Presentist Social Functionalism and the Function of Corporations

Abstract

This chapter considers the question of the function of corporations. As is well known, two main answers to the question of what corporations are for have been proposed in the literature: the shareholder-value theory and the stakeholder-value theory. The chapter lays out these two views, and then argues that an appeal to presentist social functionalism shows that the terms of this debate are too constrained. In particular, by applying presentist social functionalism to this debate, it becomes clear that there are further possible functions of corporations that have not even been considered in the literature, and that existing studies of this question have looked at the wrong data, and thus fail to be able to resolve it. This chapter thus shows the practical applicability and fruitfulness of presentist social functionalism—especially compared to its rivals.

4.1 Introduction

Contemporary capitalist economic systems feature corporations—privately owned and independently managed entities dedicated to producing and selling a particular set of goods or services (Drucker 1993; Williamson 1981).¹ However, what is less obvious—and indeed a point of fierce contention—is what corporations are for. What is the function of corporations? Do they aim at maximizing payoffs for its shareholders only? Or do they aim at doing well for all of its stakeholders—including employees, customers, and all those affected by any externalities created by the corporation? There has been much debate about how to answer these questions (see e.g. Friedman 1970; Mulligan 1986; Freeman 1984; Orts and Strudler 2002).

Importantly—though this is less widely noted—in the background of these questions is the more general social scientific theoretical framework of functionalism. As noted in the previous chapters, determining what given social institutions are for allows us to get at important features of social reality; in turn, this can provide a fulcrum with which to understand, evaluate, and respond to this reality. It thus stands to reason that now that we have a compelling form of social functionalism at our disposal—presentist social functionalism—it will become possible to find new inroads into the question of the aims of corporations. This chapter seeks to support this impression.

In particular, as this chapter makes clear, this new, presentist social functionalist-based treatment of these issues is helpful for, on the one hand, making clearer what kind of data we need to collect in order to determine the function of corporations. On the other hand, the account shows that the function of corporations may be more complex than hitherto assumed and go beyond being focused just on shareholder benefits or just on stakeholder benefits. In this way, presentist social functionalism defended in this book can be shown to be a fruitful framework with which to assess the classic—but still important—question of the function of corporations.

Apart from its inherent interest, the discussion in this chapter is thus also important, as it further develops the account of presentist social functionalism laid out in the previous chapter. In particular, the discussion here further clarifies the inner workings of presentist social functionalism and makes explicit some of the benefits the latter has over alternative treatments of social functionalism.

The chapter is structured as follows. In sect. II, I set out the background of the dispute surrounding the aims of corporate activities in more detail. In sect. III, I apply presentist social functionalism to the question of the aims of corporate activity. In sect. IV, I contrast this approach to the alternative approaches in the literature and thus help make precise the benefits that presentist social functionalism has. I conclude in sect. V.

4.2 The Function of Corporations

A corporation is a privately owned and independently managed economic entity dedicated to producing and selling a particular set of goods or services (Drucker 1993; Williamson 1981). However, this very broad characterization leaves it open exactly what the aims of corporate activity are meant to be. Is it the case that the relevant set of goods and services is produced so as to advance the interests of those “owning” the corporation—i.e. its shareholders?² Or is it the case that the relevant set of goods and services is produced so as to advance the interests of all those having a significant relationship with the corporation—i.e. its stakeholders? Before it is possible to even begin to answer these questions, though, a few general remarks about their background need to be made.

First, it is of course true that anybody can make a corporation with any particular goal in mind. Now, it at first might seem that this pulls the rug out from under the entire debate surrounding the function of corporations. Since people’s intentions in founding corporations can differ widely, there is no use in debating whether corporate activities should be seen to aim at shareholder benefits or stakeholder benefits. Both of these can be true—it just depends on the intentions behind the founding of the corporation in question.³ In effect, this would be appealing to a kind of intentionalist, design-based account of social functionalism.

