Robert J. “Rob” Pace has held a number of senior leadership positions at Goldman Sachs during his career of more than 20 years. Currently, he serves as a senior advisor to many of the firm’s most significant clients and is responsible for coordinating strategy and marketing initiatives within the Investment Banking Division. He is a member of the Operating Committee, which is comprised of the senior leadership group within Investment Banking.
Rob has headed the Americas Financing Group. In this capacity, he coordinated the firm’s multibillion-dollar business, providing financing and risk management activities across the capital structure for American-based clients. Principal product groups comprising the Americas Financing Group include equity capital markets, leverage finance, debt-capital markets, structured finance, swaps marketing, quantitative strategies, and new products. Rob also has been the partner in charge of the San Francisco office and co-head of West-Coast Investment Banking Division. Rob is a current or past member of the Investment Banking Operating, Business Practices, Compensation, Career Development Committees, and the firmwide Capital Committee.
He joined Goldman Sachs in 1986 and became a managing director in 1997 and a partner in 1998. Rob is the past recipient of both the Deal of the Year and Most Innovative Transaction awards at Goldman Sachs. He also created Goldman’s GSTrUE platform and co-created the Timber REIT product, now widely utilized throughout the paper and forest products industry.
Rob is the chairman of the National Advisory Board of the Salvation Army and is actively involved in numerous other charitable and civic organizations. He is a graduate of Oregon State University and the Harvard Business School.
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Ethix: To give us a flavor of what you do, tell us about the “Deal of the Year” award you received.
Robert J. Pace: To be clear, I was part of the team that won “Deal of the Year.” We operate in a team environment because no one of us has the sufficient skills to deal with these very complex transactions. The specific transaction was a purchase by a private equity consortium led by Texas Pacific Group. Our unique contribution came from putting a hedge around the very volatile revenue stream of the company being purchased, muting its volatility. This provided them with a more predictable stream of future revenues allowing them to acquire the company with the winning bid. They resold it later at a significant profit, so it was a huge win for our clients. It was the first time for the integration of major risk management hedging techniques and a standard leveraged buyout. So that was the innovation for us, and differentiated us from our competition. We did this in 2005.
The Role of Investment Banks
Investment bankers play a significant role in the system of business. How would you describe this role?
Basically we facilitate the efficient allocation of capital within the system. There is a score card, and good capital should go to good managers, which should foster productivity, which should create jobs in a robust economy and more receipts for the government to be able to help other people, etc. We have an efficiency role in terms of supply, matching the people with capital with people who need capital. If a company is thinking about going public, we talk to that company, and we form our own judgments as to whether or not that will be well received by the marketplace. If we do not think it will be, we will probably move on. So our role is that generally of a middleman.
Investment banks actually have multiple roles. There are the sales and trading functions that provide critical liquidity to the system, particularly in times of dislocation. There is the advisory capacity for mergers and acquisitions. Then there are also the capital markets transactions. Investment banking is a generic term for a collection of important functions.
The Impact of Enron
In the case of Enron, it seems like all parts of the business system had failed. You can find failure in the board, the executives, the auditors, and the investment banks. Sarbanes-Oxley has been enacted in partial response to these failures. How has new legislation and a new climate affected the investment banks?
A lot. Clearly the regulatory climate changed, and Sarbanes-Oxley is a poster child for that. I think the whole issue of competitiveness and transparency of the U.S. system was questioned, and confidence is critical to the smooth functioning of the markets. I would say it brought in a new level of scrutiny. There are those who will debate whether the scrutiny is at the right level, but it has certainly changed the regulatory environment.
How did it change life for you personally?
Fortunately, we were not a major player in Enron. Maybe we were just lucky, but we were not a major player. But certainly the ease of operating in a public context is something that gives private companies pause today. Because of the scrutiny, some companies are hesitant to go public, so that affects our business. Further, we are a public company and also go through our own certification processes. We experience firsthand what many of our clients experience in terms of compliance. It is mostly about making sure the markets are fair and transparent, and that is good. But it also means we must try to cross every “t” and dot every “i.”
After Enron, what kind of conversations did you have about working in the new environment?
