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Labor as a monitor of the CEO: A Power Game of Outsourcing

Jongmoo Jay Choi, Temple University, Philadelphia

23rd Mar 2012  11:30 am - 11:30 am Room 214/215, H69 - Economics and Business Building

Consistent with a stakeholder model, we propose a power play hypothesis that the CEO power is balanced by labor that can monitor the CEO behavior. We develop a theory of a cooperative power game between the CEO and labor in corporate outsourcing, and test the model's predictions concerning the decision to outsource, division of profit, and post-outsourcing firm performance using a sample of 162 outsourcing deals by U.S. firms during 1992-2005. In accord with the model, a firm is more likely to outsource the greater is CEO power, the greater is the firm's production cost, and the more homogeneous is the industry; the greater is CEO power, the greater is the CEO's share of profits. And the outsourcing decision does not affect the CEO's share of profits, and CEO power is positively related to post-outsourcing performance. Interestingly poor prior firm performance moderates power dynamics between the CEO and labor. The implication is that in addition to the traditional governance mechanisms such as board, institutional investors or banks, labor can also be an effective managerial monitor when the firm undergoes a major restructuring.