However, on a second look, it becomes clear that the fact that individuals or collectives can found corporations with many different goals in mind does not in fact spell an end of the debate surrounding the function of corporations. Even if we grant that this is one of the cases where individual intentions could ground the function of corporations—which, as noted in chap. 2, cannot be taken for granted, as this account is not general and there is no a priori to think it needs to apply here—given the complexity of corporations, there are good theoretical and empirical reasons for the thinking that this is at least not the sole way to ground their functions. The factors that determine whether and how corporations spread in a given socio-economic setting and whether they are stable parts of society—which, as noted throughout this book, are key aspects of social functional analysis (Bigelow 1998; Pettit 1996; Goodpaster 1991)—can differ from the intentions of the founders of a corporation. People might want their corporation to be stakeholder-focused—but corporate survival may depend on their ability to maximize shareholder value (or the reverse). This kind of issue will become crucial again in chap. 6, where it will be given a much more detailed treatment. For now, it is just sufficient to note that it is not obvious that the intentions of the designer are all that matters as far as the function of corporations is concerned—these intentions may be overridden by the “facts on the ground.” Spelling out exactly how institutions obtain functions is the goal of the next section; however, what matters here is just that it is widely accepted that individual intentions are not the only way to ground the function of a social institution. This is sufficient for present purposes.

Something similar also holds for the idea that, in order to determine the appropriate aims of corporate activity, we simply consider the legal status of the relevant firm. Now, it is true that some legal systems have specific distinctions involving corporations. So, in the US legal context, limited liability corporations (LLC’s) are distinguished, among others, from limited liability partnerships (LLP’s), limited liability limited partnerships (LLLP’s), and low profit limited liability corporations (L3C’s) (Booth 2003; Artz et al. 2012; see also Segrestin et al. 2020). However, the existence of these legal distinctions and frameworks does not resolve the dispute concerning the functions of corporations.

There has been a long debate surrounding the relationship between moral and legal demands, but all the major positions in that debate accept that existing laws need not match up, one-to-one, with social norms (Marmor and Sarch 2019). Legal distinctions are, in the first place, made for legal purposes, and need not match social—and certainly not moral—reality directly (Hart 1961; Raz 1979). While legal reasoning might need to be influenced by non-legal (and especially moral) considerations (Dworkin 1977, 1986), there is no reason to think that these non-legal considerations are the only thing that determines legal frameworks. The latter are also responsive to what is most useful or efficient for the legal organization of society (among other reasons).

So, it may be that corporations, from a social scientific perspective, have a given function F, but that we may want our legal codes to treat corporations in similar way to (say) consumer organizations with function F′. For example, we may want similar registration filing, tax reporting, compliance, and auditing procedures in both cases. If that is so, we may decide to create a legal category of “corporation” that includes both corporations proper and consumer organizations. However, the fact that the legal category of corporation includes consumer organizations with function F′ and “proper” corporations with function F should not be seen to imply that corporations proper can have function F or F′. The latter is—by assumption—not the case. Alternatively, we may want to create a narrower category of legal corporation that includes all and only those proper corporations with function F and further features F′ (e.g. being part of the Fortune 500). Again, this would then not entail that corporations not in the Fortune 500 are not corporations proper; it is just that, for legal reasons (e.g. having to do with the need for specific compliance requirements), certain “proper” corporations are given the different designation of being a legal corporation. Of course, we may often also want our legal categories to match social reality relatively closely. However, the key for present purposes is just that there is no requirement that this is so—and there are some good reasons to think it is frequently not the case.

All in all, therefore: the question of the function of corporations needs to be addressed head-on, and cannot be pushed aside as having a straightforward answer in either individual intentions or existing legal frameworks. A separate inquiry into this question is necessary.

To do this, it is best to begin by briefly reconsidering the two key views about the function of corporations: the shareholder-value theory and the stakeholder-value theory (see also Audi 2008). Note that these two are not the only views of the function of corporations in the literature.⁴ However, they are the key poles around which the debate turns, and most other positions are characterized in relation to them (see also Audi 2008).⁵

The first of these positions is often associated with Friedman (1970), but prominent defenses are also in Hansmann and Kraakman (2001), Stout (2002), and Jensen (2002) (among others). This position states that the function of corporations is to create benefits for their shareholders. The shareholders of a corporation are market entities (individuals or collectives) that provide funds to the corporation and receive a stake in the company that can be sold on (Bainbridge 2008; Stout 2002). Key reasons for thinking that this is what corporations are for is that the social value of the goods and services produced by a corporation is reflected in the value of its shares. Hence, increasing the value of the shares is bound to be correlated with the social value of the goods and services produced.