These issues are incredibly important to Goldman Sachs. Our CEO at that time was Hank Paulson, who is now the [U.S.] treasury secretary. He said this was not an Enron-only issue, but grew from the context of the post-dot-com bubble. There was a climate in the dot-com world that gave rise to all sorts of behavior. It is not just the legalities, but doing what is right, being able to publicly defend positions and industry practices. The reputation you take so long to build can drop in a minute if you get out of line, so we pay a lot of attention to these issues. We focus as much on our reputation and doing the right thing as on just staying clear of trouble from the new laws.
What is the measuring stick you use as an investment banker to assess whether you have created a good deal?
There are a variety of different types of deals. Let me talk about two of them: raising capital and mergers.
You try very hard not to allow your clients to buy something where you think there could be a real long-term problem.
On capital raising, I would say the best deal starts with a high-quality company; you want to be proud to be associated with that company. You want a deal that works out well for the investors, where they are rewarded not only immediately but over time. To gain reward over time starts with the deal, but it also requires the company to execute on the business plan long after the deal is done.
From the issuer’s standpoint, the quality of the deal depends on getting a fair valuation. Some investors want a big pop after the deal is announced, almost as a branding event. As an industry, we generally try to have a transaction trade up in the aftermarket some, but not too much. The rest of the gain should come over time with a deal that works. On the other hand, if a deal trades straight down, that leaves everybody with a bad feeling, including the original owners such as venture capitalists. There is nothing more painful than if the company misses the next quarter or two in its financial performance after a transaction. We are left wondering what we should have asked, what we should have done, etc., because all of the investing clients are appropriately upset at you and your team, and the issuer is not happy. It is a very difficult situation.
On a merger, you look for good industrial logic behind the deal, making sure it will be it beneficial to those companies in the future. This in no way diminishes the short-term pain, which can include people losing their jobs through “synergies.” One bank buys another bank and does not need all of the systems and overhead. That translates to people losing their jobs, and this is tough. But personally I am resigned to accepting that if I think it is a logical step; if they did not make those steps somebody else would. You want good common sense to the transaction. If you are representing a buyer, you want to make sure you don’t overpay just to get the deal done. If you are representing the seller you want an attractive price for your shareholders. These are some of the issues.
Let’s make the discussion personal, considering your own measures. When you put one of these deals together do you get paid by what happens in the short term or the long term?
The ease of operating in a public context is something that gives private companies pause today. Because of the scrutiny, some companies are hesitant to go public.
The candid answer is, it is more short-term oriented. But having said that, if you do dumb deals for a period of time, they catch up to you. The role of the bank is not as the operator. You are there to facilitate the transaction while the principles have to live with the results for a long period of time. We are not in the business of executing, and I do not think we need to apologize for that. However, the very best in our business pause and say, “Do I think based on everything I know, that this will work out well? Do I think this does make sense? Is this prudent to put on this capital structure?” What I think CEOs in particular are looking for is somebody who will tell them what they think and give them good advice even though it may result in no transaction or no fee. Some of the best long-term commercial positions I have ever made are associated with a short-term loss of opportunity. That is where you do get into the long term versus short term in our business. It is not that we are executing a specific transaction but our advice needs to be long-term oriented.
Taking a Long-Term View
Could you provide an example of how this works in practice?
For me, I would point to two transactions where I was involved. For obvious reasons, I am not going to mention the names of the executives. In an acquisition, we were representing the buyer. We knew the target was kind of “edgy.” There were concerns about their accounting, some of their business practices, etc. We raised this with our client, who also had a sophisticated board, but the deal progressed. It looked like it was going to be good deal for them. But after they did the transaction, soon things started coming up, making it clear that what they thought they were acquiring was not quite what they actually got. Eventually the lead executive was let go. Could I sleep at night since we had raised this as an issue? I guess, but I took away the sense that I didn’t want to go through this again. You try very hard not to allow your clients to buy something where you think there could be a real long-term problem.
So fast forward a few years and there was situation involving an acquisition of a company in Latin America by a large U.S. corporation, and it was well down the road. We knew that again this was sort of an edgy target, and some things started to surface. So I went to the CEO and said, “I really don’t think you should do this deal. I feel strongly, based on my experience, and here are some of the things that I think that you are going to uncover. The reality is, if a company really wants to mislead you, they can.” It is very hard in the context of an acquisition for a banker to really get deep enough to find these things, but there can be indicator lights that would suggest to you that maybe there is higher risk than usual. He thought about it and said that he really appreciated it and called off the deal.
