Why you can’t “rip off your clients” and maximize profits at the same time

Last week, an apparently disgruntled Goldman Sachs executive, Greg Smith, had his resignation letter published in the New York Times (http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?_r=2&hp). In the letter, Mr. Smith accused Goldman Sachs for exploiting its clients in order to maximize profits. He wrote that the culture of the company had become “toxic” and “the interests of the client continue to be sidelined in the way the firm operates and thinks about making money.”

If Mr. Smith is right about a pervasive “rip off the clients” culture at Goldman Sachs, the company is about go bankrupt soon. Why? Because no company can maximize profits by selling clients products that the clients do not need or that are not in the clients’ interest to buy—not in the long term. (Given Goldman Sachs’ long record in business, Mr. Smith’s accusations do not seem to add up.) Some clients may not pay attention or may not be knowledgeable, but most do and are.

The purpose of business is to maximize profits, but it can only do so if it creates value for its customers first. People’s rational interests do not conflict: business wants to maximize profits, and customers want to get a good value for their money. Both can get what they want when they trade value for value, by mutual consent and for mutual benefit.

Of course there are businesses that try to deceive and exploit their customers, but that cannot be sustained for long. (Bernie Madoff was able carry on his pyramid investment scheme for so long because he had a lot of aiders and abettors, but even his fraud scheme eventually collapsed.)

In order to fulfill its purpose of profit maximization, business needs an objective standard against which to assess any potential choices and actions: long-term profitability. If long-term profitability and survival of the company are the concern of the management, it will reject any attempts to make money by deceiving customers or investors. While it is possible to make a quick killing through such methods and disappear with the proceeds, it is not possible to operate that way and stay in business for 143 years, like Goldman Sachs has done.

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This entry was posted in "Conflicts of interests", Business ethics, Trader principle. Bookmark the permalink.

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