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Profit Margins: When Is Greed No Longer Good?

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- In Oliver Stone's 1987 film, Wall Street, business mogul Gordon Gekko (portrayed by Michael Douglas in an Oscar-winning performance) extolled the virtues of greed:
Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge, has marked the upward surge of mankind and greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the U.S.A.

When Wall Street was first released, clever Gekko-wannabees quickly reduced Gekko's tirade to a three-word slogan: "Greed is good." Even the collapse of WorldCom and Enron weren't enough to drive that phrase out of popular parlance, or out of the minds of ambitious financiers. Quarter-over-quarter profits became commonly expected and executives who failed to consistently produce double-digit profit margins saw their corporations' stock prices hammered in the markets.

Now, however, as the economic downturn lingers, unemployment hovers at 9% and America's cities are jammed with Occupy Wall Street protestors, it's time to ask another question: even if greed is good, at what point does it cease to be so? When do high profit margins stop being a benefit of wise corporate stewardship and become evidence of avarice run amok?

The answer probably depends on how the profits are used. A company that generates double-digit profits can use them to grow the business, develop innovative products and create more jobs.

For example, in 1999, Intuitive Surgical (ISRG - Get Report) created and introduced a robotic-assisted minimally invasive surgery system. Intuitive Surgical reports that it has since expanded its installed base to more than 1,450 hospital sites, providing technological and procedural innovations across a range of surgical disciplines. The company has reportedly also sustained annual growth in excess of 25%. It's a good news story that has earned Intuitive Surgical on CNN Money's 2010 list of rising stars and has probably also saved a lot of lives.

But when double-digit profits get paid out in hefty executive bonuses or dividends to already wealthy investors or, worse, get hoarded against another economic downturn, the news is far less positive.

For example, despite increasingly strident news coverage some companies continue to pay tens of millions to their CEOs each year, in some cases increasing their annual compensation by magnitudes of three times or more. Perhaps it's not surprising in the banking sector -- JP Morgan Chase (JPM), Goldman Sachs (GS) and US Bancorp (USB) all gave their CEOs massive raises this year.

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