As fate would have it, there was a reason that company was selling. Down the road, the wheels came off with that company, and my client never forgot it. This person, as is the case with many CEOs, was on other important boards. I have received many calls saying, “This particular executive said that we should never do a deal without you.” So here is an example where we as an institution forfeited a multimillion-dollar fee but,
A. We were not associated with a very bad deal, which as I said before is painful for everyone.
B. We have earned multiples of that fee subsequently.
To me, that is good business practice and common sense, an example of working for the longer term.
The challenge I see is that the short term is easy to measure and the long term is not, and so we tend to follow the short-term measures. The best path to long-term success is not necessarily through a sequence of short-term successes.
I do think there is tremendous pressure for business to not only get there over a long period of time but to get there in a relatively smooth path, which is frankly one of the things that is most difficult. One of the most compelling advantages of the private equity firms is the ability to get to the long-term positive, defined as a couple of years as opposed to a quarter, but to do it in a more private fashion and have more latitude with business decisions.
In the Wall Street Journal recently, there was an article about the business roundtable. One of the things they are trying to do is to get the expectation of providing quarterly guidance eliminated, which seems like a positive response at least to me.
Incentives for the Long Term
How do the incentives in your system work to keep someone who might not have your own longer term view from making a deal just to get a quick bonus?
Hopefully, an investment bank is smart enough to realize that it is not just about near-term score card but it is about the portfolio of future business that you are building. This is directly correlated with the relationships you have. Some of the best work I ever did in our firm had no immediate revenues associated with it. You take over a troubled relationship and you work and you build that trust and you have them convinced that you are not just out there for the next deal. As an institution you have to have the ability or metrics to assess when people are building long-term value as opposed to relying solely on a short-term score card.
What would such a score card look like?
You want a deal that works out well for the investors, where they are rewarded not only immediately, but over time.
Most organizations have some group of senior management looking at the quality of client relationships, because that is clearly the leading indicator of whether or not you are going to get a future piece of business. Very rarely, even with our reputation, which is quite good for mergers and acquisitions, do we just get a call out of the blue saying, “We know you are good at this, come do it.” So it is all about being positioned to be the company’s advisor. Do we understand what they are trying to do with their business? Good managers have a sense for who is getting that done and who is not. When I headed the West Coast, I used to meet with clients, and had a good sense of who on my team was building these quality relationships, and factored this in to the performance measures. Without this, it would be easy to have people trying to maximize short-term gain. I actually think you would be pleasantly surprised at the balanced thought that goes into this, though I can only speak for our firm.
Addressing Short-Term Pressures
I am pleased to hear that. I have found a significant number of companies that work against the pressures for short-term gain and look to the long term. And these seem to be the best companies by other measures as well. But there are incredible forces including the analysts and the availability of data that drive companies to the short term. Wal-Mart has gone beyond quarterly and monthly targets to reviewing performance on a weekly basis. It would seem that while this would be interesting data, it would create a short-term culture.
Some of the best work I ever did in our firm had no immediate revenues associated with it.
These are big important questions. The pressure for quarter-to-quarter earnings on my clients is something I certainly witness. There is no doubt that if companies miss those expectations they are often punished in the marketplace. Fund investors get measured quarterly, so it all sort of backs up. Ultimately the consumer is investing in the funds and the funds are investing in business. If the consumer says no, we are interested in returns over longer periods of time, and we want investment managers who buy companies for long term, that could change. Some of it starts with protestations from people who probably in aggregate could fix the issue.
There is no doubt that many traditional investors are measured on quarterly results. If you sit on some pension board, you are going to look at results for this quarter, and if they are not good, you would ask, “Do we have the right manager here?” So it is not surprising that this reality flows through to corporate America.
It is very hard for any individual company to go on that crusade because others might ask, “What are you hiding?” But if business in aggregate can make those arguments, then there is a chance. Of course, ultimately there is this wonderful but potentially painful, self-correcting mechanism; we may find competitors outside this country who are performing better than we are. That is one thing about this capitalistic system we are in. You would like to think though that there is an easier way to get there than to be responding out of defensiveness.
Dealing With Globalization
Since you mention companies outside this country, isn’t that line blurring very rapidly with globalization? I remember Motor Trend Magazine eliminating the “Foreign Car of the Year” award because they didn’t know how to define a foreign car. Is it the Toyota that is designed in California and built in Kentucky, or is it the Mercury that is headquartered in Detroit but built primarily overseas?”
