Michael ‘Woody’ Sherwood, one of Goldman Sachs’s most senior executives in Europe and a 3-decade veteran of the Wall Street firm, announced a surprise decision on Monday to retire. Since joining the bank in 1986, Mr. Sherwood has played a key role pushing the investment bank’s growth in Europe and more recently into emerging markets.

Mr. Sherwood, like many in the inner circle of Chief Executive Lloyd Blankfein, came up through Goldman’s fixed-income division. He previously chaired Goldman’s powerful partnership committee and had been seen as a potential successor to Mr. Blankfein. His departure thins the ranks of the next generation of executives seen to be jockeying for Mr. Blankfein’s job.

“Some people want that [job] passionately; I just didn’t,” Mr. Sherwood said in an interview. “I’ve loved working at Goldman Sachs. I’ve been here since I was 20, and it’s better to go when want you to stay than to overstay your welcome.”

Mr. Sherwood said he is proud of having turned a “tiny, lossmaking entity” into a business that contributes a little more than one-quarter of Goldman’s total income.

Richard Gnodde now takes over as sole CEO of Goldman Sachs International, the collection of overseas businesses he now runs with Mr. Sherwood. Mr. Gnodde, a South African merger banker based in London, is also one of 3 executives overseeing its investment-banking division.