Shareholder Value and Workforce Downsizing, 1981-2006 The Harvard community has made this article openly available. Please share how this access benefits you. Your story matters Citation Jung, Jin Wook. 2012. Shareholder Value and Workforce Downsizing, 1981-2006. Doctoral dissertation, Harvard University. Citable link http://nrs.harvard.edu/urn-3:HUL.InstRepos:9909630 Terms of Use This article was downloaded from Harvard University’s DASH repository, and is made available under the terms and conditions applicable to Other Posted Material, as set forth at http:// nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of- use#LAA ©2012 – Ji Wook Jung All rights reserved. Advisor: Professor Frank Dobbin Author: Ji Wook Jung Shareholder Value and Workforce Downsizing, 1981-2006 ABSTRACT Even before the current economic meltdown, waves of downsizing, starting in the late 1970s, had swept corporate America, eroding workers’ expectations of economic security. But not only did downsizing become more prevalent during this period; its basic nature changed. Previously, firms had cut jobs temporarily, to adjust the size of their workforce during a downturn. Since the late 70s, firms have increasingly cut jobs in both good and bad times, in order to boost stock price. My dissertation examines the inter-group power dynamics underlying the transformation of workforce downsizing as a shareholder-value strategy. Examining both downsizing announcements from more than 700 leading U.S. corporations between 1981 and 2006, and actual implementation of the announced downsizing plans, I find at work in the process a shift in ideology, from an emphasis on corporate growth and conglomeration to an emphasis on profitability and shareholder value, an ideology that both reflects and intensifies the growing influence of shareholders over firms and the declining role of labor. My first empirical chapter examines the role of institutional investors and shareholder- value-oriented managers in the transformation. The second empirical chapter examines the potential resistance from labor unions and shows how the anti-union stance of the public policy regime in the 1980s weakened unions’ power to resist. The last empirical chapter examines the role of investors, unions, and executives in the implementation of announced downsizing plans and demonstrates the contested nature of the implementation process. iii Together, these three chapters illustrate the class politics simmering under the surface of the acceptance of downsizing for shareholder-value maximization, and emphasize the role of agency and power, as constructed by particular institutional logics, not only in promoting but also resisting the process of institutional change. iv TABLE OF CONTENTS Abstract…………………………………………………………………………………………...iii Table of Contents………………………………………………………………………………….v List of Tables……………………………………………………………………………………..ix List of Figures……………………………………………………………………………………..x Acknowledgements……………………………………………………………………………….xi 1 Introduction……………………………………………………………………………………1 1.1 Previous Research on Downsizing………………………………………………………4 1.1.1 Economic Research on Downsizing………………………………………………5 1.1.2 Sociological Research on Downsizing: A New Paradigm of the Firm……………9 1.2 Socio-Political Account of the Transformation of Downsizing………………………..10 1.3 Research Design………………………………………………………………………..14 1.4 Data……………………………………………………………………………………..16 1.5 Structure of the Dissertation……………………………………………………………17 2 The Transformation of Workforce Downsizing as a Shareholder-Value Strategy…………..18Workforce Downsizing as a Shareholder-Value Strategy……………………………...21 2.2 Two Explanations: Resource Dependence and Decision Context……………………..23 2.2.1 Resource Dependence and External Pressure from Institutional Investors……...23 2.2.2 New Decision Context and Reorientation of Managerial Behavior……………..27 2.3 Data and Method……………………………………………………………………….31 2.3.1 Sample……………………………………………………………………………32 v 2.3.2 Dependent Variable: Downsizing Announcements……………………………...33 2.3.3 Independent Variables…………………………………………………………...33 2.3.4 Control Variables………………………………………………………………...35 2.3.5 Missing Values and Multiple Imputation………………………………………..37 2.3.6 Modeling Procedure……………………………………………………………...38 2.4 Results………………………………………………………………………………….40 2.4.1 Resource-Dependence Predictions……………………………………………….41 2.4.2 Decision-Context Predictions……………………………………………………46 2.4.3 Control Variables………………………………………………………………...47 2.4.4 Robustness Checks……………………………………………………………….47 2.5 Conclusion……………………………………………………………………………...48 3 Labor Resistance, Public Policy, and Changing Layoff Policies…………………………… 53 3.1 Public Policy and Institutional Change………………………………………………...54 3.2 The Transition from Temporary to Permanent Layoff…………………………………58 3.2.1 