PROBLEM 913 Behavioural Aspects of Budgeting; Ethics and the Manager [LO1]

Hayden Black, managing partner of the venture capital firm of Cole and Black, was dissatisfied

with the top management of CompuDrive, a manufacturer of computer disk drives. Cole and

Black had invested $20 million in CompuDrive, and the return on their investment had been

unsatisfactory for several years. In a tense meeting of the board of directors of CompuDrive,

Black exercised his firms rights as the major equity investor in CompuDrive and fired

CompuDrives chief executive officer (CEO). He then quickly moved to have the board of

directors of CompuDrive 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 CompuDrive, discov-

ered 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 car-

tons 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 behavioural consequences of the way budgets are being used at CompuDrive?

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