The Inside the Mind of the CEO interview series explores a wide range of critical decisions faced by chief executives around the world. For more insight, see PwC’s CEO Survey.
This interview was conducted in January 2020 by Daniel Gross, executive editor of strategy+business, together with Neil Dhar, financial services industry leader, PwC US.
One of the most successful startups of the past several decades doesn’t hail from Silicon Valley or Bangalore. It got started in Midtown Manhattan. And rather than being engaged in high tech, it operates in one of the oldest industries: finance. From its 1985 origins as a two-person firm founded by refugees from Lehman Brothers, Steve Schwarzman and Pete Peterson, the Blackstone Group has grown into one of the world’s largest asset managers, with more than 2,700 employees and US$571 billion under management in funds that invest in real estate, infrastructure, life sciences, and a host of other asset classes. In an era when many storied Wall Street firms have disappeared, merged, or shrunk, Blackstone has been noteworthy for its financial success and growth mind-set.
In his new book, What It Takes: Lessons in the Pursuit of Excellence, Blackstone CEO Steve Schwarzman tracks his journey as a young man in a hurry, first from suburban Philadelphia to Yale, then to Harvard Business School, and on to Wall Street. That personal story is layered with descriptions of a unique management philosophy and conscious effort to build a culture that encourages growth, large ambitions, and collective decision making. One of Schwarzman’s mottoes is that it is just as easy to do something big as it is to do something small — a mentality he has applied to philanthropy as well as business. In recent years, he has founded the Schwarzman Scholars program, a kind of Rhodes scholarship for those wishing to study in China, and made game-changing donations in AI research to the Massachusetts Institute of Technology and Oxford. Schwarzman sat down with strategy+business in the room where Blackstone’s management committee meets in Midtown Manhattan.
S+B: Every firm believes it has a unique and proprietary culture. What makes Blackstone different?
SCHWARZMAN: To develop a really good culture, you have to have your senior people — who start off being your major culture carriers — being highly visible to everyone else at the firm on a regular basis. Each week, I, together with Jon Gray, the president of the firm; Tony James, who is now executive vice chairman; our chief financial officer, Michael Chae; and others have firm-wide meetings with almost all of our business groups — private equity, real estate, hedge funds, credit, and infrastructure. And we review everything that the group is working on. This is typically carried out with 200 to 300 people around the world. The rules are that anybody can participate in that conversation. So everybody learns everything, and the firm is completely open and transparent. And it’s a learning culture.
We were hiring somebody who happened to be the head of HR for one of the biggest corporations in the world, and he said, “I’ve met 17 of your people at every different level, in different businesses. And everybody believes the same thing. I’ve never seen anything like that.” But I wasn’t surprised. Everybody gets exposed to the exact same things and shares the same basic values — hard work, meritocracy, transparency, cooperation, integrity. We also place an emphasis on hiring people who are nice, thoughtful, and considerate of others — I will never hire someone based on talent alone. If after 15 or 20 interviews, someone who strays from this somehow makes it into our environment, it’s instantly noticed. They’ll be told: “We don’t do that here.” And if somebody doesn’t buy into the program, they leave.
S+B: Maintaining that culture has to be much harder as you get bigger. The firm has more than 2,700 people now, and some of those employees have come through acquisitions — so you didn’t hire them in the first place.
SCHWARZMAN: We talked about that among ourselves at this table. As long as senior people have access to all of our people in a group on a global basis, in person and with video, we can keep that culture going for a very, very long time. I was at a Christmas party in 2018 — we have about eight for our different areas, and we [the leadership] go to all of them. Jon Gray had just been promoted to president. And we were mobbed, Jon in particular. I said, “Jon, people are too enthusiastic to see us. That means there’s an unfilled need to basically have access to you or me. And that’s a bad thing.” So we started using videos very aggressively so that we could be human, and be accessible. We came up with an idea we call Inside BX, which are three-minute videos we create and share with the firm whenever one of us or one of our business groups is doing something that’s interesting. Since launching this series, we’ve covered everything from Jon’s trip to our Mumbai office to a behind-the-scenes look at some of my philanthropy or a “day in the life” of our summer analysts. The idea is that everyone at the firm can quickly watch a video on their phone and instantly know a lot more about our leaders or what’s going on across the firm. We’re always looking for new and better ways to connect with our people.
