Breakingviews: Goldman’s partnership is too much of a good thing

The hallowed Goldman Sachs partnership is an undeniable part of the Wall Street firm’s cachet. For more than 150 years, the elite club has helped attract top-notch financiers. It is also too much of a good thing.

Goldman partners stopped being partners in the strictest, firm-owning sense when the U.S. investment bank went public in 1999. Their collective shareholding has fallen from about 60% to roughly 5%. Instead, the designation now describes about 420 senior employees who benefit from higher pay, exclusive investment opportunities and the expectation of being heard by top executives.

Partners answer to David Solomon, Goldman’s CEO. But he answers to them, too, because they’re on the front lines carrying out his plans. The friction became real in 2023 as Goldman’s consumer banking project produced growing losses. High-status insiders griped that the division was a drain, and that savings accounts and credit cards were too déclassé for the platinum-plated institution.

Outsiders had little obvious reason to complain. The bank’s shareholder returns have, over five years, matched those of chief rival Morgan Stanley. Goldman tops the rankings of M&A and equities trading. Its earnings are volatile, but mostly because of global markets and investment banking, in which more than half the current partners work. Their concerns ultimately won out, however: Solomon has, piece by piece, dismantled his once-prized retail business.

It’s a good example of how partners sometimes clash with other constituencies. At worst, a cadre of long-tenured employees – plus the 750 or so retired partners Goldman carefully cultivates – could create an unhelpful brake on new ideas or organisational change. If Morgan Stanley housed a similar star chamber, Chief Executive James Gorman might have struggled to pivot so decisively into wealth management, the division responsible for his bank’s premium valuation multiple.

The Goldman partnership faces existential questions either way. Its numbers have barely changed over the past decade even as the bank’s overall headcount increased 40%. Promotions to the sub-partner managing director level, meanwhile, have soared. If the partnership’s biennial intake doesn’t expand, it risks appearing unattainable. Make it bigger, and the balance of power skews further the wrong way.

One way to square the inner circle would be to slowly phase out the partnership, while keeping its perks: that is, appoint ever-fewer new partners, but extend the first-class benefits to high-performing managing directors. Doing so would be in the interest of other shareholders, too. For them, the sense of privilege and loyalty the partnership engenders is an asset; its clout is a liability.

(This is a Breakingviews prediction for 2024. To see more of our predictions, click here.)