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 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 — banks providing commercial, corporate, and/or investment banking products and 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. In essence, 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 three (European and non-European) banks operating in Europe. 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, resilience, responsiveness, and reliability).

The extensive 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 products and 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 study’s first report was published: Goldman Sachs — The Blueprint for Leadership. It is the definitive report card on Goldman Sachs’ reputation and performance, seen through the eyes of this influential group of decision-makers — the firm’s key clients.

Presented in three editions, Goldman Sachs — The Blueprint for Leadership focuses exclusively on the firm — independently, systematically, and comprehensively. It offers unique data and dozens of actionable insights and recommendations for Goldman Sachs, its peers, investors, and other stakeholders.

For more details on the study’s dataset, methodology, findings, and report contents, visit www.pieterklaasjagersma.com/reports/goldman-sachs-1, www.pieterklaasjagersma.com/reports/goldman-sachs-2, and www.pieterklaasjagersma.com/reports/goldman-sachs-3.

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. “On Becoming Extraordinary — Decoding Goldman Sachs and other Star Professional Service Firms” argues — backed by extensive field research — that professional service firms 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 ensures that they all march to the same drummer; it creates high levels of loyalty and motivation, and provides the firm with structure and controls, without the need for too many 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 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’s business principles at www.pieterklaasjagersma.com/decoding-goldman-sachs.

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 and boutique banks in investment banking.

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 product 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 timely (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).

THE ART OF LETTING GO

Managing relationships between banks and their business/corporate clients requires a thoughtful, strategic approach. For example, simply retaining or rejecting clients based on profitability oversimplifies a complex, crucial decision. Instead, banks must consider various factors and explore compromise options.

Terminating client relationships may be driven by declining profitability (using metrics like ‘client lifetime value’ and ‘client referral value’), reduced employee morale from dealing with ‘challenging’ clients, or important shifts in markets — including their potential — or business strategies. Some banks drop certain clients to correct past strategic errors, usually errors made by senior executives who have left the bank.

Having said that, client divestment carries significant risks, including:

☐ Competitor advantage. Divested clients may take their business to rivals.

☐ Legal and reputational risks. Terminating relationships can lead to disruptive ‘high-profile’ lawsuits or a reputation as a ‘difficult’ bank with ‘difficult’ bankers.

☐ Erosion of remaining client trust. High-value, important clients might question their own security with the bank. ‘How predictable and trustworthy is X?’

Before cutting business/corporate ties, banks should ask:

☐ Why is the client unprofitable? Profitability metrics alone don’t tell the full story. Unprofitable clients might simply lack awareness of available products and services. A strategic assessment is crucial to understanding the root causes.

☐ Can the bank still provide mutually beneficial products/services? Some clients may need guidance on leveraging bank products effectively. Educating clients not only improves relationships but can also ease transitions if the relationship ends. Exploring additional offerings tailored to their needs can also unlock hidden value.

☐ Can the relationship be revitalized? Options include adjusting payment models, altering relationship management strategies, or transitioning clients to peers (external partners). Peers or specialized partners may have cost structures better suited to serving specific clients. Alternatively, larger peers may take on clients beyond a smaller bank’s capacity, creating mutually beneficial partnerships. Such a client migration strategy demonstrates extra effort on the bank’s part, mitigating client dissatisfaction and even fostering goodwill (in the industry).

If efforts to restructure or add value prove futile, termination might be necessary. Banks should frame the decision as mutually beneficial, helping clients see the potential advantages. However, the process must be handled with great care — the potential risks are real — to avoid reputational harm or client backlash.

For more nuanced details, please visit www.pieterklaasjagersma.com/on-becoming-extraordinary.

WHAT I'VE LEARNED ABOUT INVESTMENT BANKS AND CLIENTS — AS A CLIENT

Throughout my career as a hedge fund manager, C-suite executive, and counselor to several PE firms, I have worked with a wide range of investment banks — from US and European giants to smaller, lesser-known firms based in Europe, Asia, and the Middle East.