At our meetings, we also talk about things other than deals. We talk about what’s going on in the economy, what’s going on politically, both in the U.S. and in other countries. And in effect, we’re providing a framework for how people should think. They may not agree with me on a certain observation of what’s going on in the country, but that discussion is out there. And so it’s like a family. Everybody is important.
S+B: Many CEOs and founders have a hard time delegating and sharing the credit and responsibility. How do you consciously make way for others to step up?
SCHWARZMAN: I’m just another guy now. We held a BX Investor Day in September 2018. I didn’t want to participate, but senior people told me I couldn’t just not participate, that it would send a bad message. I said, “No, it’s a great message. Nobody cares about me. They care about everybody who’s running the businesses, and the next generation of people.” So I was up on stage for, like, 45 seconds. And business-wise, it was the most fulfilling day of my career, which has now crept on for 50 years. I just sat there, and I watched the most extraordinary people with enormous enthusiasm, direction, understanding, and commitment talking about the business for which they were responsible. And everyone had a great plan for growth.
In a role of my type, you position yourself to make sure you become fundamentally obsolete. In other words, you’re still a human being. You show up and people ask you things. But in really successful businesses, if that person just got hit in a car accident and disappeared, how would the organization do? This organization would do great. Though it might miss some of its humor.
S+B: In your book, you spend a lot of pages describing the culture of the firms where you started off in Wall Street: Donaldson, Lufkin & Jenrette and Lehman Brothers. And it seems a lot of the lessons you learned were negative ones — i.e., what not to do.
SCHWARZMAN: Yes. Because you could see obvious issues — why was I not trained? Why was there very little cooperation? Why did you have to be an internal marketer of your own services? Why were there people rooting for your downfall so that they could be promoted, or have their [reputation] increased? I mean, you could see all kinds of negative things if you were a student of organizations. We have a very peculiar industry in finance. The people who go into it all think they’re enormously gifted, whether that’s true or not, and they all believe that they should at least be lieutenant colonels in the army, if not all generals. And when that’s your workforce, you have to deal with people in a very unusual way. Because if you don’t, all these people who think they’re instantaneous lieutenant colonels and above will eat their young. Cultures will develop that are dysfunctional.
S+B: How do you combat that? Historically in Wall Street firms, if you wanted to admit new people to the partnership, or simply promote them to higher levels in a corporate structure, you often had to expel others.
SCHWARZMAN: The first thing you have to do is treat everybody as if they have aspects of that rank. You have to treat them like they’re the bright, intelligent people they are. You have to teach them that their opinions are worthy, just like those of the people who are at the top of the firm, except the people at the top of the firm have had 30 or 40 years to learn some other stuff. All of us who are senior remember what it’s like being a first-, second-, third-year associate, and what those frustrations are.
The second thing is you can’t have ceilings. It can’t be in anyone’s interest to have to kill off somebody they’re competing with, or their senior, to make room for themselves to be promoted. And so part of the plan here, and the reality of it, is that we keep starting new businesses. One of the reasons to start new businesses is to make sure that you have new products that address markets, and that are great for investors. But if you’re expanding your business continually, you also need great talent to staff that new business. And if you have great talent, there will always be a place for those employees to move up and [become] senior people in that new business. What you find with a rapidly growing, innovative business is that your biggest shortfall is how many truly gifted, talented people you can put in the field to help you get someplace new. We started an infrastructure business — we took one of our terrific younger partners, Sean Klimczak, who was in our energy group, and we said, “Sean, this is your moment.” And he created the third-biggest infrastructure business in the world out of basically nothing.
