Corporate Culture and Culture

Sears is in a difficult position. There is considerable evidence that it has engaged in illegal activity. This not only creates a massive problem in the short-term, but it reveals long-term issues with respect to the organization's ethics and culture as well.

There are two problems for Sears. The first is that the company needs to engage in short-term damage control. It odes does not understand the scope of the problem that it faces, only that it is significant and could threaten the company. The second problem is that the company has ethical and cultural issues that need to be addressed. Illegal acts were sanctioned, and the corporate culture discouraged communication up the chains of command, so that senior management was unaware that its employees were breaking the law.

Facts

There are a number of key facts in this case. Sears knows that it has been engaging in illegal reaffirmation letters. This case has already attracted the attention of authorities, and will soon attract the attention of the media. There is no escaping the fact that this is going to go public. The company is going to face judicial action from the government, and is highly likely to face private action as well, possibly in the form of multiple class action suits. The situation is going to cost Sears hundreds of millions of dollars directly and it will also damage the company's reputation. The reputation damage will cost it future revenues, and its ability to collect on its bad debts is going to be much less than it has been in the past, if Sears is going to be forced to only use legal methods going forward. The company still has a large base of debtors with lousy credit ratings, a result of the policy to give credit to such customers. The company also must address corporate culture issues.

There are also facts that are at this point unknown. The situation has just come to light. Sears management at this point does not know the extent of the problem. The financial damage estimates at this point are speculative. The company does not know if the practice has been so widespread that it will be unable to survive going forward. Sears needs to find answers to some of these questions before setting out a definitive response to this situation.

Solutions/Reasons

The solution to this problem should have a number of different elements. The first is that the company needs to identify what it does not yet know, and begin finding out that information. Making good decisions is difficult in a vacuum -- Sears needs to have the information before the authorities and the media do so it needs to prioritize getting that information.

The second element of the solution is that Sears needs to control the spin with this situation. While there will be high costs associated with past actions, the company is going to have less influence over these costs than it can have with respect to its present and future actions. In other words, the biggest negative variable comes from the damage that will be done by this going public. Sears needs to contain that damage. They need to break the story to the media, and they need to appear to be cooperating fully with the authorities. They need to recommit themselves publicly to the best interest of their customers especially. The company needs to appear to be proactive in dealing with this issue, in order to minimize the negative elements of the publicity. The CEO must take a public leadership role so that it is understood how serious they are taking the issue.

The third element of the solution is that Sears needs to devise a legal strategy. While it does want to cooperate with the authorities on this matter, Sears is also going to need to work hard to minimize its damages. Once it has gathered its facts, Sears needs to work with the authorities to strike some sort of plea. The most important aspect of this will be to limit the ability of private individuals to file suit against the company, either individually or as part of a class action suit. The damages from private suits are going to be far more severe than from government prosecution, so Sears needs to find a way to minimize the possibility of private legal action.