By contrast, the second position (which has seen prominent developments e.g. in Evan and Freeman 1988; Freeman and Reed 1983; Serafeim 2014) focuses on the benefits of the wider class of corporate stakeholders. The set of stakeholders of a corporation include the latter’s shareholders as a proper subset, but has numerous other members as well: customers, employees, government regulators, competitors and those affected by any externalities produced by the corporation. Indeed, the stakeholders of a company are all those market entities with significant relationships to the corporation in question. A key motivating consideration behind the view that the function of corporations is the maximization of stakeholder benefits more generally is the fact that corporations affect many members of a society beyond its shareholders. For example, salaried employees, despite being crucial in producing the goods or services in question, need not be shareholders of the corporation they work for. The same goes for the corporation’s customers, competitors, or those living near the places where the production takes place. While all of these social entities may be affected by the actions of the corporation, these effects need not be fully reflected in the value of the latter’s shares. Hence, corporations should be seen to be acting in ways that take the interests of all of its stakeholders into account, not just those of its shareholders.

More details behind the reasons for these two views of the function of corporations could be given, but, for reasons made clearer in the next section, are not crucial in the present context. For now, it is best to use the machinery of presentist social functionalism and apply it to the case at hand, to see what progress can be made here.

4.3 Presentist Social Functionalism and the Function of Corporations

If it is neither the intentions behind the founding of the corporation nor its legal status that ground the function of the corporation, then what does? By the account of the previous chapter, this question can now be seen to turn on which features, in the current bio-cultural economic environment of a given capitalist system, increase a corporation’s expected reproductive or survival success. So, corporations would have the function to maximize benefits for just its shareholders if doing so increases their expected survival or reproductive success (in the current economic climate) relative to those corporations that aim at maximizing benefits for all its stakeholders—and vice versa.⁶ This reformulation of the debate surrounding the function of corporations is important, as it has two major implications that can significantly advance our understanding of corporations, and thus move this debate closer to a resolution.

First, the appeal to presentist social functionalism shows that prior treatments of the question of the function of corporations have relied on the wrong sort of data and inferences. Given this, these prior discussions—at least by themselves—can now be seen to in fact fail to shed light on the question of the function of corporations. (That said, as will be made clearer momentarily, they may well turn out to be useful ingredients in a compelling investigation of this question.)

For example, in the discussion surrounding the function of corporations, it is a common strategy to appeal to the values of the shares of shareholder-benefit-focused corporations in relation to those of stakeholder-benefit-focused ones (Hillman and Keim 2001; Jensen 2002; Stout 2002). (It turns out that stakeholder-focused firms do not clearly do better than firms that just focus on their shareholders: Hillman and Keim 2001; Jensen 2002; Stout 2002.)

However, given presentist social functionalism it becomes clear that these kinds of data do not in fact directly speak to the question they are meant to address. A corporation’s stock market value is not the same as the probability that it survives or reproduces. A corporation’s stock market value includes the value of the corporation’s assets and people’s expectations of the value of the company in the future. There is no question that these measures can correlate with the probability that the corporation survives or reproduces: corporations whose stock market valuation decreases are often in increased danger of going bankrupt. However, there is also no question that this correlation needs not always be high. Some corporations have high or increasing stock market values and go extinct and vice-versa. More generally, it is important to recognize that a corporation’s stock market valuation is simply a different measure as that of its expected reproductive or survival success in the actually prevailing economic system, and they should not be conflated with each other. Because of this, considering a corporation’s stock market valuation cannot be directly used to determine its function—contrary to what is often assumed (Hillman and Keim 2001; Jensen 2002; Stout 2002).

