Chapter 7
Managing for Ethical Conduct
Contents: (Please note: the Instructor Guide for every chapter will follow this structure.)
1. Chapter Outline
2. Teaching Notes
3. In-Class Exercises
4. Homework Assignments
5. Additional Resources
Chapter Outline
I. Introduction
II. In Business, Ethics Is about Behavior
A. Practical Advice for Managers: Ethical Behavior
III. Our Multiple Ethical Selves
A. The Kenneth Lay Example
B. The Dennis Levine Example
C. Practical Advice for Managers’ Multiple Ethical Selves
IV. Rewards and Discipline
A.
B.
C.
D.
E.
F.
G.
H.
People Do What is Rewarded and Avoid Doing What is Punished
People Will Go the Extra Mile to Achieve Goals Set by Managers
How Goals Combined with Rewards Can Encourage Unethical Behavior
Practical Advice for Managers: Goals, Rewards, and Discipline
Recognize the Power of Indirect Rewards and Punishments
Can Managers Really Reward Ethical Behavior?
What about the Role of Discipline?
Practical Advice for Managers: Discipline
V. “Everyone’s Doing It”
A. People Follow Group Norms
B. Rationalizing Unethical Behavior
C. Practical Advice for Managers: Group Norms
VI. People Fulfill Assigned Roles
A. The Zimbardo Prison Experiment
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B.
C.
D.
E.
VII.
Roles at Work
Conflicting Roles can Lead to Unethical Behavior
Roles Can Also Support Ethical Behavior
Practical Advice for Managers: Roles
People Do What They are Told
A. The Milgram Experiments
B. Obedience to Authority at Work
C. Practical Advice for Managers: Obedience to Authority
VIII.
A.
B.
C.
D.
E.
Responsibility Is Diffused in Organizations
“Don’t Worry – We’re Taking Care of Everything”
Diffusing Responsibility in Groups
Diffusing Responsibility by Dividing Responsibility
Diffusing Responsibility by Creating Psychological Distance
Practical Advice for Managers: Personal Responsibility
IX. Conclusion
A. Am I Walking My Ethical Talk?
X. Discussion Questions
XI. Case: Sears, Roebuck and Co.: The Auto Center Scandal
XII.
Short Case
Teaching Notes - Discussion Questions
1. Have you ever been in a situation, especially a work situation, where the norms supported a
particular behavior, ethical or unethical, where you felt pressured to go along? Explain.
Undergraduate students have limited work experience. But, they will often cite examples from
summer jobs, such as working in a fast food restaurant, where the rules said you could not eat the
food, but everyone did. Or, they may have had a job where they worked hard at first, but after
being charged with "rate-busting," slowed down to match the work levels of regular workers.
Graduate students with work experience will have lots of examples - some good and some bad.
It is good to solicit both. That way the message is clear that organizations and managers vary
and perhaps one should attempt to learn about the ethical values of an organization or manager
before accepting a job.
Probes to Stimulate Discussion
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With examples of pressure toward unethical behavior, ask:
 "What was the nature of the pressure? Why did you feel you should go along? What
options did you think you had, if you did not go along?"
With examples of pressure toward ethical behavior, ask:
 "How did you feel about the pressure?" Often the reaction is quite positive. Rather than
pressure, they may experience it as "support" for doing the right thing. Discuss the
difference.

"Do you think it is okay to pressure people to do 'the right thing,' such as supporting a blood
drive or the United Way?"
2. Have you ever been in a situation where the rewards explicitly or implicitly supported
unethical conduct? Explain.
Again, the discussion will depend upon examples generated by the students. The most frequent
examples will probably be the sales job that rewards on commission and provides no guidance
regarding how the goal is reached.
3. Can you think of situations in which unethical behavior was dealt with appropriately
(punished justly) or inappropriately? What were the reactions of others in the organization?
Generally, students will speak positively about situations where "bad guys" were punished, and
negatively about situations where people "got away with" misconduct. This reaction supports
the idea that people want to work in “just” environments, where reasonable rules are enforced.
Probes to Stimulate Discussion

"How would you feel if someone cheated on a test and was not disciplined?"

“Would you feel differently if the test was curved?”
