power to arrive at a wise decision, or judgment, is crucial, especially in investment banking, which is much more than just a numbers game. Refining one’s judgment is imperative for both individual advancement and the overall success of the firm.

Judgment is part science, part art, often influenced by personal inclinations, making it challenging to fully grasp. Despite being a nuanced and iterative process, clients primarily remember the outcomes of a banker’s judgment, emphasizing its pivotal role in shaping perceptions and outcomes.

Here are several strategies to enhance the ability to improve one’s judgment:

— Leverage past experiences. Past experiences provide valuable insights and help us move beyond relying solely on theoretical reasoning.

— Assess the likelihood of outcomes. After reaching a specific conclusion, it’s crucial to question its likelihood by asking, “Is this likely?” If the outcome seems unlikely, it doesn’t necessarily invalidate your judgment. It does, however, warrant thorough scrutiny to ensure accuracy.

— Consider alternative options. There is usually more than one way to serve the client; a given set of facts and circumstances can lead to different conclusions. Therefore, it’s essential to evaluate your judgment against various options before committing to one.

— Use time and planning. When you anticipate the need to make well-informed decisions ahead of time, you can allocate sufficient time for thoughtful consideration. The outcome? Better judgments.

— Develop the ability to recognize valuable judgment opportunities. Given that judgment improves with practice, it’s crucial to hone the skill (sensitivity) of identifying valuable judgment opportunities. They frequently arise during discussions with clients and colleagues. Cultivating good judgment is a continuous (disciplined) process of thought and action.

— Prioritize effectively. A critical aspect of judgment entails distinguishing between what is significant (signal) and what is not (noise). Further refinement lies in the ability to prioritize the elements being considered based on their importance.

— Ground judgments in facts. The strength of your judgment grows in tandem with the depth of factual understanding. Embrace all available facts — especially those that may challenge initial assumptions — to provide optimal solutions for clients.

— Seek feedback. Testing your judgment with trusted colleagues (or clients) can reveal opportunities for improvement. Every outstanding professional enjoys the challenge of assessing judgments. Feedback is gold.

Judgment is crucial to the health and wealth of an investment bank, influencing the quality of work, client relationships, individual bankers’ effectiveness, firm dynamics, and overall professional fulfillment.

GOLDMAN SACHS UNPLUGGED — BEYOND P&L

My investments include a large position in Goldman Sachs. Why? It’s really about what separates Goldman from the rest. Three words — Strong. Enduring. Principles. My investment in Goldman Sachs revolves around the firm’s rock-solid business principles; the foundation behind its long-term success and reputation.

Principles — codified experiences — are the standards that govern everything we do. They strongly impact daily practices and deliver a compass for actions taken and decisions to be made in an uncertain environment that is characterized by much dynamism. Principles can be seen as the nervous system of the firm. They provide energy to walk the talk. And under today’s challenging circumstances, it is the intangibles that count most toward ensuring enduring success.

When the environment and business grow more and more complex, structure, rules, procedures, and systems become progressively less effective as a device for unifying a firm or ensuring smooth teamwork (crucial in investment banking). Implementing the right principles — not just lip service platitudes — makes a firm great. The book “On Becoming Extraordinary — Decoding Goldman Sachs and other Star Professional Service Firms” argues — backed by extensive field research — that professional service firms (like Goldman) will be more successful when held together with this powerful glue.

‘Star’ or elite professional service firms have a powerful identity owing to their strong business principles. Such a set of principles fosters high levels of loyalty and motivation, providing the firm with structure and controls without the need for excessive formal rules and stifling procedures.

Adherence to sound principles is the hallmark of outstanding management. As an investor and hedge fund manager, you need to dig deep into this ‘soft’ topic with ‘hard’ P&L and competitive consequences. Unsound principles erode client trust and, in the long run, undermine a firm’s reputation and morale. And although principles are the building blocks of successful firms like Goldman Sachs, they are not the proverbial magic silver bullet. How they are used determines the results and makes a difference. Ultimately, that makes a respected firm prestigious.

The interesting thing about principles is that there is really nothing all that unique about them. In fact, they are universal and timeless. However, firms like Goldman Sachs are masters in applying them rigorously, consistently, and coherently. Principles need decisions followed by actions; otherwise, they are merely conceptual, looking great on paper or a tablet or smartphone screen. There is nothing revolutionary about getting into shape. If there is a magic formula, then that is it. Doing it, that is what matters. More details on the effectiveness of Goldman Sachs’ business principles at www.pieterklaasjagersma.com/decoding-goldman-sachs.

RELIABILITY, CLIENTS, AND INVESTMENT BANKS

Reliability — the ability to perform the firm’s ‘promise to clients’ accurately, consistently, and timely — is the backbone of true professionalism. Every individual contributes to the firm’s reliability since more than one employee becomes involved in the service delivery process.

There is an uncompromising relationship between reliability and quality. Reliability is to quality what a key is to a locked door: indispensable. When an investment bank makes mistakes regularly, when it doesn’t keep its promises, clients lose confidence in the bank’s ability to do what it promises dependably, timely, and accurately. A lack of reliability means ‘game over’.

Clients frequently habituate (get used to) certain levels of service such that they are unaware of their true expectations regarding the service of the bank. They are more likely to habituate when the bank’s service delivery is highly reliable. It’s a tricky psychological process because violations of ‘habituated expectations’ can provoke dramatic client reactions. For an investment bank, it is important to identify the habituated expectations of clients of whom they may be unaware. In-depth client research delivers the answers.

Investment banks are supposed to be reliable; they are supposed to provide the service they promise to provide. The opportunity to go beyond what is expected by the client is dangerous. Exceeding the expectations of clients usually requires the element of surprise. Most clients, however, dislike surprises. Predictability is key. Predictability touches the very essence of what clients expect. The intangibility of the services of investment banks heightens clients’ sensitivity to predictability. That said, defining predictability in the context of specific client work is no easy feat.

Closely related to reliability is the delivery of ‘minimal’ quality, a threshold quality level. Clients demand (at least) ‘minimal’ (baseline) quality, so an investment bank needs to know what ‘minimal’ quality means for each client (again, no easy feat). Each client has a different opinion about this threshold quality level. Performing below this quality level means damaging the reputation of the bank. Clients are seriously disappointed if investment banks perform below their threshold quality level.

Reliability seems like a straightforward concept: you are either reliable or not. In practice, it becomes more complex because reliability can mean different things to different people. It hinges on both (national and business) culture and client perception — on their reflection of the specific experience (the performance per se). ‘Habituation’, ‘predictability’, and ‘threshold quality levels’ turn reliability into an even more elusive and complex business issue. Reliability is the ultimate ‘red flag’ business concept, especially in investment banking.