Ten things I’ve learned about investment banks and clients — as a client:

☐ Paying attention is not enough. For example, knowing executives on an informal basis is one of the most important elements in client relations. However, there is no way to teach this kind of informal work other than to fail a few times. The hurdle everyone faces isn’t simply getting noticed but getting believed.

☐ Clients prefer teams. Clients consider the teams serving them as direct windows into the capabilities across the bank. The era of the individual virtuoso is declining. This is obvious, but some investment banks don’t seem to get it.

☐ Clients ‘like’ quality work, but they ‘love’ impact. The work of banks should be better than clients expect, but not more or less than the situation calls for.

☐ Investment banks must never confuse success with excellence. Many banks have enjoyed a lot of the former. Most do not have enough of the latter. Don’t confuse awards with achievement.

☐ Clients are human beings first, professionals second; they need stroking and affection. It isn’t necessarily part of the service investment banks offer, but a thoughtfully developed and regular personal dialogue with clients can put a useful, highly positive frame of reference around the work bankers do with them.

☐ Outstanding work is remembered for a year; poor work lingers on for a decade. Message: relatively small client projects are key in terms of reputational impact. It’s not the big things that will kill you — it’s the accumulation of little things. The essence of investment banking seen through the lens of bankers? Creating ‘referral value’.

☐ Clients admire the ability to mobilize the best of the best. They expect investment banks to be intellectually vibrant, professionally proactive, and continually innovative. Don’t spin a story — be a story.

☐ Quite often, the most valuable contributions to clients are not analytically based. The best advice I receive is usually heavily judgmental by nature. Occasionally, they are contributions made simply by asking the insightful question at the right moment. Having all the answers is less important than knowing what to ask.

☐ Investment bankers must tell clients the truth. William Blake, the English poet, said it best: “When I tell any truth, it is not just for the sake of convincing those who do not know it, but for the sake of defending those who do.” Make the truth as interesting as it can be.

☐ Investment banks are all about clients, people, and ideas tied together by a collaborative mindset. They have to continually make investments along these four dimensions (echo: all four dimensions). Otherwise, it’s ‘game over’.

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 (like me) primarily remember the outcomes of an investment 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. Seek out opportunities to exercise judgment. 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.

☐ 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.

☐ Regularly exercise judgment. Similar to any other skill, judgment improves through consistent practice and application. Cultivating good judgment is a continuous process of thought and action.

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

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

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 product/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 product/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 product or 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 products/services of investment banks heightens clients’ sensitivity to predictability. But 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 investment 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. However, in practice, it becomes more complex because [1] reliability can mean different things to different people. It hinges on client perception — on their reflection of the specific experience (the performance). That said, [2] ‘habituation’, [3] ‘predictability’, and [4] ‘threshold quality levels’ turn reliability into an even more elusive and complex business issue.

HOW TO DEVELOP STAR PERFORMERS

What does it take to be a great professional? Answer: training, both on-the-job and off-the-job. Let’s focus on off-the-job training.

While conducting a research study on the practices of elite professional service firms, which involved interviews with numerous client executives and senior professionals, I compiled a summary of their training practices and distilled them into the following actionable training tips:

☐ Replace the classic lecture system with integrative and interactive sessions, each containing specific learning objectives that are interwoven throughout the training program. Reduce pure lectures to the bare minimum.

☐ Conduct regular training sessions at least 3-4 times a year. Most need to run for 2 to 4 days.

☐ Use advanced technology, digital simulation, and cameras. Computer/digital simulation exercises help people run through an actual client project, presenting different situations and posing implications with consequences based on participant reactions. Cameras allow participants to see themselves in action and hear the opinions and reactions of others. Cameras also allow a faculty member to serve as a facilitator, an expert who runs the exercises, as opposed to being a lecturer.