This is the time to discuss the important social effects of rewards and punishments. As a
manager, you need to think about not only the person you are rewarding or punishing, but also
the reactions of others who are aware of the situation. They will judge your behavior primarily
in terms of its fairness to everyone. The situation with cheating is similar to a work situation,
where there is a fixed pie of benefits (e.g., bonus money) and one salesperson who is using
unethical sales tactics is likely to get the money, while the honest salespeople will be left with
nothing (but their integrity).
4. What do you think would be appropriate punishment for those found guilty of assault or
indecent exposure in the Tailhook situation? Why?
This question will probably generate a lively discussion. You may want to see, if the answers
differ for females versus males and those with military experience versus those without military
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experience. One point that is important to make, however, is that management of the Navy
needs to take responsibility for whatever role it played in allowing this behavior to continue year
after year. It was obviously considered a "rewarding" experience for many of the men involved,
and we know that people do what is rewarded. So, it might be most appropriate to discipline
individuals at the highest levels, who were responsible for tacitly condoning the behavior.
On Nov. 14, 1994, Newsweek ran an article entitled "The Military Fights the Gender
Wars," p. 35. [Source (either embedded in text, or footnoted): Morganthau, Tom. “The Military
Fights the Gender Wars,” Newsweek, Nov. 14, 1994, p. 35.] It discussed sex-related scandals in
the Navy and at West Point.
At West Point, women cadets complained that they were fondled by army football players during
an October pep rally. Citing that they had learned the lesson of Tailhook, Lt. Gen. Howard
Graves (superintendent of the academy) notified the Pentagon, launched an immediate
investigation, and talked to the New York Times openly.
Paula Coughlin, the Tailhook Navy lieutenant, won a $6.7 million jury award from the Las
Vegas hotel where the convention occurred.
In 1996, Newsweek reported that, in the four years since Tailhook, the Navy had received more
than 1,000 sexual harassment complaints and more than 3,500 charges of indecent assault.
[Source (either embedded in text, or footnoted): “Anchors Aweigh,” Newsweek, Feb. 5, 1996,
http://www.newsweek.com/1996/02/04/anchors-aweigh.html, Access date.]
There have been other sex-related scandals in the military more recently, including students at
the Air Force Academy, who claimed that they were raped by fellow students and that school
officials either ignored their complaints, or punished the accusers for complaining. Students can
be asked to do research to bring the Tailhook discussion up to date. You can also discuss how
the military’s experience relates to the experiences of other work organizations with sexual
harassment.
Probes to Stimulate Discussion

"What do the women/men in the class think?"

"What do those with military experience think?"

"How should punishment be distributed to participants and high ranking officers who did not
participate, but tacitly 'allowed' such behavior to occur?"
5. Have you ever felt obligated to do something you felt was wrong, because a person in a
position of authority told you to do it?
Discussion related to this question will rely upon students' experience. Expect to hear stories
about experience in sales positions, where students are told to be dishonest with customers in
order to sell their wares -- telling someone the shoes fit when they do not, or that buying a coat in
July is really a good idea!
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6. Think about how you might design work to maximize workers' taking responsibility for the
consequences of their actions.
Possible Answers
Make employees responsible for a whole, identifiable piece of work. The more it is chopped up
into pieces, the less likely they are to be aware of the consequences.
Create opportunities for employees to interact with the people who might be affected by their
behavior or decisions.
Both of these answers relate to the job design literature, which suggests that jobs designed along
these lines would also be more motivating.
7. Evaluate yourself or a manager you know using the "do you walk your talk" questions
above.
Probes to Stimulate Discussion

“Are these the right questions to ask?”

“Are there others we should be asking?”
In-Class Exercises
Case #1: Sears, Roebuck, and Company: The Auto Center Scandal
Case-based Questions and Answers
1. Identify the ethical issues involved in the case from a consequentialist and deontological
perspective (refer to Chapter 2).
Deontological approaches seem most useful here. For example, fairness, honesty, and the
obligation to provide customers with only needed service, are the most obvious ethical issues in
the case.
Consequentialist approaches would point one toward the costs to society of thousands of people
paying for unnecessary service. The primary harm seems to be monetary and the loss of trust.
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A virtue ethics approach begs the question, what is the relevant community here?
Mechanics and service advisors are not professionals with established codes to guide their
conduct. However, they would probably agree that people of integrity do not lie. And, doing so
certainly would not look very good on the front page of the local newspaper.
