Goldman Sachs: Ethics Optional

Goldman Sachs (NYSE: GS  ) should "be the leader in things like ethics, in putting clients first," said CEO Lloyd Blankfein last month.

But he'd also like to leave open the option of bamboozling when appropriate.

Goldman, you see, publishes a four-page manifesto on its website called "Code of Business Conduct and Ethics." It's a list of buzzwords and guidelines such as:

  • "It is the firm's policy to comply with all applicable laws."
  • "We have a history of succeeding through honest business competition."
  • "Each employee and director should endeavor to deal fairly with the firm's clients."

But then the last page drops this nugget on you:

From time to time, the firm may waive certain provisions of this Code.

Seriously? You could drive a tank through that loophole.

Confronted about this waiver, a Goldman spokesman responded to blogger ZeroHedge by saying: "The ethics code, including waiver provision, was required under [Sarbanes-Oxley]. No waivers have been requested."

But Sarbanes-Oxley doesn't require either an ethics code or waivers to the code. It requires companies to disclose such guidelines if they have them, and explain why if they don't. That's a big difference. Ethics codes with waivers are a perfect way for managmenent to tell shareholders, "We plan on behaving, but …"

Ethics optional
Now, to be fair, many companies have ethics codes with waivers. I'm just picking on Goldman because it's a moral sewer.

ExxonMobil (NYSE: XOM  ) , for example, says of its ethics code: "The Board does not envision that any waivers of the Code will be granted, but should a waiver occur for an executive officer or director, it will be promptly disclosed on this site." Altria Group (NYSE: MO  ) discloses that "Any waiver of any provision of this Code for any director may only be granted by the Board of Directors and will be promptly disclosed to the Company's shareholders." Citigroup (NYSE: C  ) warns that "waivers may be granted only by the General Counsel or the Chief Compliance Officer."

Thanks for the heads-up. But can I ask the critical question: Why? What good are ethics codes that a company's top brass can subjectively ignore? As a 2003 lawyerly report on Sarbanes-Oxley put it, "Because a code of ethics expresses the company's fundamental values, few waivers of its provisions are likely to be justified." Exactly. So why even allow them? It's like adding a 28th amendment to the Constitution that says "The previous 27 amendments may be ignored from time to time." Such language pretty well discredits everything else said before it.

Call me cynical, but a rule hollows out when a potential criminal can say: "Ooh, you know what? I think I'd like to be exempt from this one. But thanks for the concern!"

'Fess up, guys
Since ethics codes are voluntary as long as the reasons for abandoning them are disclosed, and waiver clauses make most codes irrelevant anyway, I'd like to make a modest proposal. We'll call it the code of honesty. When a company can't put together a code of ethics without a mile-wide waiver clause, management should be required to issue a code of honesty that goes something like this:

On occasion, our chief concerns are our jobs, our bonuses, and most especially our egos. We try our hardest. But please realize that we're fallible human beings who make more money than [the deity of your choice]. As such, we're prone to doing things that benefit us and only us. We're sorry. You'd understand if you were in our shoes. We love our shareholders and our clients. But as Chris Rock says, a man is only as faithful as his options. And when it comes to screwing people over, we're chest-deep in options.

I'd say that sums up Goldman's corporate culture. Goldman's management isn't filled with morally bankrupt scoundrels. It's filled with people whose top incentives are to look after their own interests. I just wish they'd admit it.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel owns shares of Altria.. The Fool has a disclosure policy.


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  • Report this Comment On June 15, 2010, at 8:06 PM, carlsz wrote:

    very true/depressing.....the down fall for the banking industry is in effect. It is the best time ever to start a new bank that starts from scratch and embeds ethics into the smallest particles of the firms activities......If you build it the investors will come!!

  • Report this Comment On June 16, 2010, at 4:35 PM, susan400 wrote:

    You vastly misunderstand Goldman.

    5 pages of discliosures, institutional investors bot RE stuff for yrs and it worksed then it didn't.

    po lil me?

    detractors of GS are unethical.

  • Report this Comment On June 27, 2010, at 5:29 PM, GastonCiucciNeri wrote:

    The SEC is trying to probe that in early 2007 Goldman Sachs misled two of its clients persuading them to buy a subprime mortgage security called Abacus 2007 that Goldman knew it was totally flawed.

    In fact in constructing the security Goldman sought the help of the hedge fund Paulson & CO, the same fund that during 2007 and 2008 gained 18 billions by shorting the CDOs market.

    It is alleged by the SEC that Paulson &CO and Goldman Sachs included in the Abacus 2007 security the worst bonds in the market so they could easily gain from shorting it.

    In fact after the launching, the Abacus 2007 security lost most of its value and this was due in part also to the huge short positions of Goldman Sachs and Paulson & CO.

    Goldman’s clients in the deal were left with an hefty loss of approximately one billion of dollar.

    If the SEC will be successful in probing Goldman’s responsibility in misleading its clients in the Abacus 2007 deal, this will be a milestone case.

    In fact it will be proved for the first time that one of the US largest financial institutions not only knew in advance of the risk posed by the products that was selling to its clients but also , shorting these products, it contributed to the demise of the CDOs market with all the terrible consequences that we know.

    Goldman’s motto is “ Our clients’ interests always come first “, the contrast with Goldman’s behaviour in the CDOs markets could have been hardly more striking.

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