Tomorrow I am guest lecturing for Dr. Morris' organizational sociology course. You can find the slides for my lecture below.

​The prevalent ideology in the late 20th century changed from embedded liberalism to neoliberalism. Embedded liberalism is the ideology that in order to manage economic instability, economic markets should be moderated by the political/legal system. Embedded liberalism, prevalent during the post-WWII period, was supported by Keynesian economics. Keynesian economics popularized the idea that governments could stabilize economic markets by managing aggregate demand through state expenditures. However, Keynesian economics lost its popularity in the 1970s when the United States faced stagflation. Keynsesian economics fails to explain stagflation, since government spending cannot manage a situation where you have inflation without economic growth. As a result, during this period, Keynsianism fell as the prevailing ideology and neoliberalism began to rise. Neoliberalism is the idea that government interference is harmful to economies. As such, neoliberalism significantly contrasts with embedded liberal ideology. The rise of neoliberalism has a major impact on current market conditions.

Neoliberalism, the prevailing ideology in the late 20th and early 21st centuries, emerged alongside three other distinct but interrelated phenomena: (1) corporate efforts to dismantle the social contract, (2) emphasis on increasing shareholder value, and (3) the spread of financialization.  These phenomena are not distinct to the United States, but have also occurred in other advanced capitalist countries to an extent.

The late 20th century is marked by increased corporate efforts to dismantle the social contract. The social contract, a term first introduced by Hobbes, is the idea that cooperation in society is not coerced, but induced by self-interest. Society is unified through a social contract. Individuals voluntarily give up their power to an authority under the assumption that cooperation will result in social benefits. However, modern corporations have increasingly focused on maximizing capital accumulation at the expense of social benefits. They have politically mobilized to dismantle social welfare policies, minimize corporate taxes and accumulate capital regardless of social benefit. This has resulted in increased inequality and the fall of the American middle class. 

The mechanism underlying corporate efforts to dismantle the social contract is economic stagnation and the fall of corporate embedded liberalism as the prevailing ideology. According to Mizruchi (2013), the fall of corporate embedded liberalism is the result of a fracturing of the corporate elite. Due to decreased cohesion of the capitalist class, when the United States faced stagflation, corporations mobilized to pursue their immediate self-interest and dismantle the social contract rather than act in the long-term interest of the capitalist class as a whole (which relies on the continued legitimacy of the social contract). In short, historical conditions (like stagflation and the fracturing of the American corporate elite) created incentives for corporations to politically mobilize and influence pulbic policy to dismantle the social contract and take back social benefits workers achieved after World War II. 

Corporate efforts to dismantle the social contract occurred not only in the United States, but in other advanced capitalist countries, like the United Kingdom. During the 1980s, companies in both the United States and the United Kingdom politically mobilized to overcome problems with capital accumulation by lobbying for public policy which dismantles the social contract. As a result, both President Ronald Reagan and Prime Minister Margaret Thatcher pushed forward neoliberal public policy. Just as the late 20th and early 21st centuries in the United States was characterized by tax cuts, increased privatization, and social welfare roll-backs, the United Kingdom was also characterized by similar neoliberal public policy. 

Emphasis on increasing shareholder value emerged along with the dismantling of the social contract. They occurred in relation to each other such that emphasis on increasing shareholder value justified corporate dismantling of the social contract. Empahsis on shareholder value was supported by Milton Friedman's shareholder theory. From this perspective, it is the social responsibility of the company to increase profits. Friedman's efforts were so widely embraced, that he received the 1976 Nobel Prize. Friedman's perspectives greatly influenced the neoliberal polices pushed forward by both Reagan and Thatcher.

Change in ideology (from embedded liberalism to neoliberalism) is the primary mechanism underlying increased shareholder value. Like neoliberalism, Friedman's shareholder theory idealizes profits over general social welfare. As such, neoliberal ideology perpetuated Friedman's shareholder theory. As a result of changed ideology, managers have become increasing dependent on shareholder value to maintain their value and status. Since the professional success of managers depends upon increasing shareholder value, managers have used their power to increase shareholder value, regardless of social costs.

Although you see increased emphasis on shareholder value in other advanced capitalist countries, you see it to a lesser extent. Still there is evidence that large British companies have skirted social responsibility in the pursuit of increasing shareholder value. For example, HSBC, a large British financial services company, was caught money laundering and committing financial malfeasance in the pursuit of increasing shareholder value. However, emphasis on shareholder value is not as prevalent in Britian as it is in the United States. For example, whereas shareholder theory is the prevailing form of thought in the United States, the United Kingdom adopted the 2006 Companies Act, which emphasized stakeholder theory over shareholder theory. Stakeholder theory, a thoery prevalent in Europe, is the idea that corporations are responsible to numerous stakeholders, not just shareholders. As such, in Europe, although shareholder value is considered important, corporate social responsibility is considered even more important. 

The late 20th and early 21st century was also characterized by increased financialization. Financialization is the influence of finance on the economy. Finance is part of the secondary circuit of capital. The primary circuit of capital is the productive circuit. The production capitalist uses capital to buy the means of production and labor power to create value and surplus value. The surplus value is reinvested, and there is another circuit of capital, continuing the production process. As long as there is surplus value you can feed back into the system, production can continue. However, capitalism doesn't always expand, which is why there is the secondary circuit of capital. The secondary circuit of capital is the credit system. The finance capitalist uses capital to loan money to the production capitalist, under the assumption that the production capitalist will make enough profit to pay off the loan with interest, so the finance capitalist can reinvest and make more profit. Not only are production capitalists involved in the credit market, so are consumers. The rise of financialization can be seen in the expansion of the credit market (by finding new participants and inventing new financial markets) in the late 20th and early 21st centuries. 

The rise in financialization occured in relation to the rise of shareholder value. In fact, neoliberalism, the rise of shareholder value and economic stagnation were the primary mechanisms underlying increased financialization. Neoliberal ideology perpetuated the deregulation of financial markets. Whereas previous policy limited the risky financial market to investment banks, neoliberal public policy deregulated and opened up the financial market to non-banks. Increased emphasis on shareholder value put corporate managers in a bind in the 1980s, as they had trouble increasing shareholder value during a period of economic stagnation. To generate profit during a period of decline, corporate managers attempted to expand capital accumulation by developing new markets to expand into. One example is the creation of derivate products. Derivatives are paper contracts that are derived from an underlying real commodity. For example, the futures market for farmers is a derivative used by farmers to hedge their market risk. From the farmer's perspective, they are investing a large amount of money but are not sure of the price of their crop in the future; they want to be guaranteed a particular price.  Futures contracts are agreements by investors to pay a set future price for the commodity. If, once the farmer grows their crop, the price of the crop is more than the price agreed in the futures contract, the investor will make a profit. However, the derivative market is risky. Unregulated, reckless derivative trading, facilitated by neoliberalism, resulted in the 2007-2008 economic collapse. 

Increased financialization (and its consequences) is not distinct to the United States. It is prevalent in other advanced countries and around the world. For example, derivative markets have spread not only in the United States, but in other countries as well. Just like what occurred in the United States, an under-regulated derivative market rapidly grew in the 1990s in Europe. As a result, the 2007-2008 economic collapse not only affected U.S. companies, but companies in Europe and around the world.

In conclusion, neoliberalism is the primary mechanism underlying three major changes in the late 20th and early 21st centuries: (1) corporate efforts to dismantle the social contract, (2) emphasis on increasing shareholder value, and (3) the spread of financialization.  Neoliberalism is not distinct to the United States. Other advanced capitalist countries have also adopted neoliberal ideology, to different extents. As a result, you also see similar changes in other advanced capitalist societies. 

Ever since Polanyi (1994) demonstrated the economy cannot be considered an entity separate from society, research has focused on embeddedness. Studies have revealed the effects of embeddedness on the internal organization of individual corporations, the network of organizations, the behavior of institutional fields and the political action of economic elites. Embeddedness is a critical line of research as it is related to organizational efficiency and major social problems, like organizational wrongdoing and economic collapse. 

Embeddedness is the way individuals and organizations are constrained by social relations, such that they cannot be viewed as distinct entities (Granovetter 1985). This means that social relations are a critical aspect of economic behavior. As such, embeddedness examines the effect of embeddedness on the behavior of organizations by focusing on the social network.  

Social networks can be considered to be made up of either few or many structural holes. Social networks with few structural holes have numerous social relations which overlap. On the other hand, social networks with numerous structural holes have little redundancy between actors. Social networks influence the position of economic actors. As such, it is a critical factor when studying economic behavior.

The social embeddedness of economic actors plays a function. Functions of embeddedness include: facilitating innovation through joint problem solving (Powell, Koput and Smith-Doerr 1996), regulating social behavior and facilitating trust (Crutchley, Jensen and Marshall 2007), managing uncertainty (Podolny 2001), and providing information and understanding of the environment (Uzzi 1997).

Social networks provide economic actors with the capacity to have flexible working groups, better capable of innovation. Powell, Koput and Smith-Doer (1996) find when knowledge base is complex and expanding, innovation occurs within networks rather than individual firms. Social networks facilitate learning and knowledge. When knowledge is complex and expanding, it is difficult for knowledge to be obtained within the rigid, single organization. Knowledge is created within a community made up of a social network of individuals and organizations. As such, a social network is an effective vehicle for learning. Individuals within the social network can join to solve problems faced by the community, facilitating innovation. 

Embeddedness is a critical aspect of economic behavior as economic exchange requires trust. Embeddedness serves the function of regulating social behavior and ensuring trust. Organizations with little embeddedness are more likely to exploit information asymmetries and act wrongfully, as embeddedness regulates social behavior. For example, Crutchley, Jensen and Marshall (2007) found when outsiders are less involved in an audit committee, accounting fraud is more likely to occur. With little involvement from external actors, the audit committee is less pressured to cause problems within the organization by pointing out possible problematic activity. In short, economic embeddedness regulates behavior to ensure trust.

Embeddedness also serves the function of managing uncertainty by providing information and understanding of the environment (Uzzi 1997). Particular social relations facilitate the management of different types of uncertainties. Structural holes are more beneficial and social status less beneficial in environments characterized by egocentric uncertainty (Podolny 2001). Egocentric uncertainty is the uncertainty of the focal actor in efficiently producing a commodity that will be desirable by exchange partners. By having numerous structural holes, organizations can have a broader reach and better obtain information about the broader market. Structural holes are less beneficial and social status more beneficial in environments characterized by altercentric uncertainty (Podolny 2001). Altercentric uncertainty is the uncertainty of exchange partners in the quality of the commodity brought to the market. Status provides a way for external actors to judge the likelihood that the commodity will be of good quality based on collective interpretations. Market uncertainty influences the value of particular social positions: network position and social status.  

Embeddedness affects the internal organization of individual corporations. For example, Castilla (2011) found that embeddedness effects social inequality in organizations.  Managerial assessment of employees is affected by: (1) the social network of past and current managers, (2) the similarity between past and current managers, and (3) the social similarity between the manager and the employee. As such, individual advancement in an organization is related to the individual's social network and status. This results in inequality in organizations, where those in positions of power all have similar characteristics and social networks. 

Embeddedness affects the network of organizations- how organizations are related to each other. The economic position of the organization in the network is not related to things the individual organizations control. Instead, it is the result of how the organization compares to others, the actions of others and its status (MacKay and Phillips 2005). 

Embeddedness also affects the behavior of institutional fields. According to Stearns and Allan (1996), economic behavior (mergers) is not because of efficiency, but institutional embeddedness. A permissive state allows those on the fringe to innovate which facilitates mergers. Merger waves occur when those actors are viewed as successful and others imitate. 

