TECNICA ESPECÍFICA DE FORMALIZACIÓN DEL RECURSO DE CASACION CIVIL POR DEFECTO DE ACTIVDAD FUNDAMENTADO EN

While resource dependence theory provides a coercive mechanism for downsizing, through pressure from institutional investors, Fligstein’s (1990; 2001) theory of conceptions of control provides an additional explanation of persuasion, through reorientation in managerial behavior towards shareholder-value maximization. Fligstein posits that, at each historical moment, there is a dominant model of the firm, one that defines the right relationship among key stakeholders and appropriate strategies that firms should pursue in the interests of these stakeholders. Fligstein (1990) further suggests that shifts in the dominant conception of control reorient the behavior of firms and managers. For example, he shows that the shift from a conception of control that views the firm as a production function to a conception that views the firm as a portfolio of investment gave rise to a growth strategy through diversification in the 1960s and 1970s. This strategy was largely abandoned in the 1980s, however, when the viability of the firm-as-portfolio model was severely undermined by the newly emergent financial doctrine that investors, not firms, should diversify (Davis, Diekmann, and Tinsley 1994).

But how do shifts in the dominant conception of control change the behavior of managers? Fligstein argues that such change occurs through intra-firm power struggles among managerial groups with different strategic orientations. A shift in the dominant conception of control tends to change intra-firm power bases of different groups, pushing those with strategic orientations most congruent with the prevailing conception of control to the top (Fligstein 1987; Ocasio and Kim 1999; Thornton and Ocasio 1999). Fligstein’s studies show that the firm-as-the-portfolio

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model favored managers with a background in finance, who came to control many prominent companies and actively pursued the diversification strategy in the 1960s and 1970s (Fligstein 1985; 1987; Fligstein and Brantley 1992). The decline of the firm-as-portfolio model, however, weakened the intra-firm power base of financial managers, which led to the abandonment of the diversification strategy (Ocasio and Kim 1999).

Building on Fligstein’s explanation, I suggest that a shift in the dominant conception of control can also occur through the efforts of external groups to change the decision context in which managers make and implement key strategic decisions. I argue that this better explains how the rise of the shareholder-value paradigm has reshaped the behavior of managers in general and their behavior with respect to downsizing in particular. Differing from previous shifts in the dominant conception of control, the primary tension resulting from the shift to the shareholder- value conception was not among internal agents (i.e., managers) but between agents and principals—that is, managers who were mostly interested in enlarging the size of firms and shareholders who wanted maximum returns on their investment. As the prosperity of the postwar years came to an end in the 1970s, culminating in stagflation and bear markets, many large U.S. companies experienced a steady decline in their market share and profitability. This stimulated emerging power groups in financial markets, e.g., institutional investors, to search for a remedy. These external groups promoted new corporate strategies for enhancing profitability and share price (Davis et al. 1994; Useem 1996; Zorn et al. 2004; Zuckerman 2000). They imposed such strategies upon management using their market power, but they also did so by changing the decision context in a way that induced managers to pursue profit maximization, and thus to implement many of those new strategies, including downsizing.

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Agency theory, a branch of financial economics, has played an important role in

constructing this new decision context. Agency theorists argue that managers, who typically hold little stake in the firm, have insufficient incentive to maximize profit (Fama 1980; Jensen and Meckling 1976). In the 1960s and the 1970s, they were busy diversifying their firms to expand the size of their empires and to raise their salaries, without increasing shareholder wealth (Amihud and Lev 1981; Jensen 1986). Agency theorists not only diagnosed these problems but also provided ready remedies, by means of practitioner outlets such as Harvard Business Review (e.g., Jensen 1984; 1989) that contributed to the theory’s ascendance in the financial community. Agency theorists called for broader governance reforms to ensure that managers would pursue value maximization.

Three such reforms became prominent. First of all, to minimize agency costs, agency theorists prescribed that managers should become owners: “If the manager of a firm owned 100 percent of the firm’s shares, then … the decisions made by that manager would be presumed to be those that maximize long-run shareholder value …” (Jensen, Murphy, and Wruck 2004, p. 21). While this is practically impossible, the board still can tie the wealth of the firm’s executives to that of shareholders, for instance by granting executive stock options (Jensen and Murphy 1990). Agency theorists also attributed the agency problems of the 1960s and the 1970s to the failure of an internal monitoring system—the board of directors (Jensen 1993, p. 862). As a remedy, they called for boards to be composed mostly of outside directors. Finally, agency theorists argued that firms should increase financial transparency, so that investors could assess their prospects (Jensen et al. 2004). For that purpose, management consultants advised firms to have a financial specialist on the top management team—a chief financial officer (Zorn 2004).

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Existing studies point to the importance of academic theories in shaping the behavior of managers (Khurana 2007; Strang and Meyer 1993). Performativity theory, for instance, suggests that market participants perform their roles as set out by theories they believe in (Callon 1998; Mackenzie and Millo 2003). Although it is unlikely that firms in this case have simply performed according to agency-theory prescriptions, all three agency-theory prescriptions mentioned above have been widely adopted. Since the 1980s, executive compensation has steadily increased, and much of the increase has been driven by stock options (Dobbin and Jung 2010; Yermack 1995). There have also been significant improvements in board monitoring in that most boards are now dominated by outside directors (Gordon 2007). Finally, by the end of the 1990s, most Fortune 500 firms had hired a CFO or similar executive (Rao and Sivakumar 1999; Zorn 2004).

One reason that corporations have embraced agency-theory prescriptions is that institutional investors have actively advocated for them. While they have put direct pressure upon firms to boost profits, they have also been interested in improving the broader corporate governance structure of firms, by pushing for a set of agency-theory prescriptions (Dobbin and Jung 2012). Public pension funds have led the charge, sponsoring an array of shareholder proposals to improve board governance, executive compensation, and financial transparency (Carleton, Nelson, and Weisbach 1998; Gourevitch and Shinn 2005). For instance, in 1985, the California Public Employees' Retirement System (CalPERS) led the Council of Institutional Investors (CII), bringing together public, private, and union fund managers, whose “shareholder bill of rights” called for greater shareholder input to reduce agency costs (Jacoby 2007). As firms have adopted these agency-theory prescriptions, they have constructed a decision context in

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I argue that in this changed decision context, workforce downsizing has become an accepted strategy to enhance stock price. Previous studies have shown that equity-based

compensation practices create incentives for managers to pursue profit maximization (Burns and Kedia 2006; Efendi, Srivastava, and Swanson 2007; Sanders and Hambrick 2007; Zhang et al. 2008). Hence, firms with option-loaded chief executives may be likely to engage in downsizing more frequently as they aim at greater profits. Studies have also shown that independent boards are more likely to fire CEOs of poorly-performing firms and replace them with outsiders (Huson, Parrino, and Starks 2001; Weisbach 1988). Managers may thus become more conscious of profit maximization under the monitoring of independent boards, which in turn may induce them to downsize. Finally, whereas financial managers used to perform back-office functions like

bookkeeping and preparation of tax documents, as CFOs they are deeply involved in making key strategic decisions. As cost experts, they have pushed for strategies that, they believe, cut costs and thereby boost profits. Workforce downsizing is one such strategy.

Hypothesis 2-1: Stock option grants to CEOs will increase the rate of workforce downsizing. Hypothesis 2-2: Board independence will increase the rate of workforce downsizing.

Hypothesis 2-3: The presence of a CFO will increase the rate of workforce downsizing.