Hi, this is Dan Morrell, host of Skydeck.

Fifty years ago, as a senior at Abington High School in suburban Philadelphia, Stephen Schwarzman (MBA 1972) got waitlisted at Harvard College. So he found the number for Harvard’s dean of admissions and called him up to plead his case directly. When told by the dean that no one would be admitted from the waiting list that fall, Schwarzman told him that he was making a mistake. It was all for naught, but this chutzpah was a bit of a hallmark: A year earlier, Schwarzman spearheaded a successful effort to get Anthony and the Imperials—then one of the most popular musical acts in the country—to play at Abington High School.

Today, Schwarzman is chairman, CEO, and co-founder of Blackstone, and the founder of the Schwarzman Scholars, a graduate fellowship program housed at the new Schwarzman College in Tsinghua University in Beijing. He has just written a new book, What It Takes: Lessons in the Pursuit of Excellence, and in this episode of Skydeck, Schwarzman and I discuss the origins of his audacity, his path to success, and what he’s learned from the low points.

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Dan: Why did you write this book? What impact did you want it to have?

Steve: I wrote the book because one of our clients, who was actually in the Middle East, running a huge sovereign wealth fund, took it over. He was a royal family member. And I had never met him before, so I was going to be the first person who managed money for this giant institution. To meet him, it was going to be a five-minute handshake and hello.

When I met him, he was young, and I started asking questions about his background and what he did, and he started asking me about how does he run a better operation, with this giant thing, because he had no experience. And we ended up talking for two and a half hours. I told him how to hire people, and how to incent people, how to have a good investment committee, how to figure out what was the right type of thing to be buying at the right time.

We had a great conversation. In the middle of it I tried to sell him some products, which I normally would do, and he said, "Please, Mr. Schwarzman, don't waste our time selling me anything." He said, "We'll buy it anyhow. Just continue to tell me how to make my company better."

And what happened, over the next year or two, is that kind of request of me started happening with enormous frequency. It would take me fully two to three hours to teach somebody how to reconfigure what they were doing. By the 25th time, I said, "This is getting so boring. I'd like to write it in a book so I don't have to talk to these people, and just give them the book and tell them to read it."

That really started the commencement of writing the book, which is extremely difficult and painful for those of us who don't like writing. As you can tell, I like talking. I like video. But writing is a very difficult task. It took me probably, off and on, over two years to write the book.

Dan: You have this really long track record of refusing to fail. I mean, we go back to Anthony and the Imperials, getting them to play your high school; calling the Harvard admissions dean and asking about why you didn't get in. Where does that determination come from?

Steve: I don't quite know. Since I was very, very young, anything I set out to do, I wanted it to be successful. I wanted to win. Most of that stuff, when you're young, is in sports. I was very fortunate. I was a very good athlete. In particular, a very fast runner, and I literally enjoyed using that skill in different settings. I liked winning. It's like a habit. Once you start it, you like to continue it because it's better to be ahead than behind. It's pretty primitive, I think. That's part of my nature.

Dan: I want to talk about a couple foundational moments at Blackstone that you detail in the book. Right around 1989, when you invested in Edgcomb. Can you talk about the aftermath of that investment, particularly that scene in the office of your investor from Presidential Life, and how it changed the firm's approach to decision making?

Steve: Sure. This was our third investment. My partner and I had never made an investment before. We were pretty good at raising money, which we raised $850 million as a first-time fund. Very difficult to do that, but we did. It was the largest first-time fund ever raised and the third biggest in the world when it was raised.

One of the younger partners at the firm brought this Edgcomb company as an investment opportunity, the way we handled it was that he talked to me about it, and he thought it was great. The firm was so small somebody heard that he was looking at this. They came into my office and said, "We think it's terrible." And I said, "Why?" He said, "Because all the company's doing is making inventory profits from steel going up." It was in the steel distribution business, and when steel prices generally go down, this company will start selling everything in their inventory at a loss, and the company will go bankrupt.

So the way I chose to resolve this problem, like a complete amateur, is I had both of those people come in, sit in front of my desk, lay out their arguments, and I would, like King Solomon, pick the right argument. Which is exactly what we did, except I ended up picking the wrong argument. We made the investment, and within three months we couldn't pay our interest. And we ended up losing our money, ultimately, in that transaction.

And this was completely my fault. I made that decision. We had no investment processes other than my apparent genius, which, we learned very quickly, was not very genius-like.