Embeddedness affects the political action and power of economic elites. Classwide rationality (a major factor contributing to the power of the economic elite) is related to the way economic actors are included in diffuse social networks (Useem 1982). Furthermore, capitalist PAC contributions are related to regulatory embeddedness, social status and network position (Burris 2005). In short, the political action of economic actors is not just affected by rational economic reasoning, but social embeddedness.

However, the extent to the effect of social embeddedness on corporate behavior is not constant over time. According to Mizruchi, Stearns and Marquis (2006), the effect of social embeddedness is historically contingent. The effect of social network on corporate behavior has declined over time due to the following factors: (1) professionalization of finance, (2) internalization of financial and (3) increased market volatility.  

Embeddedness is related to organizational efficiency. For example, embeddedness is related to the cost of capital (Uzzi 1999). At the dyad level, firms with strong social ties with their lender get the lowest rate. At the network level, firms with a network of embedded and arms-length ties get the lowest rate. However, embeddedness is beneficial only up to a certain extent (Uzzi 1997). Embedded ties help distill information when time is of importance. However, too many embedded ties can decrease efficiency. Furthermore, embeddedness can lead to the development of broader social problems.

Embeddedness relates to broader social problems, like corporate fraud and the financial crisis. For example, Prechel and Morris (2010) found political and organizational embeddedness created dependence, opportunities and incentives for individuals to commit financial malfeasance.  Although embeddedness is related to major economic problems, this can be empowering. Once the underlying social arrangements are identified, they can be rearranged to improve the problem. This is why Abolafia (2010) emphasizes the need to fix academic, political and regulatory structures to ensure we do not have another financial crisis. Economic structures can be fixed by also fixing the institutions in which the economic structures are embedded. 

Embeddedness effects a range of factors including corporate and institutional behavior and market relations and outcomes. However, the effect of social embeddedness on corporate behavior is not constant- it varies over time (Mizruchi, Stearns and Marquis 2006). As such, future research should reveal precisely which conditions relate to the effect of embeddedness on organizations. ​

​Abolafia, Mitchel. 2010. “The Institutional Embeddedness of Market Failure: Why Speculative Bubbles Still Occur.” Research in the Sociology of Organizations 30B:177–200.

Burris, Val. 2005. “Interlocking Directorates and Political Cohesion among Corporate Elites.” American Journal of Sociology 111:249–283.

Castillia, Emilio. 2011. “Bringing Managers Back In: Managerial Influences on Workplace Inequality.” American Sociological Review 76:667–694.

Crutchley, Claire, Marlin Jensen, and Beverly Marshall. 2007. “Climate for Scandal: Corporate Environments that Contribute to Accounting Fraud.” The Financial Review 42:53–73.

Granovetter, Mark. 1985. “Economic Action and Social Structure: The Problem of Embeddedness.” American Journal of Sociology 91:481–510.

MacKay, Peter and Gordon M. Phillips. 2005. “How Does Industry Affect Firm Financial Structure?” The Review of Financial Studies 18:1433–1466.

Mizruchi, Mark, Linda Brewster Stearns and Christopher Marquis. 2006. “The Conditional Nature of Embeddedness: A Study of Borrowing by Large U.S. Firms, 1973–1994.” American Sociological Review 64:310–333.

Podolny, Joel. 2001. “Networks as the Pipes and Prisms of the Market.” American Journal of Sociology 107:33–60.

Polanyi, Karl. [1944] 2001. The Great Transformation: The Political and Economic Origins of Our Time. Boston, MA: Beacon Press.

Powell, Walter, Kenneth Koput, and Laurel Smith-Doerr. 1996. “Interorganizational Collaboration and the Locus of Innovation.” Administrative Science Quarterly 41:116–145.

Prechel, Harland and Theresa Morris. 2010. “The Effects of Organizational and Political Embeddedness on Financial Malfeasance in the Largest U.S. Corporations: Dependence, Incentives and Opportunities.” American Sociological Review 75:331–354.

Stearns, Linda Brewster and Kenneth D. Allan. 1996. “Economic Behavior in Institutional Environments: The Corporate Merger Wave of the 1980s.” American Sociological Review 61:699–718.

Useem, Michael. 1982. “Classwide Rationality in the Politics of Managers and Directors of Large American Corporations in the U.S. and Great Britain.” Administrative Science Quarterly 27:199–226.

Uzzi, Brian. 1997. “Social Structure and Competition in Interfirm Networks: The Paradox of Embeddedness.” Administrative Science Quarterly 42:35–67.

Uzzi, Brian. 1999. “Embeddedness in the Making of Financial Capital: How Social Relations and Networks Benefit Firms Seeking Financing.” American Sociological Review 64:481–505.

​The holding company operates as a financial management company. It does not produce commodities itself. Instead it owns controlling stock of multiple relatively-autonomous, legally-distinct production companies.

The rise of the holding company is the result of a split between the ownership and control of organizations (Berle and Means 1932). In the United States, the first corporations emerged in the 1800s, mainly for public goods. It was traditionally a private organization, held by a small set of owners who control the organization. However, in order to internally develop funds, companies would sell their stock to the public. The dispersion of ownership is inherent in the modern corporation (Berle and Means 1932). As the size of the corporation increases, ownership becomes more diffused. The dispersion of ownership has facilitated the dominance of the holding company, especially after the Civil War.

The holding company came to rise in post Civil War during the antebellum period, especially in regards to the growth of railroad corporations (Berle and Means 1932). During this period of time, the holding company attempted to vertically integrate and ownership became increasingly centralized and concentrated. This lead to the rise of the large corporation and the establishment of monopolies (Berle and Means 1932). Although ownership became centralized through strategies of vertical integration, the holding company had problems with control (Fligstein 1985). The holding company facilitated a house of cards such that, once problems with control came to fuition and the holding company became bankrupt, the whole economy failed. This ended up leading to the Great Depression and the state’s response: the New Deal (Prechel 2000). The New Deal broke up the holding company.

​The Celler-Kefauver Amendment was enacted in 1950 because people were weary of the increasing size of organizations and their influence on the market due to the Great Depression.  The Celler-Kefauver Amendment limited vertical integration, forcing organizations to diversify in order to grow. Furthermore, in response to problems with the holding company, corporations developed a structure which would provide both flexibility and control. As such, the MDF was developed. In short, the MDF rose along with the diversification of product lines (Fligstein 1985).

The MDF consists of a single company who has a central headquarters and and multiple relatively-autonomous departments for different product lines or regions. Whereas in the holding company, those with decision making authority are within a legally separate organization, those with decision making power in the MDF are located within the company at central headquarters.

​Neo-liberalism came to rise in the late 1970s and early 1980s. Neo-liberalism is an ideology that promotes the free market claiming corporations should not be restrained in pursuing their self interest. This ideology led to the Tax Reform Act of 1986 which eliminated tax transfers within subsidiaries of a holding company. This has wide spread implications because it eliminated the tax and reporting of transfers within subsidiaries, which eliminated the costs associated with the subsidiary structure (Prechel 1997). Furthermore, it provided companies with an opportunity to internally raise capital (Prechel 2000). The MLSF’s ability to internally raise capital became a vital incentive throughout the 1970s. As such, the MLSF has become and continues to be the dominant corporate form in the United States.

The MLSF is similar to the holding company. However, the MLSF has the organizational capacity to financially manage the subsidiaries whereas the holding company’s subsidiaries functioned more autonomously. Additionally, the MLSF structure is much more complex than the holding company.Whereas the holding company consisted of two layers: the holding company and its productive subsidiaries, the MLSF can consist of numerous layers and subsidiaries can operate as holding companies. This change has facilitated financial malfeasance, as it creates a liability firewall between parent companies and subsidiaries (Prechel and Morris 2010).

Economic theory assumes decisions in organizations are made by rational actors in an attempt to increase efficiency. Furthermore, they assume profits represent efficiency (Perrow 1986). According to economic theorists, organizations are the embodiment of value-based contracts. Contracts are the mechanisms for transactions. Organizations are established to reduce the transaction costs of organized social activity (Coase 1937). In short, according to economic theory, corporate structure is organized in such a way to minimize transaction costs.

From the perspective of economic theory, changes in corporate form from the holding company to the MDF to the MLSF is the result of actions motivated by efficiency. Certain corporate structures fit best with particular corporate strategies (Chandler 1962). According to Chandler (1962), the rise of the MDF is the result of a shift in corporate strategy. Corporate strategy shifted away from vertical integration and towards diversification. The holding company was a better fit for vertical integration strategies, as it centralized control of the entire production process (something beneficial when pursuing vertical integration). On the other hand, MDF is a better fit for diversification strategies, as it decentralized control and increases the adaptability and flexibility of the company (something beneficial when pursuing diversification). Change in corporate form is the result of changes in corporate strategy, which requires a new structure to be efficient.

Although economic theory provides an explanation of changes in corporate structure, it is inadequate. Economic theorists assume the behavior of individuals is rational and purely related to economic interests. As such, economic theorists tend to ignore the complexities of organizations and overlook motives for the behavior of individuals in organization, such as professional norms and political power (Perrow 1986). Furthermore, empirical research does not support economic theory claims that changes in corporate structure are related to efficiency and productivity (Roy 1997).

Whereas economic theory ignores political power, political theory focuses on it. Political theory challenges economic theory assumptions that corporate behavior is due to efficiency. From the political theory perspective, individual decisions are more related to power than efficiency. Organizational behavior is explained as a result of powerful coalitions aiming to reduce uncertainty by interacting with their environment (Pfeffer and Salancik 1978).

According to economic theory, organizations change as a result of conflict over resources and changing power relations. Corporate change is the result of corporate attempts to overcome constraints to capital accumulation (Prechel 1994). In an attempt to ensure its survival, organizations will behave in ways to reduce their uncertainty, whether this be through (1) political lobbying of the state, or (2) placing individuals with perceived capacities to better deal face critical uncertainties into leadership positions. Changes in organizational form can be the result of either of this two responses to the uncertainty facing organizations due to resource dependence.

In conflict over critical resources, corporations will lobby the state to change public policy to better suit their interests, facilitating changes in corporate form. For example, in the 1970s, due to globalization, corporations became financially constrained and faced difficulty raising capital (Prechel and Boies 1998). As such, corporations politically mobilized, leading to the passage of the Tax Reform Act of 1986, which eliminated the costs of the subsidiary structure created after the great depression. Changes in state structure initiated by corporate actors provided an opportunity for companies to change to the MLSF. Futhermore, the MLSF decreased corporate uncertainty and resource dependence by allowing corporations to internally raise capital, creating incentives for companies to adopt the MLSF (Prechel 1997). In an attempt to better accumulate capital, corporate actors worked together to pressure the state to change regulations, creating opportunities and incentives for corporate structure to change.

According to political theorists, change in corporate structure is also the result of power shifts. The characteristics of those who control the organizations tend to change over time, depending on who is conceived to best handle organizational uncertainties. As individuals rise in power, they act in ways to ensure their power is maintained. For example, when companies pursue diversification strategies, finance is viewed as a critical contingency and finance professionals are placed into positions of power (Zorn 2004). Upon gaining power, individuals with a background in finance use their position to structure the company in a way that allows growth through diversification, thus ensuring their power is maintained (Fligstein 1985). In short, according to political theory, changes in corporate structure are the result of power dynamics.

