“h.J. Heinz Company: The Administration of Policy” Case Analysis Summary

Kyle Percival

6/13/2017

MBA 676

Dr. Todd Thomas

“H.J. Heinz Company: The Administration of Policy” Case Analysis Summary

1. Problem / Key Issues

1. What is the main problem?

How can James Cunningham, President and CEO of Heinz, implement change to encourage ethical and legal financial reporting along with production processes for the company?

1. What are the key issues that must be analyzed in order to solve the main problem?

1. What internal audit controls can be implemented at all levels to prevent future unethical financial and production practices?
2. What changes can be made to the incentive program to that foster growth for division leaders and not the use of unethical practices.
3. What changes need to be made corporate wide to promote ethics and honesty within the entire organization?

1. What case data / facts helped you resolve the Key Issues?

-Joseph Stangerson—senior vice president, secretary, and general counsel for Heinz—asked the advertising agency about the alleged practices. Not only had the agency personnel confirmed the allegation about Heinz USA, it indicated that similar practices had been used by Star-Kist Foods, another Heinz division. The divisions allegedly solicited improper invoices from the advertising agency in fiscal year (FY) 1974 so that they could transfer income to FY 1975.

-After a sluggish period in the early 1960s, a reorganization was undertaken to position Heinz for growth. Under the guidance of John Bailey and James Cunningham, Heinz prospered through a major recession, government price controls, and major currency fluctuations

-Throughout the 1970s Heinz’s major objective was consistent growth in earnings.

-Heinz’s commitment to decentralized authority as an organizational principle aided the management of internal growth as well as acquisitions.

-In 1979 Heinz was organized on two primary levels. The corporate world headquarters, located in Pittsburgh, consisted of the principal corporate officers and historically small staffs (management described the world headquarters as lean). World headquarters had the responsibility for “the decentralized coordination and control needed to set overall standards and ensure performance in accordance with them.”

-Heinz’s divisions were largely autonomous operating companies. Division managers were directly responsible for the division’s products and services, and they operated their own research and development, manufacturing, and marketing facilities. Division staff reported directly to division managers and had neither formal reporting nor dotted-line relationships with corporate staff.

-World headquarters officers monitored division performance through conventional business budgets and financial reports. If reported performance was in line with corporate financial goals, little inquiry into the details of division operation was made.

-A consistent growth in earnings attended this management philosophy.

-Designed by a prominent management consulting firm, the management incentive plan (MIP) was regarded as a prime management tool used to achieve corporate goals.6 MIP comprised roughly 225 employees, including corporate officers, senior world headquarters personnel, and senior personnel of most divisions. Incentive compensation was awarded on the basis of an earned number of MIP points and in some cases reached 40% of total compensation.

-MIP points were also awarded based on net profit after tax (NPAT) goals. (On occasion, other goals such as increased inventory turnover or improved cash flow were included in MIP goals.) Corporate NPAT goals were set at the beginning of the fiscal year by the management development and compensation committee (MDC) of the board of directors.

-Two goals were set—a fair goal, which was consistently higher than the preceding year’s NPAT, and a higher outstanding goal. The full number of MIP points was earned by achieving the outstanding goal.

-Corporate officers also had the authority to make adjustments or award arbitrary points in special circumstances. The basis for these adjustments was not discussed with division personnel.

-Corporate Ethical Policy

-Each year the president or managing director and the chief financial officer of each division were required to sign a representation letter which, among other things, confirmed compliance with the corporate Code of Ethics.

-The investigators focused on the following areas:

1. practices that affected the accuracy of company accounts or the security of

company assets; 2. practices in violation of the company’s Code of Ethics; 3. illegal political contributions; 4. illegal, improper, or otherwise questionable payments; and 5. factors contributing to the existence, continuance, or nondisclosure of any of the

above.

-On June 29, 1979, Heinz disclosed a preliminary figure of $5.5 million of after tax income associated with the income transferal practices

-On September 13, 1979, it was reported that the preliminary figure had grown to $8.5 million.

- Most of the $3 million growth was attributed to the discovery of improper treatment of sales in addition to the improper treatment of prepaid expenses discovered earlier