☐ Focus on interpersonal skills development. Try to help professionals become better communicators, whether this involves interviewing people or just sitting down and talking with them. If you are not good at this as a professional, you will not succeed. Trainers can teach people how to think about who they will be talking to and what approach to use by giving them feedback on content, rapport, and body language.

☐ Use off-the-shelf modules that take a comprehensive approach to a specific subject, with 80% of the time devoted to exercises. The modular approach permits you to build from one module to the next, with continuing themes and threads throughout. In this respect, a training program becomes like a continuous stream, with each module reflecting a different work aspect.

☐ Intermingle. Intermingling allows young professionals to obtain direct feedback on their skills from senior participants, while senior people can practice their coaching and management techniques.

☐ Participants do not learn from books. They learn by doing. What firms need to teach is awareness. Role-playing helps.

☐ Use robust, relevant case studies. Case studies should reflect real-world client engagements, capturing all the complexities professionals will encounter. Choose industries that are engaging yet accessible, ensuring participants can focus on execution rather than grappling with excessive background knowledge.

☐ Use excellent trainers. A trainer needs to be a teacher, coach, mentor, and buddy all rolled into one. This sounds like motherhood and apple pie — it isn’t.

For more details, please visit www.pieterklaasjagersma.com/on-becoming-extraordinary.

WHEN STARS COLLIDE — BALANCING STAR BANKS WITH STAR BANKERS

A few years ago, Harvard's Boris Groysberg conducted a study of 1,052 ‘star stock analysts’ from 78 US investment banks between 1988 and 1996. Defined as analysts ranked among the industry’s best by Institutional Investor magazine, stars were recognized for their superior performance and perceived as invaluable assets. However, his findings revealed surprising outcomes when stars switched employers:

☐ Decline in individual performance. Stars’ performance dropped sharply after moving to a new bank, with 46% performing poorly within the first year. Their output declined by an average of 20% and showed no significant recovery even five years later.

☐ Team disruption. The presence of an outlier can lead to interpersonal conflicts, communication breakdowns, and overall demoralization. Teams experienced prolonged declines in performance due to these disruptions.

☐ Negative impact on valuation. While star hires generate positive headlines, they tend to erode shareholder value. Groysberg found that announcements of individual star hires led to a 0.74% decline in stock prices, costing banks an average of $24 million per hire (star).

Banks (and star bankers) often underestimate how much a star banker’s success depends on their prior organization’s assets. Key factors include:

☐ Corporate routines and systems. Team-based research processes, investment committees, and technology play critical roles in supporting star performance.

☐ Managerial support. Managers allocate resources, direct priorities, and provide mentorship essential for stars to thrive. In Groysberg’s study, stars often credited their success to their supervisors’ guidance.

☐ Reputation. The bank’s name, resources, and networks amplify individual performance by allowing stars to focus on high-value tasks.

☐ Informal networks. Star bankers often underestimate the importance of internal relationships and trust-building. Successful integration across the bank requires fostering cross-functional collaborations to unlock synergies.

☐ Collegial inspiration. Stars rely on talented colleagues for inspiration, coaching, and support. As Goldman Sachs’s John Whitehead famously emphasized, “At Goldman Sachs, we never say I.”

Groysberg’s study highlights that hiring stars is rarely an effective growth strategy. European and Asian banks attempting to enter the U.S. market by poaching top analysts repeatedly failed, incurring substantial losses before retreating. Instead of recruiting (external) stars, investment banks should focus on cultivating talent internally. Homegrown stars typically outperform imported ones and demonstrate greater loyalty, recognizing that their success depends on their firm’s capabilities. By nurturing internal competencies and providing robust support systems, investment banks can retain top talent and create sustainable value. For more details, visit https://pieterklaasjagersma.com/on-becoming-extraordinary.

THE POWER OF WORDS IN HIGH-STAKES ENVIRONMENTS

In Isabel Allende’s ‘Two Words’, Belisa Crepusculario makes a living selling words. Her fate changes when a colonel with presidential ambitions kidnaps her to craft a speech powerful enough to sway the masses and defeat his rivals. Her gift for capturing emotions, aspirations, and dreams makes her indispensable.