The capital markets are clearly globalizing.
The capital markets are clearly globalizing. People point to the treasury markets as a natural place where people are putting reserves. We are starting to see it in the bond market and increasingly we are seeing investors out of the Middle East and Asia investing in equity. Globalization will force some degree of standards and best practices. There is nothing decreed that says that the U.S. capital markets have to be the most robust or strongest, etc. So, that will force some of these issues to get addressed. The question is on what time frame and how we get the key players to come together? Eventually it will make a big difference because you cannot be isolated in your approach because the markets are not isolated. Very few customers say to you, “I am only going to buy domestic products.”
Mergers and Cultures
Let me go back to the subject of mergers. I personally believe that most mergers do not work. Interestingly, when I interviewed John Reed [Ethix, issue 22], he said that he had concluded the same thing. This has to do with secondary factors. You can look at it analytically and identify the synergy of putting businesses together, but the results over time do not seem to pay out. It seems to me the major reason for this is that people are not subject to the analytics: There is an organizational culture that gets lost in the merger, and this can lead to costly outcomes. Further, there was an article in The New York Times in April that managers tended to pay too much for a company because of their own short-term benefits from getting the deal done. How do you see this whole merger picture? Is this is short-term, long-term thing again?
I am not as negative as you are, though I agree that the area of company culture is generally under-evaluated. As a banker, I try to make observations about this, but there are companies that are very good acquirers.
I would agree with that. Cisco Systems is a great example, but I was talking about mergers rather than acquisitions.
Right. In mergers, the degree of difficulty goes up because the integration of cultures can be very, very challenging but not impossible. There are plenty of examples where it has worked, but there are also certainly many examples where it has not. The question is, was it impossible for it to succeed, or was the right planning not put into place? What is your opinion on that?
I believe this is very difficult in a so called “merger of equals.” And again, it would seem that incentives cloud the picture. Addressing the culture problem is a long-term proposition, while many of the key players, including the CEO, are getting more and more short-term oriented. The average tenure of CEOs has dropped dramatically in the past 20 years, for example.
As a banker, I would say that different people are going to practice their trade differently. In my case, I have had most of my clients for a decade or two. I would not be routinely welcomed back into the boardroom if in the past I had advocated a deal that did not work. Now, it may not have been my fault because sometimes success really does come down to just execution, but I personally never want to be associated with a dumb deal. If you have done as many deals as I have done, you are going to be associated with a dumb deal, and it is just not worth it. Now, some people may take a different approach. You are absolutely right, the economic score card day one to the institution is driven by did the deal happen or did it not? But, I would argue that if you have been in our business long enough, you have a lot pride in trying to do smart deals, but being associated with bad deals is not a long-term formula for success. I am not suggesting that I am the saint of investment banking, but I believe I have been rewarded over the long term for telling people not to do deals.
Corporate Social Responsibility
Great, thanks. Let’s move to another area — social responsibility. Are you seeing this become more of a factor in the business deals, perhaps sharing some of the focus with economic results?
Yes. First of all, there are certain states of incorporation where boards are legally allowed to look at other things other than shareholder value, though in most states, the board is focused on shareholder value by law. But “green,” the focus on the environment, has become increasingly visible in our deals. The interesting question is, is that focused away from shareholder interest or is that actually aligned with shareholder interest? That’s where I think you and I can have an interesting discussion.
In mergers, the degree of difficulty goes up because the integration of cultures can be very, very challenging, but not impossible.
Now, to take an extreme, if tomorrow we say that every single car that our company buys must be a hybrid, that does not feel like it would be the right balance. But over the long term, we certainly must move to a more environmentally friendly solution in the products and the processes of business. So we have come back to the short-term/long-term questions again! Good managers are just going to have to deal with these tensions.
I would like your perspective on a question I have regarding the law requiring a company to focus on shareholder value. If nobody knows whether focusing on green is in the best interests of the shareholder or not (and we both think it might be), how could the law deal with a company that put emphasis on green instead of shareholder value?
Ultimately, it will come down to the business judgment rule. If management and boards of directors establish the right processes for deliberation, I believe the courts will and should respect their reasonable judgment.
What about a broader view of social responsibility than just the environment? Costco, for example, pays its employees more than the norm and this is part of being socially responsible. Some food companies are eliminating trans fats, not just because of the law, but because it is the right thing to do. The same applies to how a business relates to its community.