Much the same is true for some other measures of whether the function of corporations is shareholder-benefit-focused or stakeholder-benefit-focused. For example, Bebchuk et al. (2021) and Bebchuk and Tallarita (2020) consider the actions of corporate leaders in US states that allow for the consideration of all corporate stakeholders in corporate transactions as compared to those of corporate leaders who have signed the Business Roundtable Statement on the Purpose of a Corporation (Business Roundtable 2020). The Business Roundtable Statement on the Purpose of a Corporation sees corporate leaders making a “fundamental commitment to all of our stakeholders” (underlining in original) (Business Roundtable 2020). Now, it turns out that these authors have found that corporate leaders hardly ever did, in fact, negotiate on behalf of all of their stakeholders during takeovers. Instead, they acted in ways that maximized the value for their shareholders (and themselves) only.

However, interesting as they are, these studies by themselves also fail to directly address the function of corporations. It is true that what corporate leaders do may, at least at times, be related to the relevant corporation’s expected reproductive or survival success in the actually prevailing economic system. However, these are still very different measures. There are many influences on a corporation’s expected reproductive or survival success in the actually prevailing economic system other the actions of corporate leaders, including the actions of suppliers, competitors, consumers, and employees. Because of this, it cannot be presumed that the former exhaust the latter. It may be true that corporate leaders only act in ways that favor corporate shareholders—however, it may also be true that doing so lowers the expected reproductive or survival success of corporations. In this case, then, corporate leaders act in ways that are malfunctional. The fact that a corporate leader does X does not mean that X is part of the function of a corporation. Hence, the consideration of the actions of corporate leaders alone cannot tell us what the function of corporations is. We have to look at the latter directly.

A related point holds for Friedman’s (1970) classic concern that the CEO’s of corporations focused on stakeholder-benefits are put in the position of supreme arbiters of different interests—something which they may lack a sufficient basis for. However, the fact that it may be difficult for CEO’s to manage these different interests (or that many CEO’s fail to do so well) does not speak to whether doing so is what is required of them in order to act in line with the function of corporations (Goodpaster 1991).

All in all: given the presentist functionalism defended in the previous section, the determination of the function of corporations needs to be based on measures of a corporation’s expected reproductive or survival success in the current capitalist economic climate. While this implies that many of the currently available data are not useful to make this determination, it is now at least clearer what kinds of data we ought to be looking for—viz. data, concerning those features of corporations that increase their expected reproductive or persistence success. This thus makes for the first beneficial upshot of the defense of presentist social functionalism in relation to the question of the function of corporations: it brings into view the kinds of empirical investigations that need to be conducted so as to determine this function.

However, this does not exhaust the beneficial upshots of applying presentist social functionalism to the question of the function of corporations. The other major such benefit is theoretical. It concerns the fact that, with this account of functionalism in the background, we can explore novel theoretical possibilities concerning the function of corporations that have not even been considered thus far. In the forefront of these possibilities is the fact—already noted in the previous chapter—that functional ascription in the social sciences need not be seen to be restricted to one static feature of an institution only. That is, given presentist social functionalism, it becomes easier to investigate whether corporations have neither the function of maximizing benefits for its shareholders only, nor that of maximizing benefits for all of its stakeholders, but may have a more complex function.⁷ Importantly, as also noted in the previous chapter, this functional pluralism would not be of the arbitrary kind, but be grounded in the socio-economic facts at hand.

In particular, given that the function of corporations is determined by those of their features that increase their expected reproductive or survival success, it now becomes clear that this function may depend on the features of both a focal corporation and those of other corporations. This also means that the function of corporations can change dynamically as the composition of corporations in the marketplace changes: that is to say, the features of a corporation that drive its reproductive or survival success—and thus ground its function—can vary over time and across socio-economic circumstances.⁸ There are many different ways of spelling out these kinds of possibilities, but for present purposes, a very simple form of this kind of frequency-dependency is sufficient.⁹

Assume that, if rare in the relevant economic system, corporations that only maximize shareholder benefits have higher expected reproductive success than those focused on maximizing benefits for all stakeholders. The former produce highly sought-after goods and services at minimum cost. In turn, this might help them spread through the market: they are less likely to go bankrupt, and more likely to create offspring outlets (see also Schulz 2020). However, once these corporations are widely represented in the market, their fortunes may turn. Corporations that offer a wider set of benefits to a wider set of stakeholders—including employees, customers, and the environment—will start to stand out as producing more valued goods and services. Despite their higher production costs, people are increasingly willing to purchase these goods and services, leading to the relevant corporations spreading through the market—and the cycle starting anew.