Political theory is a strong perspectivive explaining the political dimensions associated with organizational which has an ample amount of empirical support. For example, there is empirical evidence supporting political theory's claim that factors such as political action, capital dependence and financial risk are related to the adoption of the MLSF (Boies and Prechel 2002; Prechel and Boies 1998; Prechel, Boies and Woods 1999). However in an event-history model of MDF adoption, Palmer, Jennings and Zhou (1993) found little support for the straightforward political view (form prevalence and CEO prior sales experience was more related to change in corporate form than CEO financial expertise and ownership network), while finding significant support for institutional theory perspectives.

Institutional theories center around how the institutional environment impacts organizational behavior. From this perspective institutional isomorphism primarily determines corporate behavior. Institutional isomorphism is the process by which organizations tend to become similar to their institutional environment (DiMaggio and Powell 2007). Isomorphism can occur through three different processes: coercive, mimetic and normative isomorphism (DiMaggio and Powell 2007). Coercive isomorphism stems from political influence and the problem of legitimacy; they are forced to change due to cultural expectations of competitors, suppliers, consumers or the state. For example, changes in state regulation after the Great Depression forced corporations to eliminate structural monopolies. Mimetic isomorphism results from standard responses to uncertainty; they are pressured to mimic other prestigious organizations. For example, a company that is struggling may see how other more successful companies have a different structure and will attempt to replicate their success and adopt a new corporate form. Normative isomorphism is associated with professionalism; they tend to follow a professional world view. For example, business schools may emphasize the benefits of the MLSF, promoting companies to change their form to that which is idealized in business school. In short, according to institutional theory, change in corporate form is the result of institutional isomorphism.

Whereas political theory views corporations as political actors attempting to increase control of their environment, institutional theory conceptualizes corporations as institutional actors responding to environmental pressures. From this perspective, in an attempt to secure legitimacy from external actors, corporations do not attempt to change their institutional environment, instead, they conform to it. As such, it fails to explain corporate political actions to change state regulation, facilitating a change in corporate structure.

Systematic research also provides evidence in support for insitutitional theories. For example, Palmer, Jennings and Zhou (1993) found institutional factors, such as the prevalence of the MDF in the industry, CEO background at elite business schools, and directional and nondirectional ties to other MDF firms, explained corporate adoption of the MDF better than political and economic factors. However, institutional theory is limited as it does not adequately conceptualize organizations as powerful political actors. Institutionalism tends to focus on normative and mimetic pressures while ignoring coercion (Mizruchi and Fein 1999). Furthermore, it focuses on how organizations become increasingly similar and does not adequately explain differences among organizations. In conclusion, institutional theory views individuals and organizations as relatively passive and minimizes the importance of agency and heterogeneity.

​Berle, Adolf and Gardiner Means. [1932] 1991. The Modern Corporation and Private Property. New Brunswick, NJ: Transaction Publishers.

Boies, John and Harland Prechel. 2002. “Capital Dependence, Political Behavior and Change to the Multilayered Subsidiary Form.” Social Problems 49:301–326.

Chandler, Alfred. 1962. Strategy and Structure: Chapters in the History of the American Industrial Enterprise. Washington, DC: Beard Books.

Coase, Ronald H. 1937. “The Nature of the Firm.” Economica 4:386–405.

DiMaggio, Paul J. and Walter W. Powell. 1983. “The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields.” American Sociological Review 48:147–160.

Fligstein, Neil. 1985. “The Spread of the Multidivisional Form among Large Firms, 1919–1979.” American Sociological Review 50:377–391.

Mizruchi, Mark and Lisa Fein. 1999. “The Social Construction of Organizational Knowledge: A study of the Uses of Coercive, Mimetic, and Normative Isomorphism. Administrative Science Quarterly 44:653–683.

Palmer, Donald, P. Devereaux Jennings, and Xueguang Zhou. 1993. “Late Adopting of the Multidivisional Form by Large Corporations.” Administrative Science Quarterly 38:100–131.

Perrow, Charles. 1986. Complex Organizations, 3rd Edition. New York: Random House.

Pfeffer, Jeffrey and Gerald R. Salancik. 1978. The External Control of Organizations: A Resource Dependence Perspective. New York: Harper and Row.

Prechel, Harland. 1994. “Economic Crisis and the Centralization of Control over the Managerial Process: Corporate Restructuring and Neo-Fordist Decision Making.” American Sociological Review 59:723–745.

Prechel, Harland. 1997. “Corporate Transformation to the Multilayered Subsidiary Form: Changing Economic Conditions and State Business Policy.” Sociological Forum 12:405–439.

Prechel, Harland. 2000. Big Business and the State: Historical Transitions and Corporate Transformation, 1880s–1990s. Albany, NY: State University of New York Press.

Prechel, Harland and John Boies. 1998. “Capital Dependence, Financial Risk, and Change from the Multidivisional to the Multilayered Subsidiary Form.” Sociological Forum 13:321–362.

Prechel, Harland, John Boies, and Tim Woods. 1999. “Debt, Mergers and Acquisitions, Changing Institutional Arrangements and Transformation to the Multilayered Subsidiary Form.” Social Science Quarterly 80:115–135.

Prechel, Harland and Theresa Morris. 2010. “The Effects of Organizational and Political Embeddedness on Financial Malfeasance in the Largest U.S. Corporations: Dependence, Incentives and Opportunities.” American Sociological Review 75:331–354.

Roy, William. 1997. Socializing Capital: The Rise of the Large Industrial Corporation in America. Princeton, NJ: Princeton University Press.

Zorn, Dirk. 2004. “Here a Chief, There a Chief: The Rise of the CFO in the American Firm.” American Sociological Review 69:345–364.

Whereas early organizational theory conceptualized organizations as systems closed to their external environment, Selznick's (1966) analysis of the Tennessee Valley Authority (TVA) demonstrates organizations can never fully achieve closure. Organizations require continuity, homogeneity and consent, which creates a need for a set of formal and informal relations internal to the organization. However, organizations have to respond to their institutional environment, which is the result of the organizations own activities and the activities of external groups. In fact, organizations can deviate from their intended purpose due to the institutional environment. Selznick found that although the TVA intended to have grass roots democratic administrative structure, attempts of democracy were negated due to pressures from the institutional environment. In his analysis, Selznick examines exactly how this process occurred. 

The institutional environment is the rules, regulations and norms to which organizations must abide in order to maintain legitimacy and support. For example, in order for a dental practice to be viewed as legitimate and survive here in town, the dentist must abide by a set of internal and external institutional norms, like having a building, providing employees with a salary, dressing professionally and dentist accreditation. However,according to Selznick's institutionalism, the institutional environment is not some abstract entity, autonomous from individuals. People run institutions and organize them in ways to better achieve their interests (Stinchcombe 1997).

According to institutional theory, organizations change as a result of coersive pressures from the institutional environment. The institutional environment molds organizations through cooptation through both formal and informal mechanisms. According to Selznick (1966:13): "Cooptation is the process of absorbing new elements into the leadership or policy-determining structures of an organization as a means of averting threats to its stability or existence." Cooptation can occur theory formal or informal means. Formal cooptation occurs when the process of absorbing new elements into leadership is public. An example of formal cooptation is a change in official appointments to key posts.  Formal cooptation is associated with problems of legitimacy for the ruling group. Informal cooptation, on the other hand, occurs when the process of absorbing new elements into leadership is private. Informal cooptation is associated with pressure from powerful groups in the external environment. For example, although it was intended to be a grassroots administration, preexisting agricultural institutions were able to influence the decisions of the TVA, and create a constituency relationship between land-grant colleges and the Agricultural Relations Department of the TVA. Tensions between the formal structures of the organization and institutional power resulted in cooptation and a deviation from its intended purpose. 

Institutional theory is a significant study in the field of organizational sociology, as it forced researchers to include the environment in their analysis. Institutional theory demonstrates how organizations can “take a life of their own” despite the will of organizational leaders. This advanced the field of organizational studies by moving research beyond the closed system approach and viewing organizations as systems open to the external environment. 

Like institutional theory, population ecology is an open systems theory that includes the environment in its analysis. Population ecology primarily ask the question: why do some organizations survive and other fails. However, whereas Selznick's institutional theory included individuals and group behavior in his analysis, population ecology does not. Population ecology analysis is conducted at the population level. From this perspective, a population is a group of similar organizations. For example, a population could be oil and gas production companies or independent breweries. Population ecology analyzes the effect of population characteristics on organizational outcomes. For example, how does the number and age of oil and gas production companies or independent breweries relate to the survival rate of the population. However, by focusing on the population, population ecology minimizes the importance of individuals, groups and organizations as social actors. 

According to population ecology, organizations are determined by their external environment. Organizations that best fit the environment survive and others fail (Hannan and Freeman 1977). From the population ecology perspective, organizations go through three stages: variation, selection and retention. Throughout the stage of variation, organizations within the population implement and try out different mechanisms. At this stage, organizations are loosely coupled, meaning that they are made up of loose, flexible relations. As organizations develop over time, they become more tightly coupled and less adaptable to change (Hannan and Freeman 1984). Selection is a process in which organizations are selected by the environment. From this perspective, organizations with a superior fit with the environment succeed; those with a poor fit fail.  Additionally, the selection process favors organizations which have developed concrete organizational structures that are difficult to change (Hannan and Freeman 1984). Retention is the stage where some organizations with certain structures grow while others do not. However, once they arrive at the retention phase, organizations are tightly coupled with a structure made up of many inflexible relationships. Organizations face constraints limiting them from changing their structure and adapting to the external environment. As such, population ecology minimizes the importance of individual organizational change and adaption (Singh and Lumsden 1990). 

Like institutional theory, population ecology accounts for the importance of legitimacy for organizations to survive. From the population ecology perspective, the selection process favors organizations with legitimacy and institutional support (Sing and Lumsden 1990). Furthermore, legitimacy is affected by population density. Legitimacy is low when a new organizational form first emerges and becomes increasingly legitimate as the population density expands (Hannan and Carrol 1995). Although Hannan and Carrol (1995) claim their is no inconsistency between institutional and population ecology arguments, the two perspectives are different. Whereas institutional theory accounts for group influence on what is determined legitimate, population ecology assumes legitimacy is purely the result of population size (Baum and Powell 1995). 

There are both strengths and weaknesses associated with the population ecology view of organizational environments. One of the strengths of population ecology is that it shows how organizations are constrained by their environment (Hannan and Freeman 1984). This forces researchers to address issues of the environment when developing organizational theory. However, although population ecology promotes researchers to address the environment, it takes on the extreme view of environmental determinism. Population ecology just explains how environments influence organizations; it does now explain how organizations influence their environments. Furthermore, by viewing organizations as passive agents, population ecology fails to explain change among individual organizations. Instead, it sees single organizations as relatively stable and change as something that occurs primarily at the population level, as a result of the environmental selection process (not variation within organizations). However, there is ample evidence of individual companies making dramatic changes to their structure and taking action to influence their institutional environment. For example, over the course of time, General Motors has dramatically changed its organizational structure and it has used political pressure to influence public policy in such a way that ensures its survival. In conclusion, population ecology is problematic, as it fails to account for these empirical events. It leaves out organizations and individuals as social actors and fails to explain change within organizations.

Whereas institutional theory and population ecology examine how environments shape organizations, resource dependence theory specifically addresses question of how organizations interact with their environment and how resources are collected and distributed in organizations. Organizations must interact with their external environment in order to obtain the resources necessary for organizational survival (Pfeffer and Salancik 1978). However, unlike population ecology, resource dependence theory does not view the organization as a passive actor. Resource dependence theory claims that organizations act interact with their environment and attempt to shape it to increase their environmental fit (Aldrich and Pfeffer 1976). In short, from the resource dependence perspective, organizations both are shaped by and shape their external environment. 

