1. Behavioral Aspects of Budgeting; Ethics and the Manager

Hayden Black, managing partner of the venture capital firm of Cole and Black, was dissatisfied with the top management of Compu Drive, a manufacturer of computer disk drives. Cole and Black had invested $20 million in Compu Drive, and the return on their investment had been unsatisfactory for several years. In a tense meeting of the board of directors of Compu Drive, Black exercised his firms rights as the major equity investor in Compu Drive and fired Compu Drives chief executive officer (CEO). He then quickly moved to have the board of directors of Compu Drive appoint him as the new CEO. Black prided himself on his hard-driving management style. At a budget review meeting, he ripped up the departmental budgets that had been submitted for his review and yelled at the managers for their gutless, do-nothing targets. He then ordered everyone to submit new budgets calling for at least a 40% increase in sales volume and announced that he would not accept excuses for results that fell below budget. Kelly Catano, an accountant working for the production manager at Compu Drive, discovered toward the end of the following year that her boss had not been scrapping defective disk drives that had been returned by customers. Instead, he had been shipping them in new cartons to other customers to avoid booking losses. Quality control had deteriorated during the year as a result of the push for increased volume and returns of defective drives were running as high as 15% of the new drives shipped. When she confronted her boss with her discovery, he told her to mind her own business. And then, to justify his actions, he said, All of us managers are finding ways to hit Blacks targets.

Required:

1. Is Hayden Black using budgets as a planning and control tool?

2. What are the behavioral consequences of the way budgets are being used at Compu Drive?

3. What, if anything, do you think Catano should do?