THE BLOG
06/27/2010 05:12 am ET Updated May 25, 2011

Profit Maximization - Ethics = The 'Goldman Standard'

Is the pursuit of profits justified at any cost? Some believe the term 'business ethics' is an oxymoron anyway. Goldman's recent mortgage activities prove their pursuit of profit justified doing whatever they needed to do 'to some of their clients' to carve out big gains for themselves. Is this their version of the 'gold' standard? if so, clients be fair warned. Shareholders may get richer, for awhile.

Will this country continue to tolerate this type of behavior? Is there a line between profit maximization and business ethics? Can legislation re-write it?

A CEO's job is certainly to maximize profits for shareholders. But, a what expense? Is everything fair game as long as it involves both making money and the likelihood of getting caught low?

Most companies operating for the long term choose an ethically sound business practices. Most have codes of moral conduct in place. This practice may cost them some earnings in the short term but allows for a strong reputation translating into a corresponding healthy long term business strategy.

How about another tough question: how generous should a company be to their community? Some shareholders believe the company should not give a dime to any community or charitable organization. They believe it is up to the shareholders to determine what to do with their dividends and equity. Others believe a company does have an obligation to support, in some manner, the community or communities in which they operate. This discussion can make for healthy tension in the boardroom. I am familiar with this debate as a former public company CEO. I believe in the power of the free market, investing in communities and the the importance of transparency and ethical behavior.

The government's fraud charge against Goldman Sachs brings 'ethics versus profits' under the spotlight providing a great opportunity for public education. This case will no doubt be one for the ages in business schools.

The background: Goldman Sachs created a sub prime mortgage security product for a client that wanted to bet against the mortgage market and subsequently allowed the client to hand pick the mortgages placed into the security. They subsequently got the product rated 'AAA', sold it to their clients. They did not disclose to their clients that another client hand picked these mortgages to fail and wanted the security created so they could bet against it. The product failed a year later. The client that was shorting won big, as did Goldman who also decided to short this type of asset making nearly $4 billion doing so. Score one for profits, a big loss for ethics. What example is set for the firm's employees?

Many in banking operated ethically through this crisis. The great majority of community banks did not make sub prime loans as they believed it was an ethical problem to make a loan they did not believe the borrower had the capability to pay back. They were willing to forego the big profits they would have made making these loans and then selling to the likes of Goldman and others. They continue to operate in their communities providing credit to small business owners and home buyers. Like consumers, they are also being punished by the nearly 6 million foreclosed homes on the market driving down property values.

It will take time, a free market's pursuit of profit, plus ethical behavior by market participants to right size the market. Onward! Lessons Learned!