Allende’s story delves into the profound impact of storytelling, the transformative power of words. Leadership is definitely not only about authority and strategy. While the colonel may possess those assets, it is his ability to articulate this ‘package’ within an effective narrative that defines his leadership in the eyes of his followers. The Holy Trinity? Will, skill, and ... thrill.

Lacking the ability to influence motivation (‘thrill’) and, consequently, behavior, a leader is merely a manager focused on daily ‘ticking-the-boxes’ tasks. A powerful story that resonates with followers and intrinsically motivates them is particularly relevant in high-stakes environments like investment banking, where leadership involves navigating uncertainty and stress, inspiring teams, and communicating complex ideas to diverse clients and various other stakeholders.

The most impactful stories, often ‘stories from the trenches’ or ‘warzone stories,’ resonate with followers because they offer guiding business principles that capture their feelings and emotions. Think of figures like John Mack of Morgan Stanley, John Whitehead of Goldman Sachs, or André Meyer of Lazard. They were (‘are’, Mack is still alive) revered wordsmiths.

A well-crafted story, adorned with metaphors, unique experiences, and anecdotes, has the power to transform dry and abstract figures — for example, numerical data — into a vivid picture. Most people, including investment bankers, perceive numbers as incomplete, at the very least. While the financial metrics of an M&A deal are crucial, the narrative surrounding it determines its success (How will the combined entity serve its customers better?)

A well-told story can inspire confidence, foster resilience, and create a sense of shared purpose. During the 2008/2009 financial crisis, leaders like Jamie Dimon of JP Morgan and Lloyd Blankfein of Goldman Sachs used storytelling to navigate their organizations through unprecedented challenges. By framing their decisions within a broader narrative of resilience and renewal, they were able to inspire their teams and restore confidence among clients and investors.

Despite the analytical nature of the investment banking business, important decisions made by leaders are usually rooted in an underlying story. Much like Allende’s ‘Two Words’, effective stories lubricate the wheels of an investment bank’s leadership-followership engine. Allende’s ‘Two Words’ is a masterful exploration of the intersection between narrative and leadership in a complex, high-stakes environment.

BEYOND LEADERSHIP — HARNESSING THE STRENGTH OF FOLLOWERSHIP

General MacArthur once said, “A general is just as good or just as bad as the troops under his command make him.” Sure, but there are thousands of books on leadership, very few on followership. Business magazines focus relentlessly on the attributes of successful leadership. The ideal seems to be a world in which everyone is a leader yet who would be left for them to be leading? However, there are exceptions to this ‘rule’. The following books were instrumental in shaping my understanding of the ‘leadership-followership’ dynamic.

In 1992, Robert Kelley wrote ‘The Power of Followership’. He ended up with five followership styles: [1] alienated followers (think critically and independently but do not willingly participate in the groups of which they are members); [2] passive followers (do not think critically and do not actively participate; they let their leaders do their thinking for them); [3] conformist followers (do participate in their groups and organizations but are content simply to take orders); [4] exemplary followers (are nearly perfect, they perform well across the board); [5] pragmatic followers (play both sides of the fence, ranking in the middle in terms of independent thinking and level of activity).

In 1995, Ira Chalef wrote ‘The Courageous Follower’. He classified followers according to the degree to which they supported leaders and the degree to which they challenged them. In 2008, Barbara Kellerman published ‘Followership: How Followers Are Creating Change and Changing Leaders’. She categorizes followers as [1] isolates (they do not care about their organizations, passively support the status quo, and impede improvement and slow change); [2] bystanders (observe but do not really participate, they consciously choose to fly under the radar); [3] participants (care enough to invest time or money, they try to make an impact); [4] activists (feel strongly one way or another about their leaders and organizations, and they act accordingly; they are eager, engaged, and energetic), and [5] diehards (they — deeply devoted to their leaders — are prepared to go down for their cause; they may also be strongly motivated to oust their leaders by any means necessary). Kellerman categorizes followers according to where they fall along a continuum that ranges from ‘feeling and doing absolutely nothing’ to ‘being passionately committed and deeply involved’.

