MONTPELIER, Vt. (AP) – W. Michael Hoffman says he might use the controversy generated by the Vermont Teddy Bear Co.’s straitjacketed “Crazy For You” bear as a case study in one of his graduate seminars on business ethics.

“Even though it has that kind of cutesy flavor, it brings up issues about corporate behavior and how corporations should be sensitive and interact with society,” said the director of the Center for Business Ethics at Bentley College in Waltham, Mass.

The decision to market the bear, and to keep doing so even in the face of widespread criticism that its straitjacket and “commitment report” made it insensitive toward people with mental illness, has put the Shelburne-based company under the spotlight among business ethicists and public relations executives around the country.

Among the question he would ask students, Hoffman said, would be, “Does the company need to be more sensitive? … Does the fact that the bear sold out mean you were right to put it on the market?”

The company began advertising the “Crazy For You” bear in early January. When mental health advocacy groups raised an alarm, the company responded by saying it was sorry if it had offended anyone, but would continue selling the bears until its inventory had sold out.

As the pressure built, with scoldings both from Republican Gov. James Douglas and the state Human Rights Commission, the company stuck to its guns.

A company official did not respond to messages requesting an interview with CEO Elisabeth Robert. Robert, whose name is pronounced “ro-BEAR,” gave a round of media interviews on Jan. 29, during which she said it was “a very difficult decision” not to withdraw the bear from the market.

“I listened to customers, from a lot of feedback from our employees. These people are Vermonters who really don’t like to be told what to do,” Robert told The Burlington Free Press.

That didn’t score any points with the company’s critics, some of whom said Robert had gotten a distorted view of the message they were trying to send.

“No one’s trying to tell them what to do,” said Rep. Anne Donahue, R-Northfield, who has struggled with serious depression and is a leader of the group Vermont Psychiatric Survivors. “We’re not demanding; we’re pleading.”

For Robert, a 1978 Middlebury College graduate who joined Vermont Teddy Bear in 1995 and was appointed president and CEO two years later, the “Crazy For You” flap has been a black mark on what otherwise by all accounts has been a shining career.

Her company’s annual report for 2004 reported 38 percent growth in revenues for the year, to $56 million. The company offers a range of teddy bears and “BearGrams” geared mainly to adults looking to spend $70 or more for a token of their affection for a sweetheart.

The controversy appears not to have harmed sales: The “Crazy For You” bears sold out last week. But there has been a personal cost to Robert. She gave up her seat last week on the board of Vermont’s largest hospital, Burlington-based Fletcher Allen Health Care after both the board chairman and its CEO said disparaging the mentally ill is contrary to the mission of institution that serves them.

And Hoffman said there could be longer-term costs to the company. “The capitalist system has a way of punishing companies that misbehave, either through lost sales or because some segments of society no longer want to invest” in the firm, he said.

In the eye of Howard Rubenstein, a New York public relations executive, “the cost to them is dramatic. It hurts their reputation.” He said whatever punishment may come the company’s way may not be wholly undeserved.

“That’s a lesson in poor public relations. They violated every rule in the game on public relations,” Rubenstein said. Putting a product on the market likely to stigmatize the mental ill was “just thoughtless,” he said. But once the controversy was called to their attention, “their reaction should have been dramatically different.”

He said he was particularly troubled by the notion that no one would tell the company what to do. “In today’s media environment, a lot of people can tell you what to do and you better analyze what they’re saying. … People will forgive a mistake but they won’t forgive arrogance.”

One Vermont company with a reputation for well-oiled public relations is Green Mountain Power Corp., the state’s second-largest electric company. Dorothy Schnure, the company’s manager of corporate relations, said there are certain steps that should be followed when a public relations crisis looms.

A quick response is important, she said, as is listening respectfully to critics. “If you have very important reasons for reaching your decision you need to clearly express why it is you believe you’re right, why you have good reasons for disagreeing with whatever the opposition is.”

A willingness to admit mistakes is key, Schnure said. She described an incident in the late 1980s when a Vermont newspaper called to ask about electrical transformers, which contain significant quantities of oil, that were being stored in Montpelier very close to the Winooski River.

“I told the (Barre-Montpelier) Times Argus, “Yeah, you’re right. We made a mistake.’ And the next day we had cranes in there so they could be stored safely away from the river.”

So far, it doesn’t appear Vermont Teddy Bear has suffered any of the punishment Hoffman and Rubenstein described – if its stock price is a guide. The company opened the year Jan. 3 at $6.45 per share. It was selling Monday at about $7.23.

And anyone looking to buy a “Crazy For You” bear now most likely would pay a premium, with prices on the online auction service eBay ranging up through the multiple hundreds of dollars.

That didn’t much impress Hoffman, who noted that the scandal-plagued Enron Corp. code of ethics also was selling in the multiple hundreds of dollars for a time on eBay.

“Just because it’s selling on eBay doesn’t mean it’s something to be proud of,” he said.