According to resource dependence theory, organizations are not essentially cooperative; instead they are characterized by conflict over power and resources. Organizations are made up of coalitions with multiple and competing interests. As such, conflict and instability is embedded within organizations. Since organizations are dependent upon resources controlled by their environment, they are uncertain of their survival. Those who are seen to best manage critical uncertainties are able to have power in organizations. As such, as ideas about the critical uncertainties facing an organization shift, so does power in organizations. Groups attempt to acquire power by decreasing capital dependence, and controlling critical resources and information systems. Organizational change is the result of competing groups exercising power in an attempt to decrease uncertainty and increase power and control.

Resource dependence theory contradicts population ecology explanations of the factors contributing to organizational survival. Whereas population ecology relates survival rates to population characteristics like population density, resource dependence theory relates survival rates to an organization's position within the resource dependence network. For example, population ecology would claim corporate takeovers are the result of problems with legitimacy and organizational fit (e.g., a small organizational size, and low return on equity). On the other hand, resource dependence would claim it is the result of resource dependence relations (e.g., structural autonomy, organizational constraint on others and both indirect and direct interlocks). Palmer, Barber, Zhou and Soysal (1995) conduct an empirical analysis testing the explanatory power of the competing theories. They found resource dependence perspectives receive more empirical support (Palmer, Barber, Zhou and Soysal 1995). 

Resource dependence theory is a strong, influential theory which accounts for power relations within and between organizations (Davis and Cobb 2010). Unlike population ecology, resource dependence theory recognizes organizations as powerful social actors. Organizations are characterized as political entities characterized by competition and complexity. Organizational goals are not always singular or clear. The dominance of particular goals in organizations is the result of power relations. In conclusion, resource dependence theory provides a stepping stone to understand the influence of power on organizational behavior. 

Institutional theory also incorporates the environment into their analysis. Specifically, it addresses how institutionalized myths and beliefs affect organizational behavior.  Like resource dependence theory, neo-institutionalism asserts organizations are dependent upon their external environment to survive. Organizational needs for legitimacy, stability and material resources are influenced by the external environment (Meyer and Rowan 1977). Community values and norms affect resource access, which in turn influence the organization's development. As such, institutionalized myths and beliefs are critical factors determining organizational outcomes.

According to neo-institutionalism, organizational behavior is not the effect of rationally calculated action, but the result of taken-for-granted, institutionalized myths (Davis, Diekmann and Tinsley 1994). Institutional myths are stories and explanations which take on a rule-like status governing human behavior (Meyer and Rowan 1977). For example, an institutional myth in the United States is that an architect must be licensed to be effective, and as a result, if all other things are held constant, individuals, with rule-like status, will choose to hire a licensed architect over a non-licensed one. As such, architects are obligated to become and stay licensed. In conclusion, organizations are pressured to incorporate institutionalized myths into their formal structure to increase their legitimacy and survival capacities. 

Like population ecology, neo-institutionalism focuses on continuity and similarities among organizations and fails to adequately explain organizational change. From this perspective, as organizations develop, they are less likely to change as the field becomes increasingly stable. According to neo-institutionalism, organizations face isomorphic pressures. Isomorphism is how institutional myths constrain organizations and force them to become increasingly homogeneous. Isomorphism has a major influence on organizations. According to Meyer and Rowan (1977:538): "Isomorphism with environmental institutions has some major consequences for organizations: (a) they incorporate elements which are legitimated externally, rather than in terms of efficiency; (b) they employ external or ceremonial assessment criteria to define the value of structural elements, and (c) dependence on externally fixed institutions reduced turbulence and maintains stability.  As a result, it is argued here, institutional isomorphism promotes the success and survival of organizations." In short, the selection process favors organizations which are similar to their institutional environment due to isomorphic pressures. As organizational fields develop, organizations which survive within the field tend to become increasingly simular. As such, neo-institutionalism fails to adequately explain differentiation and change among organizations. 

According to neo-institutionalism, institutional myths influence organizations through mimetic, normative and coercive isomorphic pressures (DiMaggio and Powell 1983). Mimetic isomorphism is how organizations tend to become increasingly similar as a result of standard responses to uncertainty. For example, it can be argued that due to the success of Kinder Morgan, oil and gas distribution companies facing uncertainty mimicked the prestigious company and began to adopt the Master Limited Partnership organizational structure. Normative isomorphism is how organizations tend to become increasingly similar as a result of professionalization. For example, a psychiatrist will prescribe medication over natural remedies to manage depression due to American Psychiatric Association best practices and standards learned at professional conferences. On the other hand, coercive isomorphism is the result of political action and the coercive authority of groups. For example, political action may result in environmental regulations to which organizations are forced to conform. In short, according to neo-institutionalism, organizational behavior and change is a result of particular mimetic, normative and coercive institutional pressures.  However, in a study of change among private liberal art colleges, Kraatz and Zajac (1996) found little support for neo-institutional arguments: schools become increasingly different over time and do not mimic prestigious organizations in their field. As such, neo-institutional theory does not adequately explain how organizations respond and adapt to their institutional environment. 

The assumptions and claims of neo-institutional theories come with their own set of strengths and weaknesses. Neo-institutionalism accounts for the institutional environment. However, this element is often taken to the extreme, such that it fails to account for individuals. Whereas institutional theory focuses on how individuals use coercive pressures to attempt to organize the institutional environment in a way that better achieves their interests, neo-institutionalism tends to emphasize mimetic pressures and ignore coercive ones (Mizruchi and Fein 1999). Like population ecology, neo-institutional theories make the fault of studying society without studying people and minimize the importance of how groups use power to better achieve their interests at the expense of others.

​Aldrich, Howard E. and Jeffrey Pfeffer. 1976. “Environments of Organizations.” Annual Review of Sociology 2:79–105.

Baum, Joel A.C. and Walter W. Powell. 1995. “Cultivating an Institutional Ecology of Organizations: Comment on Hannan, Carroll, Dundon, and Torres.” American Sociological Review 60:529–538.

Davis, Gerald and Adam Cobb. 2010. “Resource Dependence Theory: Past and Future.” Pp. 21-42 in Stanford’s Organization Theory Renaissance, 1970-2000. Bingley, NY: Emerald Group.

Davis, Gerald F., Kristina A. Diekmann, and Catherine H. Tinsley. 1994. “The Decline and Fall of the Conglomerate Firm in the 1980s: The Deinstitutionalization of an Organizational Form.” American Sociological Review 59:547–570.

DiMaggio, Paul J. and Walter W. Powell. 1983. “The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields.” American Sociological Review 48:147–160.

Hannan, Michael T. and Glenn R. Carroll. 1995. “Theory Building and Cheap Talk about Legitimation: Reply to Baum and Powell.” American Sociological Review 60:539–544.

Hannan, Michael and John Freeman. 1977. “The Population Ecology of Organizations.”  American Journal of Sociology 82:929–964.

Hannan, Michael and John Freeman. 1984. “Structural Inertia and Organizational Change.” American Sociological Review 49:149–164.

Kraatz, Matthew S. and Edward J. Zajac. 1996. “Exploring the Limits of the New Institutionalism: The Causes and Consequences of Illegitimate Organizational Change.” American Sociological Review 61:812–836.

Meyer, John and Brian Rowan. 1977. “Institutionalized Organizations: Formal Structure as Myth and Ceremony.” American Journal of Sociology 83:340–363.

Mizruchi, Mark and Lisa Fein. 1999. “The Social Construction of Organizational Knowledge: A study of the Uses of Coercive, Mimetic, and Normative Isomorphism. Administrative Science Quarterly 44:653–683.

Palmer, Donald, Brad Barber, Xueguang Zhou, and Yasemin Soysal. 1995. “The Friendly and Predatory Acquisitions of Large U.S. Corporations in the 1960s: The Other Contested Terrain. American Sociological Review 60:469–499.

Pfeffer, Jeffrey and Gerald R. Salancik. 1978. The External Control of Organizations: A Resource Dependence Perspective. New York: Harper and Row.

Selznick, Philip. 1966. TVA and the Grass Roots. New York: Harper and Row.

Singh, Jitendra V. and Charles J. Lumsden. 1990. “Theory and Research in Organizational Ecology.” Annual Review of Sociology 16:161-195.

Stinchcombe, Arthur. 1997. “On the Virtues of the Old Institutionalism.” Annual Review of Sociology 23:1–28.

Key concepts in early organizational theory are rationality, effectiveness, efficiency and control. Max Weber’s conception of formal rationality, scientific management, human relations theory, and decision-making theory each address issues of rationality, effectiveness, efficiency and control in organizations. However, the different theories do not make the same assumptions, leading theorists to different claims of how organizations work and their affects on individual behavior. 

Formal rationality, scientific management, human relations theory and decision making theory each address issues of rationality, effectiveness, efficiency and control in organizations. Before explaining the similarities and differences between the different theories, I will first define key concepts.
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Organizations are purposeful collective action structures. This means that organizations are made up of multiple individuals working together to accomplish a goal. How they work together to achieve a goal depends on organizational structure. Organizational structure is the patterns of relations between individuals. Organizational structure is related to organizational rationality, efficiency, effectiveness and control systems. 

Rationality connects individuals with organizations. Rationality is the reasoning behind individual behavior. Individual rationality is dependent upon one's position within the organizational structure. For example, a janitor may see coffee spilled all over the floor. This would likely cause the janitor to reason it is her job to clean it up and take actions to do so. On the other hand, a manager may see coffee spilled all over the floor. This would likely cause the manager to reason it is not her job to clean it up but she should report it to someone to get the janitor to handle it. In short, organizational structure affects rationality and individual behavior. 

Organizational structure affects the behavior of individuals in organizations completing purposeful tasks to achieve a collective goal. As such, organizational structure also effects the efficiency and effectiveness of organizations. The effectiveness of an organization is the adequacy of the organization in achieving its desired goal. On the other hand, efficiency is the extent to which resources are minimized and outputs maximized in the pursuit of achieving the desired goals. Whereas effectiveness focuses on just the end outcome, efficiency focuses on economizing the means by which the group achieves their goal. Formal rationality, scientific management, human relations theory and decision making theory each address efficiency and effectiveness, as researchers search for the best form of social organization. However, the consistency of individual rationality and the efficiency and effectiveness of organizations is dependent upon control systems built into the organizational structure.

Control is the power to determine individual behavior. Control systems are built into organizational structures in order to influence individual rationality, maintain consistency and enhance the efficiency and effectiveness of organizations. As such, control is a critical aspect of formal rationality, scientific management, human relations theory and decision making theory. 

Although formal rationality, scientific management, human relations theory and decision making theory each address issues of rationality, effectiveness, efficiency and control in organizations, they all have different assumptions which leads to completing claims about how organizations work and effect on individuals. 

Weber's concept of formal rationality is developed in his pursuit of answering the research question: How do formal organizations work? In order to answer this question, Weber uses ideal types. An ideal type is a mental construct that facilitates understanding not because it reflects the empirical world in precise detail, but because it reflects the salient and conspicuous features of the real world. Weber's claim about how organizations work can be understood through his definition of the ideal types of authority, bureaucracy and officials. 