Formally, we might thus have it that the expected reproductive and survival success of the two types of corporations is as follows:

$$ {w}_r={a}_1\hbox{--} b{f}_r $$

(1)

$$ {w}_s={a}_2+c{f}_r, $$

(2)

where a₁, a₂, b, c, are all positive parameters, a₁ > a₂,, w_r is the cultural fitness of shareholder-focused corporations, w_s is the cultural fitness of stakeholder-focused corporations, and f_r is the frequency of shareholder-focused corporations in the market.

In equilibrium, we have w_r = w_s, which implies that.

$$ {a}_1-b{f}_r={a}_2+c{f}_r=\left({a}_1-{a}_2\right)/\left(c+b\right)={f}_r $$

(3)

Depending on the details of the case, the upshot of this kind of scenario therefore is either a static stable state that contains both shareholder-focused and stakeholder-focused corporations, or a dynamic stable state that cycles through periods that contain mostly stakeholder-focused corporations and mostly shareholder-focused corporations (Orzack and Sober 1994). Graphically (Fig. 4.1):

Fig. 4.1

Frequency-dependent cultural selection of corporations

As noted above, this is a highly simplified sketch of this case; however, what matters for present purposes is just that it illustrates a scenario in which it is not the case that the function of a corporation is to maximize either shareholder benefits or stakeholder benefits. Rather, something more complex is true here. The function of individual corporations differs from each other: in a mixed stable state, some corporations have the function to maximize just shareholder benefits and some the function to maximize stakeholder benefits. Dynamically, too, the above case sees the function of corporations—even of the same token corporation—as changing from maximizing just shareholder benefits to maximizing stakeholder benefits (and vice versa), depending on what happens in the wider economic system the corporation is part of. Generalizing, what this implies is that, on the above scenario, the best description of the function of corporations is dynamic and relativistic: this function depends on the details of the market environment—and which the corporations themselves are responsible for creating.

Now, it is important to be clear about the nature of the conclusion reached here. The claim is not that it is definitely true that there is frequency-dependency in the function of corporations. Rather, the key point here is just that this is a hypothesis that should be further explored. Up until now, the entire discussion surrounding the function of corporations was conducted in an either/or framework where corporations are either shareholder-benefit-maximizing or stakeholder-benefit-maximizing (or have some other unique feature F: see e.g. Miller 2010, 2017). However, given presentist social functionalism in the background, it becomes clear that this view of the universe of possibilities is too limited. There are many more options that need to be explored before it is possible to comfortably conclude what the function of corporation is. Indeed, it is thanks to presentist social functionalism that the dynamic and relativistic hypothesis concerning the function of corporations sketched here becomes even visible. This thus shows that presentist social functionalism is fruitful theoretical framework that can push existing the discussion surrounding the function of corporations into novel directions.

All of this matters further, as it brings into view a third benefit of the application of presentist social functionalism to the question of the function of corporations: namely, that it can advance the analysis and handling of corporate corruption.¹⁰ The next chapter will consider institutional corruption more generally, but for now, it is sufficient to note some points specific to the case of corporations. In particular, consider the debate about whether it is defensible for big corporations to use tactics like persistent advertising meetings or biased information distribution to prevent employees from forming a union (Story 1995; Cooper and Patmore 2009). On the one hand, these tactics are often legal (Story 1995), and unionization is not necessarily something that benefits a corporation’s shareholder value, its customers, or the wider economic system (see e.g. Cahuc et al. 2014, chap. 7, for a useful overview of the issues here; see also DiNardo and Lee 2004). On the other hand, unions can provide benefits to the employees of the corporation, and thus improve their well-being (Givan 2007; O’Mara 2019).