Understanding the characteristics and nature of followers is crucial, and given their greater number, no easy task. Early in my career at McKinsey, many decades ago, I learned a valuable lesson from the senior partners. They not only recognized the importance of their followers but also actively developed their leadership skills by working with a diverse range of juniors with cutting-edge ideas. Outstanding followers are key. Nothing beats a smooth-running ‘leadership-followership’ engine.

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, neither is 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.

Companies 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. Pick out the stars and incite them to achieve even greater things. Set challenging improvement goals for ‘great’ performers. Even ‘good’ performers are inspired by the improvement goals of the best of the best, and their results will also improve. Whatever the response, it must be selective and more than incremental. Pouring on a little more power won’t work.

Group (company) productivity can best be improved not by striving to bring the mediocre players up to speed but by pushing the best 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 MIT’s Bob Solow and Princeton’s John Nash. There’s nothing quite like meeting and being challenged by ‘living libraries’. Education is good, but development is better. It’s like putting wings on a B-52.

Apart from mentoring, three other factors influence the productivity of the company’s main assets — 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 and opinions about its people — often ‘sacred cows’ — is probably missing an opportunity to improve asset productivity.

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

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

MASTERING THE ART OF TALENT DEVELOPMENT: LESSONS FROM BAIN & COMPANY

The best professional service firms (PSFs), like Bain & Company, are the world’s most successful human-capital supply chain firms.

PSFs need to reinvent the ‘people side’ of the organization continuously — talent development should be the firm’s largest single non-client investment. Advanced people and talent management systems and processes — performance appraisal, remuneration, hiring and firing, training, development, and promotion — are the body and soul of PSFs, shaping how people behave as they go about their work.

The objective of talent development is to close the gap between the current and desired ways of doing things. This requires understanding the nature and size of the gap to target the most important people skills for development. Many PSFs find that their HR, training, and development systems do not address these challenges effectively. Bain & Company seemingly discovered the Rosetta Stone.

Five distinctive characteristics of people development at Bain are:

☐ People development is the firm’s core management process. The ability to mobilize the right people for client projects stems from the large amount of time Bain spends recruiting, developing, evaluating, and managing the best of the best.

☐ There is a strong belief in enabling employees to grow. PSFs must provide the best platform for ‘organic’ growth, i.e., growth through people development.

☐ The ‘star system’ is discouraged. By hiring individual stars and rewarding them hugely, PSFs create divided, unstable organizations. PSFs cannot gain an enduring competitive advantage by hiring stars from outside the firm. Studying individual stars at PSFs for many years, I found that when they hire an outside star, his/her performance plunges, there is a performance decline in the team that the star works with, and the firm’s reputation — its most important asset — deteriorates.

☐ The recruitment and development process is primarily driven by the line, with relatively limited support. The best PSFs excel as ‘talent-catching machines’, thanks to their esteemed ‘war zone’ professionals.

☐ The people development process is characterized by a strong people ethos with a relatively informal atmosphere and a high degree of individual freedom.

There are many reasons to become great at talent development: [1] better relationship management skills, [2] a stronger firm (If you help people develop, they tend to develop the firm, too), and [3] more fun (People working in a development-intensive environment tend to enjoy themselves more, and good people who have fun attract other good people who also want to have fun).

Often, firms like Bain remain something of an enigma. But there is at least one thing that they have in common, namely a formidable talent development approach.