I was called up by one of our investors to meet with him. You don't have to be a rocket scientist to know that was not going to be a very good meeting. I went and sat in a chair in front of his desk. The guy completely excoriated me, and there was almost no curse word that he didn't have a full command of, and used it, and it was a horrific experience because he, unfortunately, was correct.

So on the way back to work, in the taxi, I vowed this was never going to happen again. We're never going to lose money. We're never going to have a bad client meeting. And I set out to figure out how to do that.

It wasn't that hard. We changed our whole paradigm. We had written presentations on any proposal. It had to lay out all the significant risks, what that risk could do to the protection of capital, and a whole variety of other factors.

And those of us who constituted what we now call the investment committee, not just me... At that point the firm was small. We had all the other partners. And you had to distribute that document two days ahead, so that other people could read it and think about it. So you couldn't over-talk them. And the job of that investment committee was very simple. It was to figure out all the risks in that investment so that we could never lose money for a customer.

Those became, as you might suspect, very spirited meetings. If you have a proposal, walk into a room, and you know that eight people around the table are going to attack the analysis intellectually, cognitively, not attack the person who brought it, but just the goodness, or risk, in that investment.

So what happens is when you get eight smart people against a small team, they'll come up with more risks. Or a different way of looking at risk. And then what you do is you send the people back, who brought the transaction, to answer the questions that other people had raised, and then that has to be in writing, and that has to have two days so that people can absorb it.

There are a lot of tricks in organizations, where people just run in, give you something, as you're sitting down to talk about, that answers all your problems. That's one trick. Another situation is to just talk to the senior person in the room and make that senior person make the decision so if they ever turn you down, you can get angry at them. There's all kind of interpersonal ways to try and manipulate outcomes.

What we did is, I figured out all the ways a system could be manipulated, and stop it. Fortunately for us, I diversified the firm's intellect away from my perhaps not-so-remarkable talents, and we ended up with remarkable outcomes for over 30 years. So that system only happened because we had an early disaster.

Dan: In the book, Steve, you write that every year, when you address the Schwarzman Scholars, you note that failure teaches more than success. How has failure been an important lesson for you?

Steve: Well, failure is important because when we just do things that come natural to us, that work, you're not quite learning anything. You're just acting from instinct. Particularly when you're younger, you end up making mistakes, no matter how good you think you are. All of us make mistakes.

The key is how you deal with that. Do you get angry at somebody? That's not going to help. Do you blame somebody that you appointed to do something? Which is actually somewhat nonsensical because you picked that person. First you hired them, then you put them in a role they couldn't handle, and then they messed up. Well, how much of that do you own? Almost 100%. Right?

So what I've learned is that when you have a mistake, that's the moment where you don't get angry. You assemble people and you say, "How did this happen? And how do we redesign what we're doing so this will never happen again?"

If you plug some really bad holes so that things won't happen again, and because mistakes happen to everyone, no matter how capable you are, if you do that over a period of years, you will find that the mistakes, either you as a person or your organization makes, are dramatically diminished. And that's the learning experience.

We just had something like this today, actually, on a deal where we made double our profits, but it actually should have been more. We started a company and didn't quite understand all the things we needed by way of infrastructure, in that new company. So this morning the team announced that we had sold it at a very good profit, and I basically stopped the celebration and said, "Yeah, that's terrific. I mean, that's wonderful. However, we all know we could have done better. And what we should do is, after the celebration, sit around, and everybody involved should talk about what we could've done differently. And the reason for that is we'll have another occasion to do something similar, and we don't want to live this mixed dream in the future."

Everybody sort of looked at me as like, "Well, the school teacher's out here." And I said, "Don't feel put upon. What we're trying to do is safeguard this thing for the next time we try something like this. We'll make much more money, but you'll all be scared a lot less. It'll just work the way it should, as opposed to the adventure it was this time."

That's the way you take away blame from people, the way you enhance what you're doing, set yourself up for big wins. There's no downside. But most people may pretend that nothing bad happened, or if something bad happens, it was somebody else's fault. That is not the way to think things through. You're trying to change the operations, change the paradigm of what you're doing. That's what leads you to be a great organization.

Skydeck is produced by the External Relations department at Harvard Business School and edited by Craig McDonald. It is available at iTunes and wherever you get your favorite podcasts. For more information or to find archived episodes, visit alumni.hbs.edu/skydeck.

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