Goldman Sachs is alleged to have structured and marketed a synthetic collateralized debt obligation (CDO) which hinged on the performance of subprime residential mortgage-backed securities (RMBS). By failing to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO, Goldman Sachs broke the law. The product may have been both new and complex, but the resultant deception and conflicts are old. It was unethical for Goldman Sachs to allow a client that was betting against the mortgage market to have a huge influence on which mortgage securities were to be included in the investment portfolio while deceiving the investors that the securities were chosen by a third party that was independent and objective. The investors had the right to receive full and accurate information regarding the investments and the omission of information can be considered as illegal.
Goldman Sachs is a mega-firm that is known for its money prowess which leaves many impressed, envious, and/or suspicious. My answer would not change even if Goldman Sachs had not made billions selling those CDOs, what Goldman did was both illegal and unethical. Goldman not only failed to tell its clients that the synthetic CDOs had been picked with the help of Paulson, but they also failed to reveal to them that these CDOs were riskier than the rating agency had thought. Goldman was aware that Paulson was betting against the synthetic CDOs but still took the initiative to market these CDOs to institutions. Regardless of whether Goldman Sachs made money or not, deception remains to be deception and there is no other word for it. The company put its interests and profits above those of its clients so my answer cannot change. The key element to the success of any business is the ability to earn the trust of clients and Goldman Sachs simply threw that trust into the wind.
While Goldman Sachs claimed that it had no fiduciary responsibility to their shareholders to maximize profits and to offer its clients reliable services and products. Goldman Sachs argued that it is the clients ‘responsibility to assess the value of security hence as a body it has no fiduciary responsibility and neither does it offer a warranty. Something about this does not feel right at all. A financial product or any product for that matter should not be built to lose value. Goldman Sachs had the responsibility of providing security for the products it offered its clients. It is understandable and fine to bet whether something will maintain, gain, or lose value. However, to build something for it to lose value is intentionally destructive and wrong. The company failed to meet its obligations to clients. Their responsibility does not only extend to maximize profits for its shareholders but also ensure security for products offered to investors. The company should have informed the clients of the likelihood of the mortgage-based securities downgrading and let the clients choose whether or not to invest in them. By building a mortgage investment that was meant to fail, the company failed in its fiduciary responsibility
In this case, the hedge fund manager Paulson approached Goldman Sachs and by doing some tactics, Paulson gained from a speculative bubble in housing. SEC charged Goldman Sachs for not making investors aware of the risks associated with the bonds that they were offering as well as the involvement of Paulson. It is unethical for companies such as Goldman Sachs to allow its managers to trade on the company’s account because the company’s interests do not always reflect the interests and expectations of the clients. In this case, for example, the company, Goldman Sachs made huge profits from these transactions but the clients made huge losses. The company representatives make use of their position of insiders e.g. how Goldman made use of information provided by Paulson to take full advantage of opportunities that present themselves while investors, on the other hand, are at a disadvantage given that they majorly depend on the information that is availed publicly. Regardless of the conflicts put in place, conflicts will always arise between trades made on behalf of the company and those made on behalf of the clients. Even if policies are established to prevent these conflicts, top managers will always be a step ahead of the company moves and clients will always be a step behind given the managers’ roles in decision making. Unless there are effective transparency and accountability, clients may continue being shortchanged even though they may sometimes fail to notice what is going on. Managers as key decision-makers should assume deontological approaches that bring the best results for everyone.
Question 2
- How might a company configure its strategy-making processes to reduce the probability that managers will pursue their self-interest at the expense of the stockholder?
In any given organization, the employees and the employers have the responsibilities and duties that they have to fulfill. These obligations are covered within legal and ethical frames. To prevent managers from pursuing their interests above those of the stockholders, the organization must develop manuals that describe how the managers along with other employees are expected to behave as well as the conduct that the organization desires that its workforce to display. To ensure that the needs of stockholders are addressed, the company has to ensure that the managers are familiar with the set goals, mission, vision, and values. Managers would pursue their interests if managers are not working towards the goals of the stockholders. The culture of the organization should be one that places a high value on ethical behavior hence ensure that the managers act in a manner that places stockholder’s interests and those of the company above their interests.
Every organization ought to establish a decision-making process. These processes will ensure that for every business decision that the managers have to make, they have to ensure that they consider the ethical dimensions of the choices taken. The company can ensure that the organization’s mission statement includes elements of the demands of stockholder’s demands. The mission statement will, therefore, serve as a reminder to the managers who will be repeatedly reminded of what it is that they need to achieve. In every organization, there should be an alignment between the interests of stockholders and management compensation to ensure that the managers do not place their interests above those of the stockholders. The company can have compensation schemes that are stock-based
The problem caused by the differing interests between stockholders and managers can be prevented by having a board of directors in place to govern the conduct of managers. The board of directors would have the responsibility of regulating the activities carried out by managers to ensure that whatever they execute falls within the company’s procedures and specifications. Financial statements should be regularly taken and audits conducted occasionally. The threat of takeover can serve as a measure to limit and ensure that the interests of managers do not go above those of stockholders. The culture of the organization must emphasize responsibilities and accountability just as Modally did when he entered Ford.
Top of Form
Question 3
- When would a company choose a matrix structure? What are the problems associated with managing this type of structure, and in what circumstances might a product-team structure be preferable?
Whenever a company wants to promote innovation as well as speed up the development process of new products, the company may choose a matrix structure. The matrix structure allows the organization to group its workers by either function or project/product. With the two chains of command, the employee, therefore, ends up having two bosses with one being a functional boss and another being a project boss. A functional boss heads the function while the project boss heads the projects. With this type of structure, the employee ends up being accountable to more than one boss. The disadvantage of this structure is that the employees may end up having two boss problems hence at times get caught in the middle. The matrix structure increases organizational complexity rather than simplifying it for the employees. This is true seeing that it demands a high degree of cooperation between the two chains of management i.e. the functional and the project management chains. There is a great potential that with this structure, management directives may end up conflicting. It is also possible that employees may have a hard time establishing their priorities to ensure that they suit both project and functional management. The two separate chains may increase overhead costs associated with management and this is considered to be a disadvantage. Product –team structure is preferred where the focus is directed at creating a given product or product part. Where the company is departmentalized and has multiple products, the product team structure is suitable since each division within the company is dedicated to a specific product line. The teams report to one manager even though the team members have the power to make the decisions.
Question 4
- When would a company decide to change from a functional to a multidivisional structure?
A multidivisional company is one in which there is a parent company with various divisions that operate a separate business. A company is most likely to change from a functional structure to a multidivisional one when it wants to increase its size and complexity. The multidivisional structure is adopted once an organization grows and diversifies. It is ideal to shift to the multidivisional structure when the company is looking to diversify and extend into different geographical regions. This is because this type of structure allows the company to divide its employees into geographic regions and product areas. Some companies change to a multidivisional structure when they want to enhance the cost savings as well as product differentiation. While a multidivisional structure has higher operational costs compared to the functional structure, the change leads to an increase in the bureaucratic costs that are linked to managing the multibusiness model. The structure makes it possible for the company to effectively handle all the activities associated with the company’s value creation. As a given company seeks global standardization and shift from localization, it is likely to adopt a multidivisional structure. This structure will allow the organization to provide its clients with products of a wide variety. A multidivisional structure makes it possible for companies that want to obtain a culture of effective communication and tighter control over the company’s productivity to attain the needed number of employees, provide more effort contributions and attain differentiation.