HERDING IN INVESTMENT BANKING

‘Herding’ eliminates differences among investment banks’ product/service offerings, client strategies, pricing/fee models, innovation strategies, marketing (relationship management) approaches, and more. When investment banks in a ‘strategic group’ — full-service investment banks, boutique banks, financial conglomerates, or universal banks — begin to herd around a single strategy, declining margins are bound to follow. But it is change over the longer term that establishes whether herding has taken place. A decline in differentiation and uniqueness demonstrates that firms are engaged in strategic herding. Since the global financial crisis, this trend has negatively impacted investment banks, as observed by myself and other clients, leading to a decline in reputation, employee appeal, client loyalty, and financial performance.

Strategic herding has destroyed margins in many industries. For example, in the 1990s, the Federal Reserve Bank of Boston examined the degree of ‘strategic differentiation’ and its effect on the margins of the biggest companies that accounted for 98 percent of the PC market from the mid-1970s to the late 1980s. During that period, the PC industry’s ‘strategic differentiation index’ declined by more than 35 percent as firms clustered around the then dominant ‘IBM-clone’ PC model. As a result of this decline in uniqueness, margins fell during the same period by more than 50 percent, representing $3 billion in destroyed margins by the end of the 1980s. Interestingly, the study’s most distinctive firm, Apple Computers, became a true icon — many years later.

The solution for the investment banking industry? Look for ‘white spots’ — unexplored areas on the client landscape. ‘White spots’ can take the form of new product niches, value-added services, sales/market/relationship management, etc. strategies, as well as unexploited fee/price structures. Don't forget people with unique backgrounds (e.g., experienced hires from other industries).

The number of ‘white spots’ — business opportunities — in the investment banking industry is almost unlimited, with opportunities ranging across many dimensions. Message: in the long run, failure to (re)invent products, services, client approaches, people acquisition strategies, and so forth to ensure ongoing strategic differentiation will lead to a steady decline in performance. Herding, today’s dominant investment banking logic, ultimately undermines the reputation and status of individual investment banks.

BLACKSTONE'S WINNING FORMULA — STICKING TO ITS CORE

A few years ago, I authored a book on elite professional service firms (PSFs) like Blackstone. Among the many success stories, Blackstone’s meteoric rise stands out as particularly remarkable. What truly sets them apart, however, is something surprisingly simple yet profoundly impactful: an unwavering commitment to their original mission — a value proposition crafted decades ago that still drives their success. The foundation? Institutional skills focused on investment performance and clients.

Clarifying a PSF’s value proposition is the starting point for building effective firm-wide or ‘institutional’ skills — Blackstone’s hallmark asset. A value proposition is a statement of the benefits clients will receive. Therefore, a clear understanding of client needs is essential for defining the firm’s value proposition. Ultimately, a competitive edge lies in delivering superior client value to create wealth for all parties involved. It also requires a keen understanding of why clients choose one firm over another — why Blackstone? Consequently, leading firms prioritize client value over a purely product- or service-centric approach.

I always use the following questions to assess whether a PSF — a potential investment — has a well-defined and compelling value proposition: [1] What services do their clients want, and are they willing to pay for them?; [2] Does the firm’s ‘statement of benefits’ include evidence-backed reasons why clients would choose this value proposition over alternatives?; [3] Does analysis support the value proposition’s potential for generating above-average returns?; and [4] How does the firm’s value proposition compare to those of its rivals? Is it more attractive?

For PSFs, being explicit about the institutional skills required to fulfill their value proposition is essential. These skills must be clearly defined and consistently applied in a way that outperforms the competition. This approach was precisely what Schwarzman and Peterson envisioned when they founded Blackstone in 1985.

Successfully building and leveraging institutional skills involves identifying the pivotal individual roles — including designing the right systems and management style to support and empower them — that must be performed excellently. Individual skills articulate the actions that individuals must perform well for the firm to build superior institutional skills. The list of individual skills should summarize the capabilities that contribute to institutional skills.

Schwarzman, the late Peterson, and exceptional colleagues like Jonathan Gray exemplify a crucial principle of building great businesses: unwavering consistency in mission and purpose — paired with a healthy dose of restlessness — is essential for expanding a firm beyond the limits of markets, countries, or industries. Happy shareholder, over here — mission accomplished.