Weber describes three different ideal types of authority: legal rational authority, charismatic authority and traditional authority (Weber 1970). Unlike charismatic authority and traditional authority, legal rational authority is impersonal- authority is not tied to the individual but their position within a formal organization.  According to Weber, modern society is increasingly characterized by legal-rational authority, which increases the importance and prevalence of bureaucracies and officials (Weber 1970). 

From the formal rationality perspective, the most prevalent organizational structure in modern society is the bureaucracy. According to Weber (1970), the bureaucratic ideal type consists of different characteristics: (1) Bureaucracies have rules and regulations and the authority to give commands and designate official duties, (2) Bureaucracies are hierarchical with ordered authority and  the ability to manage turn-over, (3) Bureaucracies consist of formal written documentation of activities, thus establishing an organizational history, (4) Bureaucracies are made up of bureaucratic managers who are experts and receive specialized training, (5) Bureaucracies are ideally operating at full working capacity, and (6) Bureaucratic managers are subject to a set of stable and learnable rules. In short, from this perspective, organizations are characterized by bureaucracies and bureaucratic managers (i.e., officials).

According to formal rationality, bureaucracies are maintained by officials. From Weber's (1970) ideal type, officials are individuals pursuing a career within a bureaucracy with the following characteristics: (1) Officials have social prestige compared to the governed, (2) Officials are appointed by a superior with bureaucratic authority, (3) Officials receive life-tenure, (4) Officials receive compensation through a fixed salary, and (5) Officials are set for a lifelong career advancing thin the hierarchical structure of the bureaucracy. From the formal rationality perspective, modern organizations work as systems of legal-rational authority maintained by officials.  

Although Weber's theory of bureaucracies focuses on formal, legal-rational aspects of organizations which affect individual rationality, according to Weber, rationality consists of both formal and substantive rationality. Formal rationality is the written rules and regulations guiding individual behavior, whereas substantive rationality is the group value orientations that guide behavior. Although Weber's ideal type of bureaucracies emphasizes the formal rational aspects affecting individual behavior, this does not mean he believed individuals in bureaucracies are not influenced by value orientations. This is because ideal types to not reflect the empirical world in detail, they just represent the salient and conspicuous characteristics of empirical reality.  

According to Weber, bureaucracies are currently the most efficient and effective form of social organization. Whereas traditional and charismatic authority systems allows for personal relations to affect the treatment of individuals within organizations, the ideal bureaucratic type promotes equal treatment and universalism (Perrow 1986). Bureaucracies have technical advantages, as they ensure continity and reduce personal friction. 

From the formal rational perspective, organizations are systems of control through formal rational means. Organizational control is ensured through the development of the bureaucratic structure and maintained through formal lines of authority, formal lines of communication and information flow between those two lines (McNeil 1978). Organizations control individual behavior by setting individuals in formal roles within the organizational hierarchy, controlling how they communicate with others based on their position and influencing what information they receive. Control systems emerge as formal rational tools helping organizations achieve their goals and they expand along with the bureaucratic structure. For example, after facing problems with employee turnover or inconsistency of employees in completing the same task , a company might create standard operating procedures, which is a set of rules and regulations determining precisely how tasks should be completed. Control systems influence the rationality of officials in regards to precisely how and when to complete tasks and can be used to increase organizational efficiency. In short, from the formal rational perspective, bureaucracies work as a control system of written rules and regulations which determine the behavior of officials. 

Whereas Weber focuses on how organizations work, scientific management scholars focus on how organizational control can increase the productivity and efficiency of organizations. Since scientific management views organizations as instruments of production, they tend to focus on the production process aspect of the organizational structure. The production process is the observed patterns and ways of work. Scientific management scholars assume the work process can be broken down and quantified. Managers can internally control the production process and, through economic incentives and formal controls, influence worker rationality in order to increase organizational efficiency (Taylor 1970). Like formal rationality, scientific management assumes organizational structure exists to advance collective goals.

Scientific management also makes certain assumptions about rationality in organizations. However, scientific management assumptions of rationality are very different from Weber. Weber sees rationality as both substantive and formal, whereas scientific management theory does not acknowledge substantive rationality. Under scientific management, rationality is strictly viewed through a positivist lens, where things are assumed to be able to be unbiased, calculable and comparable. Scientific management focuses on the formal aspects of organizations and does not account for the substantive values associated with human rationality. 

Like Weber, scientific management sees bureaucratic control as an instrument to increase the efficiency and effectiveness of organizations. However, scientific management tends to focus on organizational efficiency over organizational effectiveness. According to Taylor (1970), managers have the responsibility to ensure organizational efficiency by controlling the labor process. Managers can increase the efficiency and effectiveness of organizations through scientific management principles applied to maximize worker incentive. In short, from the scientific management perspective, managers should determine and quantify all of the factors influencing the production process and use scientific tests to formally arrange the production process in a way that maximizes organizational efficiency. 

Whereas formal rationality focuses on the way formal rules and regulations control the behavior of individuals in organizations, scientific management focuses on the way managers can influence the formal rules and regulations which determine individual behavior. From the scientific management perspective, organizational control can be ensured by managers through the scientific management of the work process. Control systems emerge as a result of management efforts to increase efficiency. Control systems are maintained by managers and are used to influence individual rationality and motivate workers to increase their productivity. In conclusion, from this perspective, organizations work due to managerial control of the production process.

Like scientific management theorists, human relations theorists address questions of how to increase organizational efficiency. However, whereas formal rationality and scientific management focus on the formal aspects affecting the behavior of individuals in organizations, human relations theorists address questions of how informal relationships effect organizations. In short, unlike scientific management, the human relations model addresses the impact of substantive rationality developed in working groups on human behavior. 

From the human relations theory perspective, organizations are systems with formal and informal structures. Furthermore, informal structures have more impact on the rationality of individuals in the organization than formal structures. Organizations are made up of working groups with goals, relationships and processes which differ from the formal structure of the organization. Norms are not strictly defined by managers but they emerge within working groups. Furthermore, status is not formally given but informally obtained (Burroway 1984).  Individuals become attached to certain values which influence group performance and organizational output (Roethlisberger and Dickson 1970). 

Whereas scientific management focuses on the power of managers to influence worker productivity through the administration of formal rules and regulations guiding the work process, human relations theory focuses on both the power of working groups and managers to influence worker productivity by determining the culture of informal groups. Human relations theorists assume that groups and individuals are important to increase productivity, because power comes from the bottom up (Barnard 1970). Cooperation among working groups is essential because it gives power to those higher up in the organization. Organizational inefficiency and ineffectiveness develops when conflict arises from incongruence between the formal and informal structures of organizations (Roethlisberger and Dickson 1970). Since working groups influence informal structures contributing to the behavior of workers in the organization, it is critical to include the actions and cultures of workers when studying the factors related to organizational efficiency and effectiveness. However, human relations theory still holds a managerial bias, meaning workers are viewed as manipulable by management for the aim of increasing organizational effectiveness. 

Human relations theory critiques scientific management measures of the work processes related to organizational efficiency and effectiveness. Scientific management attempts to break down and quantify the work processes related to organizational output. Human relations theory claims it is not possible to break down and quantify all of the factors related to organizational effectiveness and efficiency. Instead, it assumes that the sum is greater than the parts and it is not possible to reduce group characteristics to the characteristics of individual tasks. 

Whereas scientific management and formal rationality focus on the formal aspects of control systems, human relations theory focuses on the informal aspects. From the human relations perspective, control systems emerge within informal working groups, are influenced by both formal and informal processes and consist of norms and beliefs influencing individual behavior. Organizational control can be ensured by management through the establishment of benefits initiated to influence worker norms and beliefs such that cooperation and company loyalty among working groups is increased. From this perspective, informal and formal control systems influence individual beliefs and rationality and determine how organizations and individuals in organizations work. 

Decision making theory primarily addresses how situational organizational structures impact decisions. According to decision making theorists, decision making is not centered around efficiency; things are done in particular ways because that is how it was done in the past. Contradictions and irrationality are prevalent within organizations. Decision makers are limited because of their perceptions and inability to adequately obtain and assess information (March and Simon 1958). Perceptions are bias and bounded by sense-making determined by previous experience and knowledge (Weick 1970). For this reason, organizational history is vital to understanding the behavior of individuals within organizations. 

From the decision making perspective, organizational structure is fluid, as it must be enacted each moment as individuals must continuously perceive and make sense of the world around them. However, sense making is limited due to bounded rationality (i.e., limits in information and constraints on individuals to adequately assess information). According to decision making theory, organizations are made up of a mix of goals, problems and possible solutions (Levitt and Naas 1989). In order to ensure routine behavior in organizations, programs are developed. Programs are routinized activities in response to frequently experienced stimuli. Programs facilitate, yet limit worker understanding. Programs increase understanding, as they evoke meaning to common experiences. However, programs limit understanding, as they focus attention to some events, while ignoring others. Organizations affect individual rationality through programs which influence individual attention and subgoals along with the division of labor and communication structures. 

Whereas scientific management and human relations focus on managerial decisions to increase efficiency, decision making theory focuses on effectiveness. Decision making theorists claim decisions are usually determined by effectiveness, not efficiency (March and Simon 1958). Individuals tend to routinize their behavior and develop programs in response to stimuli.  It is costly for actors to have efficiency involved when making decisions. Instead, actors tend to think of effectiveness when completing tasks- they just worry about getting the job done.

Decision making theory strongly contrasts with both the scientific management and human relations theory. Decision making theory strongly criticizes the managerial bias, as it claims it is not possible for mangers to control the work process. From this perspective, control systems are situated (Vaughn 1998). Control systems emerge as a result of past decisions and other's interpretation of responses, they cannot be determined by current management. All individuals in the organization, including managers, face bounded rationality. As such, everyone within the organization is constrained in their ability to adequately assess information and control organizational outcomes. 

Decision making theory builds from formal rational perspectives of organizations, but according to decision making theory, formal rationality only has half of the equation. Whereas formal rationality emphasizes how organizational control is ensured through a focus of information, decision making theory emphasizes how both the focus of information and the focus of attention is related to organizational control (March and Simon 1958). Historically developed control systems (i.e., programs) influence the way individuals decide when and how to act when experiencing particular stimuli. In conclusion, according to decision making theory, organizations work as sets of continuously enacted programed responses, allowing worker discretion and flexibility in how a mix of goals is achieved. 

As you can see, many theorists have addressed issues of rationality, efficiency and effectiveness. Each theory has its different claims regarding how to ensure organizational control, how organizational control systems emerge, and the effect of control systems on individuals and the organizational structures differently. Although there are similarities between Weber’s concept of formal rationality, scientific management theory, human resource theory, and decision making theory, there are also many differences.

Barnard, Chester. 1970. "Cooperation." Pp. 84-97 in The Sociology of Organizations: Basic Studies by Oscar Grusky and George Miller (eds.). The Free Press: New York, NY.

Burroway, Michael. 1984. "Organizing Concent on the Shop Floor: The Game of Making Out." Pp. 134-143 in Critical Studies in Organization and Bureaucracy by Frank Fischer and Carmen Sirianni (eds.). Temple University Press: Philadelphia,PA.


Grusky, Oscar and George Miller (eds). 1981. The Sociology of Organizations: Basic Studies. Second Edition. New York, NY: Free Press.

Levitt, Barbara and Clifford Nass. 1989. “The Lid on the Garbage Can: Institutional Constraints on Decision-Making in the Technical Core of College-Text Publishers.” Administrative Science Quarterly 34:190–207.

March, James and Herbert Simon. 1958. “Cognitive Limits on Rationality.” Pp. 136-171 in Organizations. New York, NY: Wiley-Blackwell.

