The Legitimizing Firm

In Figure 3.1, there is a box set above the “Working Firm” box, and loosely connected to it, called the “Legitimizing Firm.”This chapter explains the relationships within this part of the firm, the loose connection it has with the Working Firm, the influence the financial bureaucracy wields over firms and the resulting disconnection with shareholders, and the function that this part of the modern American firm actually serves. The box includes the board of directors, the CEO, and top executives and it is noted that people in these positions are often not employees who worked their way up and instead, are hired from elite friendship networks. The CEO and some of the executives are also often on the board of directors and they are considered “inside” board members whereas others on the board are “outside” board members, and it is sometimes considered that they may bring an objective view since they are not part of management. However, they are all part of the same friendship networks and thus, they are highly embedded, even overembedded, with each other, and embeddedness theory is useful for this component of the firm. These friendships make it very difficult for them to have any substantial disagreements with each other. Research and news reports are supportive of this and some examples follow.