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Goldman Sachs sets the standard for excellence both on Wall Street and throughout the financial sector.
It's respected, if not feared, by peers. It hires the best and brightest minds regardless of pedigree. Its employees are frequently tapped for senior positions in Washington. And despite being a fraction of the size of the universal banking behemoths, it comes in second to only JPMorgan Chase in terms of investment banking fees from underwriting and advisory services.
This isn't to say that everything Goldman does is perfect because, of course, that isn't the case. But a look at how the New York-based company treats its stakeholders -- investors, employees, customers, and society at large -- shows that the firm does many more things right than wrong.
The ascent of Goldman's stock
Since succumbing to internal pressures and the imperatives of the marketplace to go public in 1999, Goldman's stock has returned a total of 196%, or roughly twice that of the broader market. By comparison, over this same time period, Morgan Stanley is up by a mere 7.6% while JPMorgan Chase has produced a total return of 71%.
The source of Goldman's success is simple. Despite the challenges of the last few years, the investment bank has remained consistently profitable. "If you look at our average [return on equity] since the onset of the financial crisis in 2007, we have outperformed each of our U.S. competitors, having produced an average [return on equity] during this period of more than four times the peer average," CEO Lloyd Blankfein and COO Gary Cohen wrote in their latest letter to shareholders.
Beyond a high return on equity, two things have contributed to the performance of Goldman's shares. First, it distributes 17% of its earnings via dividends, generating a yield of 1.3%. This accounts for 40 percentage points of Goldman's total return over the last 15 years. Additionally, over the last three years, it spent $17 billion on buybacks, reducing its outstanding share count by 15%, or 80 million units.
The magnetic draw of a Goldman career
Few things illustrate the respect that Goldman commands better than the fact that it pays new recruits less than many of its competitors but is still able to attract the most talented people to enter financial services every year. "Goldman was not known as the highest payer on Wall Street for entry level positions," writes former employee Steven Mandis in What Happened to Goldman Sachs, "and yet talented people often prioritized working for Goldman."
You can see this in a comparison of Goldman's overall compensation per employee to its competitors. At the end of last year, Goldman closed its books with 32,900 employees and $12.6 billion in total compensation expense. That equates to $382,979 per employee. Although this exceeds Morgan Stanley's $291,734, and is far above Citigroup's $95,486, it pales in comparison to Lazard's $532,057 and The Blackstone Group's $917,654. And, of course, many of the leading hedge funds are in a league of their own when it comes to compensation.
Goldman's appeal is threefold. First, as I've already noted, it's the most revered company on Wall Street. Second, even though Goldman expects employees to work long hours, it inoculates a strong sense of shared values and invests heavily in development. And finally, even though its starting salaries may be comparatively anemic, Goldman makes up for the deficit as one ascends the ranks.
These points are supported by Goldman's performance on employment surveys. It scores higher than many of its peers on Glassdoor, where 91% of respondents approve of CEO Blankfein's leadership. Vault ranks Goldman second only to The Blackstone Group in its weighted formula reflecting the "issues banking professionals care most about." And the investment bank almost always makes Fortune's annual list of America's most admired companies.
Goldman's guiding principle toward clients
If there's one area in which Goldman's reputation has suffered, it's in the perception that the investment bank has departed from its principle that "clients' interests always come first." The examples of this are notorious.
- Internal emails unearthed during a 2010 Congressional investigation into Goldman's role in the financial crisis implied that the investment bank viewed its customers as adversaries and not as clients.
- In 2012, a departing employee penned an OP-ED in The New York Times saying, among other things, that "the interests of the client continue to be sidelined in the way the firm operates and thinks about making money." He went on to note that clients were often referred to as "muppets."
- Finally, a recent book examining the "organizational drift" at Goldman concluded that the bank has come under "numerous types of pressure to achieve growth, and that pressure, from both inside and outside of Goldman, resulted in many incremental changes" that "added up over time, caused Goldman to drift from the original interpretation of the firm's principles, most notably from the first principle of always putting clients' interests first."
But despite the corroborating nature of these accusations, there's reason to believe that they represent the exception as opposed to the rule at Goldman. Namely, the claim that Goldman views its clients as nothing more than adversaries is difficult to reconcile with its continued dominance in its sphere of influence. Last year, it ranked second after only JPMorgan in total investment banking fees. And, more granularly, it ranked first in fees from both equity underwriting and from advising mergers and acquisitions.
Does Goldman make the world a better place?
It's easy to demonize Goldman for its role in the financial crisis. Indeed, to the average person, its name is virtually synonymous with greed. "The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money," former Rolling Stone writer Matt Taibbi wrote four years ago.
But this perspective, while understandable, doesn't give credit where credit is due. In a society dependent upon economic growth, firms like Goldman aren't only important, they're necessary. As an investment bank, and the best of the bunch at that, Goldman sits at the narrows between institutional savers and spenders, allocating idle funds between the two in order to fuel investment, advancement, and growth.
Could other firms do this job? Absolutely. But whether they could do it as well as Goldman from the perspective of its four primary stakeholders -- investors, employees, clients, and society at large -- is far from certain.
John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. The Motley Fool owns shares of JPMorgan Chase, LAZARD Ltd., and The Blackstone Group L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.