McNeil, Kenneth. 1978. “Understanding Organizational Power: Building on the Weberian Legacy.” Administrative Science Quarterly 23:65–90.

Perrow, Charles. 1986. Complex Organizations, 3rd Edition. New York: Random House.

Roethlisberger, Fritz and William Dickson. 1970. "Human Relations." Pp. 67-83 in The Sociology of Organizations: Basic Studies by Oscar Grusky and George Miller (eds.). The Free Press: New York, NY.

Taylor, Frederick. 1970. "Scientific Management." Pp. 55-66 in The Sociology of Organizations: Basic Studies by Oscar Grusky and George Miller (eds.). The Free Press: New York, NY.

Vaughn, Diane. 1998.  “Rational Choice, Situated Action, and the Social Control of Organizations.” Law & Society Review 32:23–61.

Weber, Max. 1970. "Bureaucracy." Pp. 7-36 in The Sociology of Organizations: Basic Studies by Oscar Grusky and George Miller (eds.). The Free Press: New York, NY.

Weick, Karl. 1970. "Enactment and Organizing." Pp. 265-279 in The Sociology of Organizations: Basic Studies by Oscar Grusky and George Miller (eds.). The Free Press: New York, NY.

Uncertainty, risk and wrongdoing are key distinct but interrelated concepts in organizational sociology. Uncertainty always creates risk for organizations and risk can result in organizational wrongdoing. In order to fully understand wrongdoing, uncertainty, and risk must also be understood.

Every organization faces uncertainty, as they do not control all of the factors related to their survival. Uncertainty is when knowledge of the nature, extent and probability of outcomes is limited. Since organizations depend on their external environment to survive, every organization faces some degree of uncertainty. Uncertainty makes it impossible for organizations to always accurately predict outcomes. Even when organizations develop technologies meant to reduce uncertainty, they are never 100% accurate and there can be adverse consequences (Holzer and Millo 2005). Uncertainty always creates risk for capitalist organizations competing for resources because outcomes are uncertain.

Risk is a situation in which their is unknown exposure to danger. According to Holzer and Millo (2005:223), uncertainty is a fundamental aspect of risk: "risk refers to fundamental uncertainty: at the time of risk taking, one cannot know for sure whether the opportunity concerned will be realized; in the worst case, the costs incurred might be greater than any benefit." In short, uncertainty is an inherent part of risk.

Uncertainty is not the only factor related to exposure to risk, so is resource access. One's conception of risk is related to conflict over resources and the balance of power (Dietz, Stern and Rycroft 1989). Due to actions of powerful actors, those with less resources tend to remain uncertain of their risk exposure and pay the consequences of the risky decisions made by those in positions of power (Auyero and Swistun 2008). Since power and conflict are other aspects associated with risk, risk can lead to wrongdoing.

As explained in a previous post, wrongdoing is behavior that results in the violation of the law, a written or unwritten code of ethics, or social responsibility doctrines which are monitored and enforced (Palmer 2012). Not all risk leads to wrongdoing, but all wrongdoing is related to risk, as it is not possible to always accurately predict the consequences of wrongful behavior. As such, it is important to understand exactly how organizations will attempt to manage risk and develop structures which promote wrongdoing. 

In order to better manage risk, organizations will develop differential social structures which facilitate wrongdoing. Two key factors facilitating wrongdoing include organizational complexity (Beamish 2000) and resource dependence (Prechel and Morris 2010). For example, Beamish (2000) found intra-organizational complexity, hierarchies and subcultures led to Unocal Corporation spilling over 20 million gallons of petroleum into California's Guadalupe Dunes. On the other hand, Prechel and Morris (2010) found in an attempt to manage uncertainties and capital dependence, corporate actors initiated strategies and structures which created incentives and opportunities for corporate malfeasance. In short, to cope with uncertainty and resource dependence, organizations develop structures which provides opportunities and incentives for wrongful behavior. 

Although uncertainty, risk, and wrongdoing are all theoretically distinct concepts, they are interrelated. Wrongdoing creates and can be the result of risk. Furthermore, risk creates uncertainty and uncertainty creates risk. It is important to understand the differences between the three concepts to fully understand organizational wrongdoing. ​

Auyero, Javieer and Debora Swistun. 2008. “The Social Production of Toxic Uncertainty.” American Sociological Review 73(3): 357-379.

Beamish, Thomas. 2000. “Accumulating Trouble: Complex Organization, a Culture of Silence, and a Secret Spill.” Social Problems 47(4): 473-498.

Dietz, T, PC Stern and RW Rycroft. 1989. “Definitions of Conflict and the Legitimization of Resources: The Case of Environmental Risk.” Sociological Forum 4(1): 47-70.

Holzer, Boris and Yuval Millo. 2005. “From Risks to Second-Order Dangers in Financial Markets: Unintended Consequences of Risk Management Systems.” New Political Economy 10:223–245.

Palmer, Donald. 2012. Normal Organizational Wrongdoing: A Critical Analysis of Theories of Misconduct in and by Organizations. New York, NY: Oxford University Press.

Pfeffer, Jeffrey and Gerald R. Salancik. 1978. The External Control of Organizations: A Resource Dependence Perspective. New York: Harper and Row.

Prechel, Harland and Theresa Morris. 2010. “The Effects of Organizational and Political Embeddedness on Financial Malfeasance in the Largest U.S. Corporations: Dependence, Incentives and Opportunities.” American Sociological Review 75:331–354.
​

​Organizational wrongdoing is a major social problem, both in the United States and around the world. Organizational wrongdoing is wrongful behavior conducted in and by formal organizations.  Wrongful behavior is behavior that results in the violation of the law, a written or unwritten code of ethics, or social responsibility doctrines which are monitored and enforced (Palmer 2012). Examples of organizational wrongdoing include financial malfeasance, dumping toxic waste, misappropriation of funds and unfair promotions. Organizational wrongdoing includes a large range of behavior which significantly impacts material access and the everyday lives of so many people. Since it is such a significant social problem, it is critical for the causes of organizational wrongdoing to be understood. 

There are two competing perspectives of organizational wrongdoing: wronging as an abnormal phenomenon and wrongdoing as a normal phenomenon (Palmer 2012). One perspective (organizational wrongdoing as an abnormal phenomenon) sees wrongdoing as an act of deviance within the organization. The other perspective (organizational wrongdoing as a normal phenomenon) sees wrongdoing as a typical act within the organization. By building from two different foundations of thought, the two competing perspectives both attempt to explain why organizational wrongdoing occurs.

​From the rational choice perspective, people in organizations act wrongfully due to a rational cost-benefit analysis. According to this perspective, organizational wrongdoing is the result of problematic organizational incentive structures which motivates wrongful behavior. Two main theories stem from the rational choice account of wrongdoing: agency theory and strain theory. 

Agency theory is a perspective rooted in economics. According to this perspective, economic relationships are made up of principals and agents. Principals are individuals who pay others for their labor. An example of a principal would be a stockholder who provides investment funds to a company whose managers are expected to use the investments to make a profit. Agents are individuals who are paid to perform work. An example of an agent would be a corporate manager who receives a salary for managing a company. From this perspective, increased divisions between principals and agents has resulted in organizational wrongdoing. Both principals and agents act opportunistically, even at the expense of the other. According to agency theory, organizational wrongdoing occurs when social structures create incentives for agents to act opportunistically at the expense of principals. For example, Berle and Means (1932) claim the dispersion of stock ownership has misaligned the interests of stock holders (principals) with the interests of corporate managers (agents). As a result, wrongful behavior, like earnings manipulation and personal use of company resources, occurs (Fama and Jensen 1983). 

Whereas agency theory focuses on principals and agents, strain theory focuses on legitimacy (i.e., socially accepted use of power). Strain theory is a perspective rooted in sociology. According to this perspective, individuals pursue illegitimate means (i.e., ways that are not socially accepted) to achieve goals when they cannot achieve their goals legitimately (Agnew 1985). For example, an individual in a competitive environment might not be capable of achieving their career aspirations. This could result in individuals seeking illegitimate means, like earnings manipulation, to better achieve their interests. 

Whereas the rational account perspective focuses on the rational/formal aspects affecting individual decision making, the cultural account focuses on the irrational/normative aspects. From the cultural perspective, people in organizations act wrongfully not because of rational cost-benefit calculations but because of cultural norms, values and beliefs within the organization. Organizational cultures affect individual assumptions about empirical reality and can directly or indirectly promote wrongful behavior. Ashforth, Anad and Joshi (2004) identify six ways in which perverse organizational cultures can promote/legitimize wrongdoing: (1) denial of responsiblity, (2) denial of injury, (3) denial of victim, (4) social weighting, (5) appeal to higher loyalties, and (6) balancing the ledger. Through the socialization process, individuals come to embrace perverse organizational cultures that promote/legitimize wrongdoing. For example, the torture of Arabs by U.S. soldiers at Abu Ghraib was facilitated by group cultures to follow the line of command and dehumanize detainees. In short, according to this perspective, organizational wrongdoing is the result of problematic cultures within organizations which motivates wrongful behavior. ​

​Studies of ethical decision bridge the gap between normal/abnormal perspectives of organizational wrongdoing. From the ethical decision perspective, people in organizations act wrongfully due to limitations in the decision making process. According to this perspective, organizations are made up of individuals with different tasks, who when properly coordinated, work to achieve a set goal. Individuals within organizations collect information on how to best achieve their tasks. From this perspective, organizational wrongdoing is the result of individuals failing to process ethical criteria when making a decision. The main issues emerging from the ethical decision account of wrongdoing include bounded rationality, bounded ethicality, multiple ethical decisions and cognitive dissonance.

Bounded rationality is the cognitive limits of humans to acquire, store, process and retrieve information. Since individuals face limits to their knowledge, their behavior cannot be a rational calculation of costs and benefits; it must be constrained by what they know (March and Simon 1958). As such, individual decisions are limited by the factors contributing to what they know.

Bounded ethicality is the cognitive limits of ethical decision makers. Due to bounded rationality, individuals have poor conceptions of the contributing factors and consequences of ethical decisions. For example, individuals tend to underestimate the range of those affected by their ethical decisions and disregard the consequences of their actions (Chugh, Banaji and Bazerman 2005). Individuals in organizations face problems when making ethical decisions because their decisions are limited by their inaccurate decision frames. 

Another problem organizational decision makers face when making ethical decisions is that they have to make multiple, linked decisions. As such, ethical decisions develop over time and are affected by temporal processes. For example, Jordan, Mullen and Murnighan (2011) find individuals attempt to maintain their ethical identities by creating a balance of ethical versus unethical decisions: a person who identifies herself as ethical makes an unethical decision may attempt to make up for it by making more ethical decisions in the future and person who identifies herself as unethical that makes a ethical decision may attempt to make up for it by making more unethical decisions in the future. Furthermore, the temporal aspects of decision making create problems of layering. A decision made at one point of time lays the foundation for future decisions. These complexities limit individual decisions and can lead to organizational wrongdoing. 

Ethical decision making is further limited by cognitive dissonance. Cognitive dissonance is the way individuals tend to rationalize their behavior (Aronson 1973). Individuals may interpret their behavior as the result of rational or normative decisions, however, their behavior suggests it must be something else. For example, an individual who commits malfeasance may rationalize their behavior as the result of cost/benefit analysis or cultural norms, when their decision is really characterized by uncertainty, complexity and inadequate information. By rationalizing the behavior, the issues of uncertainty, complexity and inadequate information systems are not addressed, thus reifying the process contributing to unethical decisions.