2. Identify the management issues involved in the case. For example, think about the case in
terms of multiple ethical selves, norms, reward systems, diffusion of responsibility, and
obedience to authority. What factors contributed the most to the alleged unethical conduct on
the part of service advisors and mechanics?
Multiple ethical selves: Most of the people who were dishonest to customers are probably
upstanding members of the community, who think of themselves as good, honest people. It is
likely that their self-perception did not change because of their behavior at work.
Norms: It seems that dishonesty became the norm in this environment. It became the way things
were done.
Roles: Consider making quality an important part of the mechanic and service advisor roles.
Another possibility is to create a new role - quality control person. But, this is not an ideal
solution. Why check up after the fact, if you can avoid problems from the start? This case also
suggests that there are role conflicts for those who diagnose problems and sell service to
customers. These roles should be separate.
Reward System: Clearly the reward system is the biggest problem in this case.
Management has designed a reward system that focuses on ends (quantity, not quality), but not
means (honesty with customers). It also rewards people not only for selling more service, but
implicitly rewards them for being dishonest. It also punishes those who are honest, if by being
honest you will do less repair work. For a company that has prided itself on customer service
over the years, this new reward system created problems with consumer trust that take years to
rectify. The reward system contributed the most to the unethical conduct. The reward system
can be changed to focus goals on quality, customer satisfaction, and/or repeat customers, rather
than amount of service sold. A great exercise - have students design this new reward system.
Diffusion of responsibility: Diffusion of responsibility is a factor in this case, especially with the
new reward system that maintains commission for mechanics. For example, if a mechanic is the
one diagnosing the problem, he/she may list more problems (or bigger problems) than really
exist, because of the reward system. But, this is even more possible because he/she might think,
"I'm not the one really advising the customer.""I'm just making a list of problems and handing it
to the service advisor." So, the responsibility for the bad advice is diffused between the
mechanic and the service advisor. And, it is possible for either or both to point to the other as
"really responsible." Psychological distance comes into play here as well. If the mechanic never
sees the customer, it is probably easier to be dishonest than if he/she has to lie to the customer
face-to-face.
Obedience to authority: Nobody was openly telling these people to be dishonest.
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But, in the absence of clear statements, employees will try to figure out what authority figures
want them to do. In this case, employees figured out that management wanted them to sell more
service at any cost - and they did.
3. How would you evaluate Sears' response to the allegations and the changes they made?
Has Sears resolved its problem? Why or why not?
Brennan's response was weak. He should have apologized and fully accepted management's
responsibility for creating a faulty reward system. He should also send a strong message to
employees about future expectations.
Some of the ideas that were implemented are okay. For example, commissions based upon
customer satisfaction should turn attention to satisfying the customer, rather than selling a certain
number of brake jobs. And, shopping audits can provide management with useful information
about the kind of service customers are really getting. However, Sears has definitely not
resolved the problem. The fact they the company maintained the compensation system for
mechanics is a huge problem. As the letter from Chuck Fabbri stated so well, mechanics are
frequently the ones who provide the diagnosis. This system encourages them to oversell or
recommend more repair work than is needed.
4. What do you think is the impact of the scandal on Sears' reputation for quality and service?
There is no good way to know, but thousands of business school students are studying this case
every year through versions published in this book and elsewhere. It might be interesting to
conduct a brief survey of students in the class, to find out whether they would take their car to
Sears, or what they would advise their parents to do.
It might be interesting to note that, since the scandal, Sears has invested heavily in a corporate
ethics program. They even won an award for it. So, they seem to be aware of the importance of
ethics and their reputation.
5. Respond to Brennan's comment, "We have to have some way to measure performance."
What can management do to prevent "overselling?" Propose a management plan (including
a compensation system) that allows management to measure performance and encourages
auto center employees to behave ethically. Be specific.
Certainly, management needs some way to measure performance, but they selected inappropriate
ways to do it. Again, any goals or incentives based on sales run the risk of promoting the sale of
unnecessary service, or overselling. At the very least, if they insist on sales quotas, they must
counterbalance these with strong ethics training, and harsh and enforced penalties for dishonesty.
They certainly should not punish people for being honest.
