Business Ethics - Why Good People Do Bad Things

FROM THE DESK OF WENDY HARPER

CONFIDENTIAL ADVICE TO CHARLES MARK RE: PENASCO PENSION ISSUE

November 17, 2010

Charles – As promised in our telephone conversation on 15 November, I am providing you with my views on PENASCO's pension crisis. This memo includes the background research that I conducted in advance of our conversation, and at the end details what I believe the company should do to overcome some of the shortfalls described.

1. Why did John Smith mis-sell the endowment policies? What are the range of possible reasons or motivations that resulted in John's unethical sales activities?

LaCroix (1979) provides a useful model to us for evaluating the ethical pressures of middle managers. In his work, he outlines three types of pressures (1979, pp.110-114):

1. Pressure from business superiors to perform and sometimes to act questionably;

2. Pressure from family-related obligations to provide for their loved ones and to overcome conflicts between work and home pressures; and,

3. Pressures from internal competition where success is measured by results.

I have no issue with your approach to management whereby you expect results. Results are the cornerstone of any sales organization. While some may construe pressure to perform as tacit approval to act unethically, I disagree.

John could be facing a personal crisis. A member of his family could be ill or they could be in financial trouble. While this would not excuse his behaviour, it would help to explain it.

In my estimation, I believe LaCroix's third pressure of internal competition sheds the most light on John's situation. There are three key factors to consider:

• PENASCO's compensation and reward structure. To paraphrase McCall (2004, pp.243), the incentives that are created by compensation packages will have an impact on the decisions that executives make. In our case, the generosity of our rewards (i.e.: luxury cars) is causing our sales team to do whatever is necessary, including unethical behaviour, to meet their targets. Also, the up-front nature of our commission scheme provides no due regard to any long-term consequences of what we sell to clients.

• The opportunity for a promotion. In your conversation with John, you implied that he will be promoted in a future reorganization. This would have encouraged John to continue his strong sales performance and therefore incent him to sell these unethical policies.

• Lack of accountability mechanisms. John will have observed that there were no quality control measures to check whether the sales were genuine and whether the customer was provided