From the ethical decision account, wrongdoing can be conceptualized as either a normal or abnormal phenomenon.  Wrongdoers can be seen as perverse. From this perspective, perverse individuals may disregard the consequences of their actions and fail to process ethical criteria when making decisions. On the other hand, wrongdoers can be seen as normal, good people. Also from this perspective, normal individuals facing uncertainty, complexity and inadequate information may fail to process ethical criteria when making decisions resulting in wrongdoing. In this way, the ethical decision account serves as a bridge between normal and abnormal perspectives of organizational wrongdoing. 

Wrongdoing as a normal phenomenon assumes wrongdoing is unremarkable and wrongdoers are ordinary (Palmer 2012). The causes of wrongdoing include pervasive social structures and processes (Palmer 2012). In short, from this perspective, organizational wrongdoing is seen as a typical behavior. The five major accounts stemming from this perspective include: the administrative system account, the social situational influence account, the power structure account, the accidental behavior account and the social control account (Palmer 2012). ​

​Administrative systems theory draws from the ethical decision account of wrongdoing. Specifically, it draws from March and Simon's (1958) concept of bounded rationality. From the administrative systems theory account, organizations are made up of individuals with different tasks, who when properly coordinated, work to achieve a set goal. However, since individuals face bounded rationality and complex environments, organizations require adequate coordination to be effective. Administration systems help individuals in organizations manage problems of bounded rationality and complex environments. 

Administrative structures include obtrusive and unobtrusive controls (Perrow 1972). Unobtrusive controls are implicit guidelines on how to complete a task. An example of an unobtrusive control is norms learned at professional meetings. Obtrusive controls are more explicit guidelines on how to complete a task. An example of an obtrusive control is set standard operating procedures to assist in decision making. Obtrusive and unobtrusive controls are used to coordinate behavior and influence the actions of individuals within the organization. 

From the administrative theory perspective organizational wrongdoing is the result of obtrusive and unobtrusive controls which program unethical behavior. For example, a well operator may choose to dispose of fracking fluid in a way that endangers water sources due to standard operating procedures and professional norms. In this way, organizational wrongdoing is conceptualized as a normal event, programmed by design. 

​The situational social influence account of wrongdoing draws from human relations theory, which focuses on the informal aspects influencing productivity. From this perspective, social context (group dynamics, informal norms and goals) primarily influences individual behavior (Barnard 1938). Informal norms shape attitudes of how individuals in particular roles should act, how people in general should treat one another and how members of informal groups should be related (Palmer 2012). As such, situational social influence is critical to understand the behavior of individuals within organizations. 

Individual acts of wrongdoing can be the thoughtless acts resulting from situational social influence. For example, group norms of efficiency and confidence in the effectiveness of the production process may push individuals to thoughtlessly create a safety compliance report, later resulting in a defective product and recalls. Group norms can promote thoughtless behavior and result in organizational wrongdoing.

​From the power structure account, organizations are power structures made up of formal  and informal authority relations. Formal authority is the set power relations and hierarchies within organizations. From this perspective, organizational wrongdoing is the result of organizational power structures including formal authority and resource dependence. 

The formal authority associated with organizations can contribute to organizational wrongdoing. The Milgram experiment (1963) is a famous study demonstrating how formal authority can result in wrongdoing. The experiment had participants use a button to "shock" a learner who answered a question incorrectly, with the severity of the shock increasing over time (however, there really was no person they were shocking). Milgram found at the order of lab managers, participants would be willing to inflict deathly shocks upon others. In short, formal authority results in subordinates obeying the commands of those in positions of authority, even when the subordinate believes the behavior is wrong. 

Furthermore, informal power resulting from resource dependence can result in organizational wrongdoing. Organizations need resources to survive (Pfeffer and Salancik 1978). Members in organizations who control the resources needed to survive and cope with the uncertainty associated with the external environment have informal power. As such, individuals are motivated to accumulate power and are influenced by informal goals associated with being perceived to be in control of managing critical contingencies facing the organization. For example, in order to acquire informal power, individuals in organizations can withhold or manipulate information to shape others perceptions of critical environmental contingencies facing the organization. Informal power resulting from resource dependence is problematic because the strategies used to accumulate informal power resulting from resource dependence typically are associated with norm violations and organizational wrongdoing. 

​The accidental behavior account of wrongdoing draws from the administrative systems account. Like the administrative systems account, the accidental behavior account of wrongdoing claims wrongdoing can be the result of accidents occurring due to inadequate organizational design. For example, Vaughan's (1996) study of the Challenger disaster finds inadequate system designs can result in catastrophic accidents. Technologies and structures of production create information deficiencies resulting in accidents and wrongdoing.

From the accidental behavior perspective of wrongdoing, wrongdoing is the result of information processing deficits. Information processing deficits can result in organizational accidents and wrongdoing when individuals do not have or cannot process the information necessary to understand the wrongful character of their actions. Individuals in organizations may attempt to pursue rightful objectives, but accidentally achieve wrongful outcomes.

Wrongdoing and accidents are different, but related concepts. Accidents are unintentional outcomes. On the other hand, wrongdoing is an outcome that violates law, ethics or social responsibility doctrines. Accidents are related to wrongdoing in three ways. According to Palmer (2012:238-240): "First, wrongdoing can facilitate accidents... Second, accidents can facilitate wrongdoing...Third, accidents can lead to the detection of unrelated wrongdoing...Fourth, accidents can lead to broader definitions of wrongdoing, which create the possibility of new forms of wrongdoing in the future." Although wrongdoing and accidents are distinct concepts, they are related.

From this perspective, accidents can not always be remedied by improving defunct administrative systems. Instead, normal accidents are likely to occur in organizational structures that are tightly coupled and complex (Perrow 2007). Tightly coupled systems are organizational structures made up of highly interdependent parts. An example of a tightly coupled system is a rocket engine where the functioning of its parts are interrelated and dependent upon the adequate operation of other parts. An example of a loosely coupled system is the education system which is made up of separate, highly autonomous districts. Complex systems are structures with numerous related parts. An example of a complex system is NASA, which is made up of numerous relationships between of numerous groups and contract groups. An example of a simple system is a self-employed plumber: there is the plumber, the supply store and her clients, so the production process requires few groups to be involved. Organizational structures that are tightly coupled and complex cannot be remedied; under these conditions, normal accidents are inevitable. 

​Like the cultural account, the social control account of wrongdoing examines the influence of organizational culture on wrongdoing. However, from this perspective, wrongdoers are not perverse, instead, wrongdoing is the result of the relationship between social control agents and organizational participants. Social control agents have incentives to punish individuals who act wrongfully, while at the same time, they attempt to avoid punishment. This creates conflict and influences wrongdoing.

The interaction between social control agents and individuals in organizations results in first order and second order wrongdoing. First order wrongdoing is how social control agents have the power to directly develop formal rules for organizational participants which can make it more possible for individuals to act wrongfully. An example of first order wrongdoing is the ability of politicians to write laws that deregulate the banking industry, decreasing oversight of banking transactions and making it easier for traders to commit fraud. Second order wrongdoing is wrongful behavior that would not have been possible without previous interactions between social control agents and organizational participants. An example of second order wrongdoing is Martha Stewart who violated laws of impeding an investigation in the processes of defending herself from allegations of insider trading. the ability of social control agents generate group pressures. She wouldn't have violated laws of impeding an investigation, had it not been her interactions with federal investigators. In short, wrongful behavior depends on the relationship between social control agents and organizational participants. 

​Agnew, R. 1985. "A Revised Strain Theory of Delinquency." Social Forces 64:151-167.

Aronson, E. 1973. "The Raionalizing Animal." PP. 131-138 in Staw, B (ed.), Psychological Dimensions of Organizational Behavior, Second Edition. Englewood Cliffs, NY: Prentice Hall. 

Ashforth, B.E., V. Anand and M. Joshi 2004. "Business as Usual: The Acceptance and Perpetuation of Corruption in Organizations." Academy of Management Executive 18:39-53. 

Barnard, C. 1938. The Function of the Executive. Cambridge, MA: Harvard University Press. 

Berle, Adolf and Gardiner Means. [1932] 1991. The Modern Corporation and Private Property. New Brunswick, NJ: Transaction Publishers.

Chugh, D. M. Banaji and M. Bazerman. 2005. "Bounded ethicality as a Psychological Barrier to Recognizing Conflicts of Interest." PP. 74-95 in Moore, D., D. Cain, G. Loewenstein, and M. Bazerman (eds.) Conflicts of Interest: Problems and Solutions from Law, Medicine and Organizational Settings. London, UK: Cambridge University Press. 

Fama E.F. and M.C. Jensen. 1983. "The Separation of Ownership and Control. " Journal of Law and Economics 26:301-325. 

Jordan, J.M., E. Mullen and J.K. Murnighan. 2011. "Striving for the Moral Self: The Effects of Recalling Past Moral Actions on Future Moral Behavior." Personality and Social Psychology Bulletin 37: 701-713. 

March, J.G. and H. Simon. 1958. Organizations. John Wiley and Sons, New York, NY. 

Milgram, S. 1963. "Behavioral Study of Obedience." Journal of Abnormal and Social Psychology. 67: 371-378. 

Palmer, Donald. 2012. Normal Organizational Wrongdoing: A Critical Analysis of Theories of Misconduct in and by Organizations. New York, NY: Oxford University Press. 

Perrow,  C. B. 1972. Complex Organizations: A Critical Essay. New York, NY: McGraw-Hill. 

Perrow, C.B. 2007. The Next Catastrophe: Reducing Our Vulnerabilities to Natural, Industrial and Terrorist Disasters. Princeton, NJ: Princeton University Press. 

Pfeffer, J. and G.R. Salancik. 1978. The External Control of Organizations: A Resource Dependence Perspective. New York, NY: Harper and Row Publishers. 

Vaughan, D. 1996. The Challenger Launch Decision: Risky Technology, Culture and Deviance at NASA. Chicago, IL: University of Chicago Press. 

There are three key theoretical perspectives of organizations: rational, natural and open systems. Understanding these different perspectives is critical because each makes important points about organizations. Additionally, the three perspectives embody the historical development of the science of organizations. This historical development reveals why the three perspectives focus on particular aspects of organizations. Modern organizational theory can be described as a combination of these three main perspectives (Scott 2003). 

The science of organization emerged in the early 1900s. In response to the increased rationality of modern life, early researchers focused on the legal rational rules and regulations governing organizations. From the rational system perspective, "Organizations are collectivities oriented to the pursuit of relatively specific goals and exhibiting relatively highly formalized social structures" (Scott 2003:27). Rational systems theorists focus on formalization and goal specificity of organizations because they are critical elements of the rationality of organizations. Important rational systems theories include scientific management (Taylor 1911), administrative theory (Fayol 1919), decision making theory (Simon 1945) and bureaucratic theory (Weber 1968).  

Scientific management takes a rational systems approach to organizations. This perspective, pioneered by Frederick Taylor (1911), attempts to quantify and develop more efficient work procedures through formal mechanisms. Through case studies at Bethlehem Steel, Taylor (1911) found productivity can be maximized through managerial control of the production process. He argues companies should use scientific management rather than follow ordinary management principles. Scientific management differs from ordinary management by: (1) developing a science (measurable rules, regulations and procedures) for the working process instead of using the rule-of-thumb method, (2) workers are scientifically selected, and trained rather than the worker having control over the production process, (3) management cooperates with workers to ensure workers follow set procedures to set standards, and (4) work and responsibility is split between worker and management rather than it being primarily the responsibility of the worker (Taylor 1911). In short, scientific management aimed to increase efficiency by calculating the variables influencing the production process within organizations and using that scientific knowledge to ensure productivity is maximized through formal managerial control of individual tasks. 