However, given presentist social functionalism, this question of the defensibility of anti-union activities of big corporations can now be investigated more precisely than what was possible beforehand. On the one hand, it is not implausible that a corporation’s present expective reproductive or survival success may be increased by its fair, equitable, and honest dealings with its employees. If so, then benefiting its employees is part of the function of a corporation. If we further see activities that hinder an institution from fulfilling its function as corruption—which, as the next chapter makes clear, is not implausible—then anti-union action turns out to be a form of corporate corruption. However, whether this is in fact the case depends on whether it is actually—i.e. in the present socio-economic environment—true that a corporation’s present expective reproductive or survival success is increased by its fair, equitable, and honest dealings with its employees, and whether unionization contributes to this.

Importantly, the latter may be true for some corporations at some time, but not for all corporations at all times. It is plausible that it will hold true in socio-economic systems where consumers are well-informed and have significant alternatives for the goods and services provided by a corporation. For in such cases, a corporation that does not treat its employees in a fair, equitable, and honest manner—which may (though need not) require allowing the formation of a union—may stand out negatively, and thus lose market share and be at a higher risk of bankruptcy or failure to spawn offspring firms (see also Schulz 2020, chap. 3). In these cases, therefore, treating its employees in a fair, equitable, and honest manner, is (at least ceteris paribus) part of the function of a corporation.¹¹

This is important to note here for two reasons. First, the existing evaluations of anti-union action are typically done in an either/or manner: this either is, or is not, seen as defensible. What the application of presentist social functionalism here shows, though, is that the issues may be more complex: it may be defensible in certain cases or to a certain extent only.

Second, many of the existing evaluations of anti-union action are focused on the morality or justice of these actions—that is, whether they are defensible from the point of view of moral or political considerations. However, what the appeal to presentist social functionalism makes clear here is that this does not exhaust the kinds of considerations that are important to consider here. It is also relevant to assess how these actions relate to the function of corporations—i.e. whether they further or hinder the features that make it more likely for corporations to survive or reproduce. Importantly, these two sources of evaluation can complement each other. For example, to the extent that we seek to encourage corporations to treat their employees in a fair, equitable, and honest manner, this thus suggests regulating our socio-economic system in such a way that corporation’s expected reproductive or survival success is increased by its fair, equitable, and honest dealings with its employees. In turn, this may include ensuring that consumers are well-informed about the nature of corporate policies and actions (for example by encouraging the development of a free and widely read business press) and that they have many alternatives for the goods and services provided by a given corporation (thus encouraging the development of a robust competition regulator). Of course, there are many details to be worked out here about what exactly this entails. However, what matters for present purposes is just that the presentist social functionalist perspective defended here can make more precise exactly when, where, and why certain corporate behaviors (such as anti-union advertising) are corrupting.

Importantly also, the remarks of this section generalize to other social institutions. Whether the analysis is focused on privatized military contractors, campaign finance, policing (or whatever other social institution), a presentist functionalist perspective can (a) make more precise what data we need to consider in order to determine what the purpose is of the social institution in question (e.g. is the expected reproductive or survival success of a national defense force increased or decreased by its being managed by a private corporation or a public office?), (b) consider novel theoretical possibilities about this purpose (e.g. do elections for different offices have different functions—such as allowing the public to influence collective decision-making, as opposed to making people feel connected to each other), and (c) advance the analysis and handling of institutional corruption (e.g. would the installation of automatic speed cameras decrease the likelihood that the function of policing is undermined by the racial profiling of traffic violations?). For this reason, presentist social functionalism can be seen as a productive approach towards the study of institutional purpose and its corruption quite generally. Making this clearer is the aim of the next chapter.

4.4 Benefits of the Presentist Social Functionalist Analysis of Corporations

To further bring out the benefits of this way of approaching the function of corporations—and to deepen and illustrate the workings of presentist social functionalism more generally—it is now useful to contrast the treatment of the last section with the rival accounts laid out in chap. 2. Since the early discussion already engaged with the intentionalist-account, there is no need to go over these issues again. The focus in what follows will thus be on the historical, structural-functionalist, and virtual selectionist accounts.

