Sears, Roebuck, and Co. used to be the largest retailer in the U.S. in the 1980s. The company has a long history that dates back to 1886, when its founder began to sell watches (Paine, 2003). Later on, it started to operate as a mail-order company offering low prices for the customer and continuously diversifying its catalogs of goods. Sears also ran auto centers which faced serious difficulties with profitability in the 1980s.
In 1991, the company introduced a productivity incentive plan aiming to increase profits in its auto centers on the national level (Paine, 2003). The employees were to meet sales quotas to avoid termination. As a result, a series of pricing scandals followed, and numerous lawsuits were filed against Sears, Roebuck, and Co. for auto repair fraud. This paper aims to discuss the Sears Auto Case, define the ethical issues, and recommend changes to be made to regain customer trust.
The root causes
There are several root causes that can be determined for the ethical violations of Sears Auto Centers. Upon the introduction of the productivity incentive plan, Sears Auto Centers faced a number of ethical issues. Mechanics eliminated procedures and steps, and service advisors were pressured to sell unnecessary repairs to meet the sales quotas. As a result, the clients were misled and charged for unneeded repairs; thus, customer trust was undermined.
Furthermore, the top management did not promote a safe and ethical working environment for employees. Occupational fraud must be prevented by leadership whose task is to keep organizational integrity and provide employees with conditions that help them remain honest (Struminska-Kutra & Askeland, 2020). The reward system introduced by Sears led to immoral conduct of services in the company affecting different parties, such as employees, customers, the company, the CEO, and the wider community.
How important is the compensation system?
The compensation system can be identified as an important factor for unethical behavior in employees. Sears’ service advisors were paid a base salary and additional commission. According to Paine (2003), they had to meet the set sales quotas, “such as a certain number of alignments per shift, and dollar volume quotas based on the value of goods and services sold per hour“ (p. 3). Receiving commissions was not uncommon in the automotive service sector, and similar quotas were utilized by the company’s competitor, Firestone (Paine, 2003). The commission component is regarded as critical for the ethical concerns around the Sears case.
How seriously should the CEO take the allegations?
The California Department of Consumer Affairs (DCA) alleged that the company’s quota system resulted in overcharges. According to Schmeltzer and Mateja (1992), as a result of “an 18-month undercover investigation,” it was estimated that they corresponded to $233 per car (para. 2). The company’s CEO, Edward Brennan, defended the auto service centers and denied implementing a scheme recommending unnecessary repairs or provide services that were not requested by clients (Paine, 2003). The company’s CEO should respond immediately to fraud allegations and take actions to eliminate errors and improve organizational integrity.
Which of the allegations do you find problematic (and why)?
The DCA’s allegations of fraudulent overselling are problematic for Sears since they undermine its image and imply the need for an investigation and immediate measures. The breach of ethical and legal conduct can have severe consequences for the company. As Schmeltzer and Mateja (1992) claim, the DCA’s director suggested that “Sears has used trust as a marketing tool” (para. 3). Selling and performing additional services resulted in customer dissatisfaction; furthermore, cars leaving Sears services in a worse state than upon entering were reported (Paine, 2003). Therefore, there is a need for the company’s CEO to address the allegations immediately.
How strong are Sears’ counterarguments/defense?
Sears’ response was prompt, with Brennan strongly denying any misconduct. In his defense, the CEO called the California DCA’s allegations a political strategy. According to Schmeltzer and Mateja (1992), the company referred to the investigation as “incompetent, very seriously flawed” and not compliant with the accusations (para. 8). The investigation of DCA’s Bureau of Automotive Repairs (BAR) constituted a part of a broader campaign addressing fraud at repair shops (Paine, 2003). The BAR carried out undercover runs at Sears auto centers and concluded that employees recommended unnecessary repairs or services in most of their visits. While the company has the right to challenge the investigation method chosen by the agency, the violations of the auto repair act came to the surface.
Is Sears being unfairly targeted?
