Power Game between the CEO and Labor: Evidence from Outsourcing

Abstract

Prior studies of CEO power have mostly focused on internal corporate governance as the balance of CEO power but neglected the effect of labor. We attempt to explore the power play between the CEO and labor in a special type of corporate restructuring - outsourcing. Fundamentally, outsourcing may be potentially desirable because of cost saving and the value of flexibility. However, to make it happen, the CEO must negotiate with labor that may resist outsourcing because of its concern for jobs. Yet without outsourcing, the firm may lose out competitively and labor may lose even more. This paper develops a theoretical rationale for the power between the CEO and labor, and empirically examines the extent to which outsourcing decisions and its outcomes depend on CEO power and labor participation in major corporate decisions. Using the sample of US firms, we observe that the probability of outsourcing is positively related to CEO power and negatively associated with labor power. Our results also demonstrate that both CEO and labor power affects to their share of profits. We further show both a dominant CEO and powerful labor are correlated to long-term firm performance, as well as short-term market valuations.