The company might think about implementing a straight salary system, with bonuses for quality,
customer satisfaction (based on surveys), and referrals. Some of these could be team-based,
which would encourage mechanics to work together, consult each other for ideas on how to solve
problems, etc.
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It would probably also help to have the mechanic meet the customer and talk with him or her
about the problem (reducing psychological distance). Midas muffler mechanics work in glassedin shops, so that customers can watch them work. They also bring customers into the shop to
show them what is wrong - the hole in the muffler, for example. Obviously, that is easier with
mufflers, but it could probably be done with other problems, and would do a lot to inspire trust.
An important part of any new reward system will be to make it clear that any future dishonesty
will be harshly disciplined, and then following through.
The current system focuses only on selling more service to current customers. How about
looking beyond these customers, to think about ways to bring more customers in? They might
consider getting service employees involved in coming up with creative ideas to attract new
customers. If they are successful, they should share in the profits. Goals or incentives based on
quality, new customers, referrals, or customer satisfaction, focus on satisfying customers.
Service managers and mechanics would then be motivated to satisfy customers over the long
term, rather than to make short-term sales.
Sears might also consider implementing some kind of simple code to guide mechanics, like,
"Would I recommend this service if this were my mother's car?"
You can have students work in teams to design a reward system. They can present their ideas to
the other teams who can play the role of devil’s advocate. Given the reward system, what is the
behavior that is rewarded, punished? Hopefully, students will learn what an important
management role designing reward systems is.
6. Should anyone be disciplined? If so, who and when? What should the discipline be?
Take care when discussing this question. Students (especially undergraduates) will often want to
harshly discipline the "unethical" workers - to make an example of them. But, discipline must be
perceived to be fair (by observers and by those punished), if it is going to be effective. So, first,
management must take responsibility for its role in tacitly encouraging the unethical behavior
through the poorly designed reward system. The best answer here is for management to
acknowledge its role, to make clear that things are changing, to change the reward system to one
that does not encourage unethical behavior, to state clearly that unethical behavior will be
harshly punished in the future, and then to follow through at the first opportunity. Under these
circumstances, discipline will be very appropriate and necessary.
7. Think more generally about Sears’s management’s response to the firm’s financial problems.
How else could they have increased auto center sales without providing incentives to
employees to sell specific products?
There are many possible responses to this question. They could offer discounts in an attempt to
increase volume, improve customer service, so that people are more likely to come back for
service when they need it, etc.
An additional resource for the Sears case:
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Rucci, A.J., S.P. Kirn, andR.T. Quinn. 1998. “The Employee-Customer-Profit Chain at Sears,”
Harvard Business Review, 76(1): 82-97. A good teaching note to accompany the case. (Thanks
to Stu Youngblood at Texas Christian University for bringing this to our attention).
Case #2: Another Short Case for Discussion
1. What are the ethical issues in this case?
Fairness is a prominent issue in this case. What is the fairest allocation of resources, given the
three regions’ size and needs? The fairest approach is to support all three regions, not just
Bill’s. The golden rule would certainly support that position, as would Kant’s categorical
imperative. Fairness comes up again, when Bill says he will recommend you and your people
for every award, AND give you a monetary bonus out of his own pocket. That begins to feel like
bribery and undue influence and should be avoided at all costs.
2. What are some reasons why the decision maker in this case might be inclined to go along?
Not go along?
Obedience to authority may come into play here. Bill does represent the largest region and the
biggest money maker. Depending upon the company’s values, Bill may have more power than
the other regional directors, and that puts pressure on the decision maker in this case. But, the
decision maker’s gut should be screaming about the fairness and bribery issues as well, which
would make him or her think more than twice about the situation.
3. If you were the decision maker, how would you handle the situation?
This probably depends a lot on the organization’s culture. In some organizations, Bill would be
allowed to get away with these shenanigans, because of his region’s financial success. The best
approach is to first have a frank conversation with Bill about the situation and your fairness
concerns. You can explain that your approach will be to work with each regional director with
equal enthusiasm and provide the best service possible to all of them. You also need to be clear
that you cannot accept the monetary bonus. If he continues to insist on preferential treatment,
you might suggest that you and all of the regional directors have a problem-solving meeting with
their manager to discuss the situation. If you take a problem-solving approach, you may be able
to come up with a creative solution. For example, if Bill’s area is clearly the most important to
the company, maybe you can designate a particular person or persons to work closely with Bill.