When we started in 1985, we had one fund, Blackstone Capital Partners — the private equity fund. We now have 50 different types of funds. And we have a strategic planning process every year, when each one of the big groups comes to the management committee with three ideas maximum, one minimum, for new businesses to start that will be great for customers. And if it is [going to be great], the question is: How big is it? Because it’s got to be big to make sense for us. And because our investors are the biggest institutions in the world, it’s got to be big enough for them to deploy money. We debate how good that new business idea is for customers first, and ask: How fast can we get to breakeven? I’m a great believer in the idea that you should get to breakeven within a year of [starting] anything. If you’re raised culturally in an environment like that, you will be innovating. You will be taught to think about how you expand. You will put the customer first, and then figure out how to analyze how grand something can be.
The head of a very big investment banking firm called me one day, and he asked, “How do you have all these amazing people running different businesses at your firm? They can all run any business, and you never lose anybody.” My reaction was: Why would they leave? It’s so much fun here. It’s a community of really interesting, really smart, really driven, cooperative people who are all rational. And we realize that if we work together, something much better will come out of this than just being isolated on our own.
S+B: But, again, not all of your growth has been organic. Blackstone has grown in part through acquisitions, which can present a challenge to culture.
SCHWARZMAN: It depends what the business is. For example, we wanted to be in the life sciences investing business, and we wanted to find someplace where there was a moat. So we interviewed all kinds of people in the life sciences industry, and we ended up purchasing a company called Clarus. They were running a relatively small business, with a $1 billion fund, basically joint venturing Phase III drug development in partnership with pharma companies. To be successful in life sciences, you’ve got to be a Ph.D. And everybody who works in this business is a Ph.D. So we bought it in October 2018, and it is now Blackstone Life Sciences.
S+B: In your book, you write that after an early deal didn’t work out, you realized decision making had to become more democratic and open, involving all senior partners. And you mandated that everybody weigh in on every deal. What is the rationale for that?
SCHWARZMAN: Basically, the reason to be at a table is that you have something to contribute. I’m not a believer in paid audiences. There’s no reason to sit in a room and watch somebody else work. You’re there to work. What working means, when you’re assessing something, is you should have independent views, and you should share them, because we all learn from each other. If I were smarter and more gifted, we wouldn’t need anybody else. I could run a small shop like Warren Buffett and do just fine. I happen not to be that gifted. The way I compensate for that is I find people who are very smart, assemble them, give them a detailed proposal, give them enough time to read it, and go to a meeting with the people who are proposing it within the organization. This is a risk assessment type of meeting. And so everyone should have their own views on what the risks are.
I’m not a believer in paid audiences. There’s no reason to sit in a room and watch somebody else work. You’re there to work.”
Does the team have the right sense of what the probability of a bad outcome happening is with each of the key variables? And how bad can it be with each variable? And what’s the probability that several things will go wrong at the same time? Their task is to think about it before they get there, and share what they think. So, if you get eight really smart people doing that, you are going to find almost everything that could go wrong. The views of people differ as to the magnitude of the problem if one of those things goes wrong. And that’s a worthy discussion, because in some of the cases, people haven’t even thought about one of those variables. But that triggers a whole new set of discussions, and more questions. So the team has to go back, answer those questions, and put their answers in writing. Sometimes, we’ll do it three times. By the time we finish that process, the chance that something is going to get through here that then blows up, and in effect genuinely risks investors’ capital, is quite, quite low.
S+B: It also seems like it is a way to enforce consensus and distribute ownership.
SCHWARZMAN: It completely liberates the team who brought the deal. In a normal organization, the people who bring the deal feel their job is to convince everyone to do it. And if the deal goes wrong, then they get blamed. And it creates some very odd incentives. Here, by the time we’ve beat something up, we’ve depersonalized decision making. We don’t care who you are, who’s bringing this deal. It’s the thing itself that matters. You’re not going to go wrong; it’s going to go wrong. At which point, you suffer, the firm suffers, everybody suffers. So let’s not suffer. In about 80 to 90 percent of the cases, if something goes wrong, it’s going to be one of those variables that we evaluated. And if we’ve mis-assessed that as a group, then how could you be held responsible for that? It makes the firm a very supportive environment for people working on things that, of necessity, have risk.
S+B: A lot of management thinking today focuses on mindfulness, letting go, and sleeping better. You write that worrying is actually a positive and a key part of your management philosophy.