First, when it comes to the historical approaches, the key issue to consider is what features of corporations led to their cultural evolution: why did they spread? Alas, answering this question is quite difficult. On the one hand, it is not the case there were forms of corporations that were tried out, with some spreading rather than others. Of course, different countries have different frameworks for creating corporations, and within a country, the rules for creating firms tend to change across time. However, this is not well seen as a case where we can look to a history of past selection to determine the function of corporations: it is not the case that shareholder-focused firms were selected over stakeholder-focused firms; indeed, it is the origin of this dispute that both of these firms still exist.

On the other hand, it is not clear how far back we need to go to ground the function of corporations. Is the question which features led to the establishment of corporations in the early days of (Western) market economies? Or is the question which features led to the survival of corporations in the last 5 years (which include the Covid years)? Or is it both? It is not clear how to answer these questions, and thus, it is not clear how to use historical information to ground the function of corporations.

By contrast, the situation when it comes to presentist social functionalism is very different. As noted early, this allows for a clear—though complex and variable—set of functional ascriptions to corporations. Since functional ascription is now relativized to a specific time slice—the present—the ambiguities plaguing the historical accounts are absent. We can ask: here and now, do shareholder-focused firms do better—in terms of their expected reproductive survival or reproductive success—than stakeholder-focused ones? This means we can address this debate head on. We can also ask similar questions about other types of firms in the past: do family-run firms do better than non-family-run firms? Do firms arranged in guilds do better than those outside of guilds? As noted above, we can allow for these answers to differ in geographical and temporal contexts, and also allow for frequency-dependence and other complications. In this way, we can develop a sophisticated, dynamic account of corporate function that is still non-arbitrary and unambiguous. The function of corporations in country C₁ at time t₀ might be F₁, it might then change to a combination of F₂ and F₃ at time t₁—depending on the frequency of different firms of types A and B; all of this might further be different in country C₂. In this way, we can maintain the best of the historical accounts: the focus on the details of the historical situation of corporations in different cultures. Importantly, though, we obtain these benefits without having to countenance the drawbacks of the historical accounts: ambiguity and absence of the needed historical knowledge or facts.

Second, consider a structural-functionalist treatment of corporations (see e.g. Potts et al. 2016). This might take a number of different forms. For example, we may analyze the provision of goods and services to people, and in that context see corporations as playing the role—i.e. having the function of—ensuring an efficient production of these goods can be achieved. If so, we may favor a shareholder-based view of corporations. By contrast, if we consider a wider social system that includes people as providers of labor, consumers, family members, we may see corporations as playing the roles—i.e. having the functions of—providing goods and services to people, as well as providing them with stable employment, giving them access to important social networks, and safeguarding their and their families’ futures. In turn, this might lead us to favor a stakeholder-based view of corporations.

For present purposes, the key point to note about this is that this makes the dispute surrounding the functions of corporations extremely difficult to resolve. In particular, this dispute now comes to look like the two sides are talking past each other: they are simply considering different questions. One side asks what role play for the provision of goods and services, the other asks what role they play in society more generally. To resolve this conflict, it is not a matter of collecting more or different data—e.g. about the performance of funds focused on ESG (environmental, social, and corporate governance) rather than more general funds. The issue is really what the right way of carving up society is here, and thus where to slot corporations into that analysis. Unfortunately, though, it is difficult to provide straightforward arguments for one or the other side on this point—this looks to be something that is inherently driven by the interests and dispositions of the relevant researchers.

The presentist social functionalist treatment of the previous section does not have this issue, though. Rather, it provides a non-arbitrary analysis of the function of corporations. The question is not which (social) system to analyze; rather the question is which features of corporations actually do increase their expected reproductive or persistence chances. As noted earlier, the presentist social functionalist treatment does point out that more and different data can help resolve this conflict: it is true that resolving this dispute does not turn on determining whether funds focused on ESG (environmental, social, and corporate governance) perform better than more general funds—we need data on which ways of treating employees (e.g. in terms of unionization) and customers (e.g. in terms of pricing) actually enhance a corporation’s expected reproductive or survival success here. In this way, the dispute becomes non-arbitrary, resolvable, and not a case of the two parties talking past each other.