Administrative theory also takes a rational systems approach to organizations. However, unlike scientific management, which focuses on the social psychological level of analysis, administrative theory focuses on the structural level of the organization. From this perspective (Fayol 1919), formal procedural change is best made from the top-down (changes at the level of the work structure that will affect individual tasks), rather than the bottom-up (changes at the level of individual tasks that will affect the larger work structure). Administrative theory focuses on two parts of the organization's structure: coordination and specialization. coordination is the hierarchical organizational form controlling the relations between organizational participants. Specialization is how activities are grouped among work groups. Administrative theory moved beyond scientific management by looking beyond the individual and focusing on the organizational structure. However, like scientific management, it is fixated on studying formal aspects of organizations in an effort to maximize efficiency.

Another rational systems perspective, decision making theory, also focuses on the formal aspects of organizations. Like scientific management (and unlike administrative theory), Simon's decision making theory focuses on the individual, rather than the structure. However, Simon critiqued scientific management assumptions of the economically rational worker. Although workers may seek to maximize their self-interest, they often do not know what is in their self-interest and they do not know all other possible options (Simon 1945). Organizations simplify decisions by setting goals and premises. Decision making theory expanded understanding of how the worker makes decisions by accounting for organizational constraints and gaps in knowledge. Never the less, like other rational perspectives, it focuses on the formal structures used to achieve set tasks. 

Weber's analysis of legal rational authority and bureaucratic ideal types contributes to rational perspectives of organizations (Scott 2003). According to Weber (1968), there are three main types of authority: traditional authority (i.e. authority based on traditions), charismatic authority (i.e. authority based on the perceived extraordinary powers of an individual), and legal rational authority (i.e. authority based on written rules and procedures). Each authoritative type is associated with a particular administrative structure. As such, legal-rational authority relates to  the bureaucratic ideal type. An ideal type is a construct or abstraction describing distinguished features of a specific form, but rarely found in society. There are particular characteristics which make up the bureaucratic ideal type: (1) a set of rules and regulations, such as routine activities, the authority to give commands and regulated expectations and qualifications, (2) a hierarchy with ordered authority and turnover management, (3) a written charter and documentation of organizational activities, (4) effective management through expert training, (5) operates at full working capacity, and (6) management is based on a stable and teachable set of rules. In addition, there are certain features associated with the ideal type of a bureaucratic worker or official: (1) officials are pursuing a vocation that requires certain trainings, (2) officials are are appointed by superiors and are held accountable which is associated with a perceived higher status, (3) officials have tenure, (4) officials receive a salary, and (5) officials are pursuing a career (Weber 1968). Bureaucracies and officials differ in regards to their purpose and scope. In modern society, bureaucracies flourish because they increase calculability and can be used to level social differences. As such, bureaucracies, with their formal rules and regulations, are currently the most efficient method of social organization.

Whereas rational systems perspectives focus on the formal aspects of organizations, natural systems perspectives examine its informal aspects. Natural systems perspectives emerged in the 1930s in response to rational system approaches to organizations. Although the formal structure of modern organizations is important, often individuals in organizations do not adhere to formal rules. From the natural system perspective, "Organizations are collectivities whose participants are pursuing multiple interests, both disparate and common, but who recognize the value of perpetuating the organization as an important resource.  The informal structure of relations that develops among participants is more influential in guiding the behavior of participants than is the formal structure" (Scott 2003:28). Natural systems theorists focus on goal complexity and informal structure. Important natural systems theories include cooperative systems (Barnard 1938) and human relations (Buroway 1979;  Roethlisberger and Dickson 1939).  

Cooperative systems theory takes a natural systems approach recognizing the informal aspects necessary for organizations to exist. According to Barnard (1938:96): "An organization comes into being when (1) there are persons able to communicate with each other (2) who are willing to contribute action (3) to accomplish a common purpose. The elements of an organization therefore (1) communication (2) willingness to serve and (3) common purpose." Individuals within organizations must be induced to contribute, often through informal means. As such, the informal aspects of organizations is critical to understanding how organizations work. 

Human relations theory also takes a natural systems approach to organizations. From this perspective, the behavior of individuals in organizations is influenced by the social context. Human relations theory developed out of a series of studies conducted at the Hawthorne Plant, starting in the 1930s. Like scientific management, human relations theory focused on the individual level. However, unlike scientific management, it focuses on the informal aspects affecting productivity. According to human relations theory, the behavior of individuals within organizations is influenced by organizational ideology, defined as: "the system of ideas and beliefs by means of which the values of both the formal and informal aspects of the social organization are expressed and the symbols around which these values are organized" (Roethlisberger and Dickson 1939: 81). Organizations are social systems in which groups are interdependent and rely upon organizational ideology to justify social relations. As such, problems within organizations are primarily due to conflict between the organizational ideology and actual work processes. Likewise, in another study of the Hawthorne Plant, Buroway (1979) found informal aspects, rather than written rules and regulations, have a major influence on the behavior of individuals in organizations.  Unlike rational systems models, Buroway conceptualizes internal conflicts within organizations- individuals within organizations have competing goals different to the formal goals of the organization. Internal conflict is mediated through an ideology of competitiveness. In short, from the perspective of human relations theory, ideology (a key informal aspect of organization) has a major influence on individuals within organizations. 

Both rational and natural systems perspectives tend to focus on factors within the organization and hold the environment constant, meaning they take a closed systems approach. However, organizations do not operate in a bubble, they are effected by their external environment. Open systems perspectives emerged in the 1960s to explain interrelationships between organizations and their external environment. From the open systems perspective, "Organizations are congeries of interdependent flows and activities linking shifting coalitions of participants embedded in wider material-resource and institutional environments" (Scott 2003:29). More recent organizational perspectives combine open system models with rational and natural perspectives (Scott 2003). For instance, open system rational models include theories such as bounded rationality (March and Simon 1958), contingency theory (Lawrence and Lorsch 1967), and transaction cost theory (Williamson 1975). On the other hand, open system natural models include theories such as organizational population ecology (Hannan and Freeman 1977; Hannan and Freeman 1984), resource dependence (Pfeffer and Salancik 1978), and institutional theory (Selznick 1949; Meyer and Rowan 1977; DiMaggio and Powell 1983). 

Bounded rationality takes an open systems rational approach to organizations, meaning it focuses on the formal rational aspects of organizations while accounting for the external environment. Building upon Simon's (1945) decision making theory, bounded rationality examines the influence of the environment on decision making within organizations. Individual understanding is limited and related to environmental contexts. According to March and Simon (1958:137): "The organization and social environment in which the decision maker finds himself determines what consequences he will anticipate, what one he will not; what alternatives he will consider, what ones he will ignore. In a theory of organization these variables cannot be treated as unexplained independent factors, but must themselves be determined and predicted by the theory." Environmental stimuli serve as the foundation upon which routine activities within organizations are built. As such, the external environment is critical to understand rational decision-making within organizations. 

Like bounded rationality, contingency theory supports an open-rational systems perspective of organizations. However, whereas bounded rationality focuses on the social-psychological level of analysis, contingency theory focuses on the structural level. Like other rational, open systems approaches, contingency theory accounts for the effect of the external environment on the rational behavior of organizations. From this perspective, the external environment provides different constraints and opportunities for organizations. Lawrence and Lorsch (1967) find environmental uncertainty influences decision-making within organizations and relates to the internal formal structures of organizations. Organizational structures change in response to rational decisions made in contexts to environmentally dependent constraints and opportunities.

Transaction costs theory also takes an open, rational systems approach to organizations. Transaction costs theory contributes to our understanding of the effect of the external environment on the rational behavior of organizations by examining the cost of performing an economic exchange, i.e. transaction costs (Williamson 1981). Organizations attempt to minimize the costs of coordinated social activity (Coase 1937) Transaction costs influence organizational structure and the decisions of organizational participants. As such, the transaction is the ideal level of analysis for organizational research (Williamson 1981). Like other open rational systems approaches, transaction costs theory assumes organizational behavior is rational and influenced by the external environment. However, unlike other perspectives, transaction costs theory focuses on the ecological level, meaning it looks at groups of organizations (Scott 2003). 

Like transaction costs theory, organizational population ecology focuses on the ecological level. However, unlike transaction costs theory, organizational population ecology takes a natural systems approach to organizations, meaning it does not assume organizational behavior is rational. It is not organizations that optimize, but the external environment (Hannan and Freeman 1977). Organizations tend to stay the same due to structural inertia. According to Hannan and Freeman (1984:149): "Some of the factors that generate structural inertia are internal to organizations: these include sunk costs in plant, equipment, and personnel, the dynamics of poliical coalitions, and the tendency for precedents to become normative standards. Others are external.  There are legal and other barriers to entry and ext from realms of activity. Exchange relations with other organizations consittue an investment that is not written off lightly.  Finally, attempting radical structural change often threatens legitimacy; the loss of institutional support may be devastating." Due to these pressures, organizations do not frequently change or adapt to their environment. In addition, organizational populations tend to be similar due to structural isomorphism (Hannan and Freeman 1977): "In each distinguishable environmental configuration one finds, in equilibrium, only that organizational form optimally adapted to the demands of the environment.  Each unit experiences constraints which force it to resemble other units with the same set of constraints." Since similar organizations operate in similar environments with similar pressures, they tend to have similar structures. In short, organizational structure is not determined by efficiency, but environmental fit. 

Resource dependence theory also takes a natural open systems approach to organizations. However, from the resource dependence theory perspective, not only does the environment influence organizations, organizations also influence their environment. Organizational structure is not determined by efficiency, but by power struggles (Pfeffer and Salancik 1978). Organizations rely upon their external environment to survive. This reliance causes interdependence and competition for resources within and between organizations. Individuals within organizations scan the environment for opportunities and threats and use such interpretations to achieve favorable outcomes, sometimes by changing the external environment. 

Similar to organizational population ecology and resource dependence theory, institutional theory adopts an open-natural systems approach at the ecology level. Like other natural systems perspectives, according to institutional theory, formal structure is distinct from the actual activities of organizations.  Similar to March and Simon (1958), institutional theory accounts for cognitive controls in organizations. However, unlike bounded rationality (march and Simon 1958), from the institutional theory perspective, behavior is not the result of formal, rational programs, but institutional myths and symbols.  Organizations are influenced by symbols established in their institutional environment rather than established formal goals (Selznick 1949). Institutional theory assumes isomorphism (like organizational population ecology). According to DiMaggio and Powell (1983:149) isomorphism is "a constraining process that forces a unit in a population to resemble other units that face the same set of environmental conditions." Isomorphism occurs through coercive, mimetic and normative pressures from the external environment (DiMaggio and Powell 1983). Isomorphism has major implications for organizations: (1) organizations are not based on efficiency, but on external legitimacy, (2) the perceived value of structural elements of organizations are determined by external criteria, and (3) dependence on external organizations reduces uncertainty and maintains stability (Meyer and Rowan 1977). In short, organizational behavior is the result of often informal pressures from the external environment. 

In conclusion, organizations are understood to be rational, natural and/or open systems.  The historical development of organizational theory explains why each theoretical perspective focuses on particular parts of organizations. Since it is the foundation of organizational theory, modern perspectives combine these rational, natural and/or open systems models. 

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