The organization might even pay for additional staff. But, whatever you do, it needs to be out in
the open and not some side deal.
Would you report the conversation to your manager? Why or why not?
You could certainly solicit advice and support from your manager on this sticky situation. That
is what managers are there for. Your manager may have information about Bill and the others
that could be helpful in working the situation out. You may also gain insight into what the
organization’s stance is likely to be, by talking with your manager.
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Homework Assignment
Please note that either of the in-class discussion cases would make excellent homework
assignments.
Additional Resources:
1. Video: “Obedience”
A 45-minute, classic film about Milgram's experiments is entitled "Obedience." Although the
film is old, it makes an extremely powerful statement about the notion that "people do what
they're told." We recommend that you preview the film and then prepare students for what is to
come. Students typically react to the "worst" obedience scenes with nervous laughter. If you
explain to them that they are likely to react that way, they will understand their own discomfort
better. Advise them to feel free to laugh, but to think about why they are laughing and be
prepared to discuss that. Be sure that you leave enough time for discussion. Students will often
argue that "people are different now" and that they would never comply as those in the film did.
The major point to be made here is that the research overwhelmingly supports the idea that
people do what they are told. This was not just one study, but many studies that are documented
in Milgram’s book. Therefore, managers/leaders have a great deal of influence on most people's
conduct and that responsibility must be taken seriously.
Another important point to be made is that experiments such as Milgram's could not be done
today because of the Human Subjects Committees at universities that protect the rights of
research subjects.
2. Video: “Quiet Rage”
A newer, 50-minute video entitled, “Quiet Rage; the Stanford Prison Study,” is similarly
powerful. It is narrated by Zimbardo and includes scenes from the actual experiment. It is
highly recommended for discussion on the power of roles to mold behavior. Reading about the
experiment just does not convey all of its complexity.
3. Video: “Invitation to Social Psychology”
A shorter film/video, entitled "Invitation to Social Psychology," has very brief vignettes from
both Milgram's and Zimbardo's studies.
Both the full-length Milgram film and the Zimbardo film are highly recommended for students at
any level. Students report that they are thought-provoking and memorable. The important
lessons about the power of obedience and roles will not be forgotten soon.
Some websites devoted to Stanley Milgram and his work can be found by putting “Stanley
Milgram” into the Google search engine.
4. Primetime Live – a recent “Obedience” experiment
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In November, 2005, Primetime Live ran a powerful segment about a situation that occurred in a
number of McDonald’s restaurants. Much of the segment was from video, recorded on a
McDonald’s surveillance camera. A man, saying he was a policeman, called. He claimed to
have a McDonald’s manager with him. He requested to talk to the restaurant manager and told
this manager that a young female employee who he described had stolen something and should
be called into the private office. The caller proceeded to make requests that involved requiring
the 18-year old woman to take off her clothes, so that she can be searched, and worse. The
young woman in the segment ended up being physically abused by a man (the restaurant
manager’s boyfriend, who was called in to watch the young woman, while the manager went
back to work). The restaurant manager, a middle-aged woman, came across as not evil, but
simply following orders from an authority figure (a policeman). She never questioned him about
his requests. The segment was not available to purchase when we last checked, but it has been
rerun. So, you may want to look for it. We tell you about it, because sometimes students say,
“Oh, this couldn’t happen today.” This story clearly counters that belief.
P.S. The perpetrator was caught (by tracking down his calling card).
For more information and the script of the segment, see
http://abcnews.go.com/Primetime/story?id=1297922&page=1
You can also purchase a DVD that ABC created. It is available on Amazon.com as part of a
series ABC News Primetime called “Basic Instincts” – it is number 5 in the series and is entitled
“The Milgram Experiment Re-Visited.” It demonstrates how a University of Santa Clara
psychologist replicated the Milgram experiment (with some serious tweaks to reflect today’s
ethical standards). It shows variations on the Milgram experiment, as well as a very short
segment on the McDonald’s story. If you use it (especially the part about what happened at
McDonald’s), you may want to warn the class. We have had students get upset (one young man
who had daughters found it very difficult to watch; a young woman who had been sexually
abused also had a negative reaction). But, the large majority of students find this to be an
extraordinarily educational video.
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