Industrial Unionism and Temporary Layoff……………………………………..59 3.2.2 Shareholder Value and Permanent Layoff……………………………………….61 3.3 The Role of Public Policy in the Shift of Layoff Policies……………………………...62 3.3.1 Resistance from Labor Unions…………………………………………………...63 3.3.2 Cognitive-Cultural Legitimacy of Temporary versus Permanent Layoff………..64 3.3.3 The Role of Public Policy………………………………………………………..66 3.4 Data and Method……………………………………………………………………….69 3.4.1 Sample……………………………………………………………………………70 3.4.2 Dependent Variable: Layoff Announcements…………………………………...70 vi 3.4.3 Independent Variables…………………………………………………………...71 3.4.4 Control Variables………………………………………………………………...72 3.4.5 Missing Values and Multiple Imputation………………………………………..75 3.4.6 Modeling Procedure……………………………………………………………...75 3.5 Results………………………………………………………………………………….77 3.5.1 Union Resistance and Public Policy……………………………………………..78 3.5.2 Density-Dependence Legitimation and Public Policy…………………………...80 3.5.3 Control Variables………………………………………………………………...84 3.6 Conclusion……………………………………………………………………………...84 4 Multiple Institutional Demands and Implementation of Workforce Downsizing by Firms…89 4.1 Conflicting Institutional Demands and Policy Implementation………………………..92 4.2 Workforce Downsizing and Its implementation…………………………….……...…..96 4.3 Inter-Group Struggle over the Implementation of Downsizing………………………..98 4.3.1 Pressure from Institutional Investors…………………………………………….99 4.3.2 Resistance from Labor Unions………………………………………………….100 4.3.3 Self-Interest of Top Managers………………………………………………….102 4.4 Data and Method……………………………………………………………………...104 4.4.1 Sample…………………………………………………………………………..104 4.4.2 Dependent Variables……………………………………………………………105 4.4.3 Independent Variables………………………………………………………….105 4.4.4 Control Variables……………………………………………………………….107 4.4.5 Missing Values and Multiple Imputation………………………………………110 4.4.6 Statistical Method………………………………………………………………110 vii 4.5 Results………………………………………………………………………………...111 4.5.1 Main Effects of Downsizing Announcements………………………………….111 4.5.2 Interaction Effects………………………………………………………………114 4.5.3 Control Variables……………………………………………………………….117 4.6 Conclusion…………………………………………………………………………….118 5 Conclusion………………………………………………………………………………….123 Bibliography……………………………………………………………………………………128 viii LIST OF TABLES Table 2.1: Data Sources and Descriptive Statistics……………………………………………...36 Table 2.2: Continuous-Time Event History Analysis of Downsizing Announcements…………42 Table 3.1: Variable Definitions, Data Sources, and Univariate Statistics……………………….74 Table 3.2: Event-History Analysis of Temporary versus Permanent Layoff Announcements….81 Table 4.1: Data Sources and Descriptive Statistics…………………………………………….108 Table 4.2: Fixed-Effects Estimates of the Percentage Change in the Total Number of Employees…………………………………………………………………………...112 Table 4.3: Fixed-Effects Estimates of the Log Odds of Managerial Employees……………….113 ix LIST OF FIGURES Figure 2.1: Downsizing Announcements………………………………………………………...41 Figure 2.2: Changes in Institutional Ownership before Downsizing Announcements…………..45 Figure 3.1: Temporary and Permanent Layoff Announcements (All Sampled Firms)……….....79 Figure 3.2: Temporary and Permanent Layoff Announcements (Firms in the Transportation Equipment Industry)………………………………………………………………...79 Figure 4.1: Interaction Effects with Institutional Ownership…………………………………..116 Figure 4.2: Interaction Effects with Union Density…………………………………………….116 Figure 4.3: Interaction Effects with CEO Stock Options………………………………………117 x ACKNOWLEDGEMENTS This dissertation would not have been possible without a great deal of professional and personal support from my dissertation committee. My committee members, Frank Dobbin (Chair), Christopher Marquis, and Peter V. Marsden provided excellent guidance and invaluable advice through the years of my graduate student career. Frank Dobbin was an advisor whom I appreciated more and more as my time in graduate school passed. He was the reason I came to Harvard, and, after taking his seminar course on organizational sociology, I decided, without hesitation, to have him as my adviser. Ever since then, he helped me grow as a person and a researcher with his attention to the details as well as the big picture of my life and research. Throughout my graduate studies in both U.S. and South Korea, I met many great scholars, whose footsteps would continue to guide my future academic career. Frank is the greatest of them. Christopher Marquis came to Harvard Business School when I was writing my qualifying paper, and willingly accepted my offer to be on my committed. Since then, he was always the right person to ask for advice about personal and professional development, and was very generous about his time whenever I needed his input. He