If you lose the public trust by not using the resources wisely, that has a huge downward impact [in the non-profit world] just like it would have in a corporate context.
I think all of this is part of a trend in business. Green is probably the easiest to identify right now, but you are right, we must think broader. In our business, for example, we are in a war for talent. At the end of the day, the key success factor for a company in the service business is the quality of the people you have. So, how do you retain those people, how do you provide a good work environment? How do you accommodate diversity in the workplace and, more flexibility around certain issues? I see a bit of a paradigm shift occurring. When I started in investment banking there was a group of people like myself, who rightly or wrongly were 24/7. It was the work ethic, or whatever you want to call it. We were willing to focus on our work fairly manically to the detriment of other things. I see fewer young people willing to make those tradeoffs for a career right now. So, businesses have to be more flexible, otherwise we are not going to get the best people.
Tell me a bit about you personally. Wall Street has the reputation, rightly or wrongly, of being a bit cut-throat. How have you found this environment personally?
You may be surprised, and I have been pleasantly surprised, at the lack of times I felt like I was truly in an ethical bind between the conventional thinking of Wall Street and what I felt was right. In fact, at Goldman I feel very blessed in that while it is a very commercial results-oriented place, anytime I ever suggested something did not feel right to me, my opinion was seriously considered. There may have been times when people would say they disagreed —which is fine — but any concerns were always respected.
I have been pleasantly surprised at the lack of times I felt like I was truly in an ethical bind between the conventional thinking of Wall Street and what I felt was right.
This has been a fascinating time to be on Wall Street for the last 20 years, in the midst of rapid innovation and the capital market’s evolution. I got to learn so much I have been able to see strategies at a high level, to meet with business executives across a variety of industries, to glean their insights, and to see what works and does not work. The capital markets provide a pretty interesting score card, and Wall Street has equipped me with a number of skills that I am really excited to utilize now in a position of responsibility in the nonprofit world.
The Not-for-Profit World
You are also chairman of the board of Salvation Army. How do you see the not-for-profit sector and the for-profit sector? What do you see as similarities and as differences?
There are a lot of similarities. Good operations matter a lot. The Salvation Army prides itself on being extremely efficient. When we go out to see a donor, the fact that 85 cents on every dollar goes to recipients matters. So productivity, and the ability to stay productive and use all the tools at your disposal, whether they be technology or other things, matter a lot in terms of efficiency of the organization. The score card is different in a corporate context wherein you must provide benefit to the shareholders. But in an organization like the Salvation Army, if you lose the public trust by not using the resources wisely, that has a huge downward impact just like it would have in a corporate context. Where it is different, I would say, is the motivation. The motivation in a corporate context is to create value for shareholders. In the Salvation Army’s context it is to help others without discrimination, motivated by Christian principles. The recipients benefit from the efficiency of the organization with the non-profit group. In a corporate context, it goes to the shareholders and obviously the employees.
Are you familiar with Max De Pree’s book Leading Without Power? He said, if you are running a group of volunteers you react one way, if you are in a business you react another way. But even in the for-profit company, people can walk away. Maybe you ought to treat the employees in a for-profit company more like volunteers! So it seems like there are more parallels than we often think about.
I would advise others to move earlier in their careers to a “hybrid model” of incorporating both professional and personal priorities throughout their career.
Oh, I think that is right. I also think that people want to be a part of an organization that gets something done. You only have a finite amount of time, so I think if you are part of a nonprofit and you are too laissez-faire in terms of expectations, I think then your best talent goes elsewhere, because they want to be part of a productive organization. So you can draw a lot of parallels. Now, how you pace certain things and certain ways you say please and thank you might be different.
Don’t you need to say please and thank you in businesses as well?
You should, but you don’t have to! I think in a nonprofit it is a minimum standard.
Advice for Younger People
What advice would you have for a younger person entering your field?
I have always had a clear sense of my priorities, and I do not think that they were compromised. But they were put on the back burner a little bit for society by working too much. I was in the “20-year work like crazy and then do great things” mode — the “success to significance” model. Thankfully, I have a very understanding and supportive wife, but I think that while my work is significant, so are other things in my life. I would advise others to move earlier in their careers to a “hybrid model” of incorporating both professional and personal priorities throughout their career.