Since Sears violated the auto repair act and fraud was becoming a frequent reason for customer complaints, the company was not unfairly targeted. The profit-seeking approach was adopted by other companies as well, but the lack of managerial control and communication with employees resulted in unethical behaviors. Since several stakeholders were affected by the compensation system, such as employees, clients, and partners, the criticism for Sears’ strategy cannot be considered unfair.
Who bears the greatest responsibility in this situation?
Sears’ CEO and executives made a series of mistakes leading to the loss of customer trust and poor services. The managers’ primary responsibilities include implementing adequate policies and ensuring that employees provide quality services. In this scenario, the executives introduced the productivity incentive plan but did not account for the moral aspect. In other words, the consequences of the managerial decisions were not considered, and the main objective to provide value for the customer was compromised.
The institutional leadership perspective identifies the company’s management as responsible for ensuing organizational integrity while accomplishing goals (Struminska-Kutra & Askeland, 2020). In Sears auto center case, the reputation of the company was tarnished, and CEO risked his professionalism. Furthermore, employees were pressured to meet the sales quotas, and no relevant discussion of the ethical concerns was conducted by managers to prevent fraud.
If you were Brennan in the midst of this situation, what options do you have, and what would you recommend?
In the midst of the scandal, Brennan has several options to address the ethical violation in Sears. First, the compensation system can be reconsidered, and the commission component can be taken out. Furthermore, sales quotas for repairs and sales can be lifted as well. Alternatively, the commission program can instead focus on customer satisfaction and service quality. The recommended option is moving away from the quota system and concentrating on providing quality services and establishing a competitive advantage. A reconsideration of Sears’ integrity is required, and organizational leaders play a pivotal role in the ethical decision-making of the employees.
What should Brennan do now?
Brennan should ensure that a proper auditing system is in place to increase the quality of services and regain customer trust. Furthermore, the executives should not assume that employees naturally behave in an ethical way; instead, an organizational integrity system should be implemented to help them be moral in their decisions. It can utilize compliance-based tools focusing on control mechanisms ensuring legal compliance, such as codes of conduct, reporting procedures, disciplinary measures, and employee monitoring (Molina, 2016). Furthermore, values-based tools should ensure that the company’s core values are reflected in its daily activities. The CEO should restructure the initial incentive compensation program to ensure it will help the company meet quality standards.
If he determines that the allegations are true, should he publically admit error?
Brennan should publically admit the error and accept the responsibility for the consequences of the reward system since Sears’ actions can be characterized as unethical. As a result, acknowledging the problem and working toward implementing solutions is the only way to win back customer trust and restore the company’s reputation. Brennan should be a role model for the employees by taking responsibility for Sears’ value system.
What are the foreseeable impacts of the recommendation you are making in v.1 above?
A business is expected to run under the law and legal system; hence, the foreseeable impacts of the recommendation made above include providing fair and efficient conditions for employees and quality service for clients. The options suggested can eliminate the adverse effects of the compensation system. The organizational integrity system and focusing on a competitive advantage can help Sears remain profitable without violating the auto repair act.
Should changes be made, and if so, what?
The changes required include an alteration in the reward system, adoption of the organizational integrity system and tools, as well as establishing a competitive advantage to improve the company’s financial state and attract customers. To summarize, Sears, Roebuck, and Co. case is an example of poor managerial decisions and a lack of control systems to prevent corporate fraud. Neglecting the moral aspect of business can result in adverse consequences for all stakeholders. Instead, focusing on customer satisfaction and quality service, providing value, and ensuring proper communication between the management and employees can be effective for Sears without compromising its integrity.
References
Molina, A. D. (2016). Ten recommendations for managing organizational integrity risks. The IBM Center for The Business of Government. Web.
Paine, L. S. (2003) Sears Auto Centers (A). HBS No. 9-394-009. Boston, MA: Harvard Business School Publishing.
Schmeltzer, J., & Mateja, J. (1992). Sears auto centers charged with fraud. Chicago Tribune. Web.
Struminska-Kutra, M., & Askeland, H. (2020). Foxes and lions: How institutional leaders keep organisational integrity and introduce change. In M. Struminska-Kutra & H. Askeland (Eds.). Understanding Values Work (pp. 117-138). Palgrave Macmillan, Cham.