SCHWARZMAN: I must say, it doesn’t make my life relaxing. I always have something on my mind. And what you do is you sort the worries from day to day [according to] what can damage the business the most. Or “What can we do that’s really amazing that we’re not doing?” That’s a worry too, you see, because somebody else might be doing that, and they could get ahead of us.
S+B: But are you worrying about climate change and bushfires? Or is it that, at one particular portfolio company, there’s a debt payment coming up? What were you worrying about before you walked in here?
SCHWARZMAN: I worry about some very large things as well as small things. I worry about what’s going to happen to the United States with all this divisiveness. I worry about anger, and that we’ll end up going off on tangents that are very destructive. And that’s just not a U.S. phenomenon; that’s a global phenomenon. I worry about a lot of big societal issues. That’s an overlay to things we should be doing at the firm. And some of these things end up dropping into my personal philanthropic bucket.
S+B: That was going to be my next question. You have made a series of very large philanthropic investments involving very large topics — like China and AI. What’s the philosophy behind that?
SCHWARZMAN: When I see [a problem], I usually end up trying to do something about it, because it’s possible for me to make a contribution. Ten years ago, after the financial crisis, I was worrying about China. I could see pretty clearly that China was going to end up as the target of populism in the U.S., if not globally. It was an interesting problem, because you had to educate China about it, but China also was being misrepresented around the world by some people. So I came up with this idea of the Schwarzman Scholars [which brings young students from around the world to study in China for a year]. And, like the Rhodes scholarship, we have recruited some of the most remarkable students in the world to go to Beijing.
I learned about AI about five years ago from [Alibaba Group founder] Jack Ma, and I learned that very famous technology executives thought there would be a variety of different types of outcomes with AI — from being terrible for society to being great for society. So I got involved with that, and I’ve done two really big things, at MIT [creating the College of Computing to advance the study of both the technological and societal issues related to AI] and Oxford [creating the Institute for Ethics in AI].
S+B: How do you go about distinguishing between personal philanthropy and Blackstone being a vehicle for this work? These days, particularly in Silicon Valley but also on Wall Street, leaders are making a direct connection between their business and solving societal problems like climate change.
SCHWARZMAN: I don’t look at it in that way. Blackstone’s got a principal objective of managing money for its various constituencies, and doing a great job at it. And that’s our primary reason for being in business. That doesn’t mean we don’t have other stakeholders. But I’ve spent, just myself, over $1 billion doing these things I’m talking to you about. I don’t think it’s appropriate for Blackstone to be funding MIT or Oxford with AI ethics programs. I don’t think that Schwarzman Scholars should be a Blackstone project. That’s private philanthropy. I’m not trying to benefit Blackstone in any way in doing that. I’m trying to deal with issues that affect society and the world, like world peace. I know it sounds corny, but that’s what I’m trying to do. And I don’t have any difficulty separating the kinds of things that I think I should do personally with my philanthropy [from Blackstone’s work].
S+B: You write that, in evaluating talent, you rely on instinct to identify the type of people you want to hire. But relying on instinct is a tricky thing when you’re dealing with thousands of people. Do the qualities you look for show up in resumes and cover letters?
SCHWARZMAN: By the time people get to me, they’ve met a lot of people here at the firm, so I seldom deal with a free-floating molecule. And so when I meet anybody — this is almost embarrassing to say — I just jettison myself into somebody else’s brain to see what they’re like, and what it feels like to be them. And how do they think? Are they curious? Are they insecure? How will they do under stress? Are they articulate or not? Do they have a sense of curiosity? Adventure? How have they become successful?
You start with a resume. If I get a document that that person prepared, there’s always something in there that is a non sequitur. It’s typically at the bottom, with “interests.” You may find out, for example, that at the age of 4 they were a world chess champion or something. And it’s just sort of right there. And the only reason it’s there is they want you to ask them about it. So you ask them, “What was it like at age 4? How did that happen to you? I didn’t even have a chessboard until I was 14. What are your parents like?” What happens is they’ll tell you almost everything you need to know [about who they are]. And you start seeing that each person is, in his or her own way, fascinating. Because of the combination of whatever their genes are, and whatever’s happened to them — and there they are. I find it really easy to have that kind of interaction.