Finally, consider Pettit’s (1996) virtual social functionalism. This would say that the function of corporations is tied to those of their features that ensure they would persist were their survival threatened. So, consider a world where our economies are drastically changed (due to some catastrophe or even by design) and we found ourselves in a state of much autarky, with many people being entirely self-reliant. If, in this counterfactual world, corporations persisted due to the fact that they bring different groups of people together to collaborate on solving collective action and provision problems, then we would be justified (at least ceteris paribus) in seeing corporations as having a stakeholder-like function. After all, it is in virtue of their ability to bring different groups of people together to collaborate on solving collective action and provision problems that corporations survive in cases where their existence would be threatened. By contrast, if in the above counterfactual scenario of a boost in autarkic living, corporations persisted due to their superior ability to create wealth for people, then we would be justified in seeing them as having a shareholder-like function (in the actual world). (Something similar for other functions, and even for the case where corporations have no functions, as they would not persist in the relevant scenarios where their survival were threatened.)

The problem with this approach here is that these kinds of counterfactuals are very difficult to assess, due to the fact that firms and corporations are so deeply embedded in market economies. On a general level, it is hard to imagine what the world would be like if the existence of firms or corporations were threatened. In a world where autarky was so common as to threaten the existence of firms, it is hard to say whether the latter would persist or why. This is akin to imagining a situation where Rawls’s assumption of “moderate scarcity” does not obtain; in such a world, the precondition for cooperation do not seem satisfied. Would this collapse into a Hobbesian or Mohist state of nature? Or a more benign Lockean or even Rousseauian one? How do we know?

More generally, which threats to the existence of corporations should we consider here? Is the case of autarky sketched above too radical, as it already implies that corporations are unlikely to survive? If so, what alternative cases should we consider here? To be sure, as noted earlier, in a technical sense, corporations are quite culturally specific institutions. For example, they are not found among the Hadza people now, and did not exist even in Great Britain until relatively recently—much of the European Middle Ages saw production and consumption organized into small family-owned enterprises (smiths, bakeries, etc.). In that sense, it is easier to ask whether corporations would persist: if we introduced corporations into the world of the Hadza (as is increasingly happening: Apicella et al. 2014) or if we went back in time and introduced them into the England of Henry II, would they persist? However, even here, this kind of scenario is not fully tractable. These cases would require deep changes to our entire economy; it is hard to assess what would happen then. Perhaps the conditions would be right for the persistence of corporations, perhaps they would not be (Henrich 2020). This is likely to call for a detailed treatment of many specific contingencies of the case at hand. This is already very difficult for actual historical inquiries; assessing counterfactual situations in these ways is bound to be even harder.

This, though, is different when it comes to presentist social functionalism. Since the latter is based on the actual world only, we only need to assess what features of corporations (if any) aid their persistence or reproduction in the here and now. To be sure, as noted in the previous chapter, this kind of assessment can still be difficult. However, as also noted earlier in this chapter, this is not impossible. Indeed, presentist social functionalism points to the kind of data that can be collected to make these sort of inferences easier. This is a key upshot of the discussion in this chapter: it shows that the assessment of the features of an institution that increase its expected reproductive or persistence success are not nearly as shrouded in mystery as might be feared. In fact, as the discussion of the function of corporations shows, presentist social functionalism can make this assessment easier. In this way, the discussion here underwrites and illustrates the claim that presentist social functional avoids the pitfalls of Pettit’s virtual social functionalism.¹²

In all of these ways, therefore, presentist social functionalism can provide a functional analysis of corporations that improves on that of its rival accounts. Indeed, it makes the question of the function of corporations tractable and avoids controversial (at best) historical, counterfactual, arbitrary, or moral claims.

4.5 Conclusion

This chapter developed a new account of the function of corporations. To do this, it applied presentist social functionalism to the question of the function of corporations. The upshot of this assessment is twofold. On the one hand, existing discussions of this question have tended to look at data that are not directly about the function of corporations. While stock market valuations and the behaviors of corporate leaders may sometimes correlate with the expected reproductive or survival success of corporations, they will not always do so, and are in general just a different measure. Instead, new studies should assess the expected reproductive or survival success of different types of corporations directly. On the other hand, the application of presentist social functionalism to the question of the function of corporations makes clear that there are numerous options about this function that have not even been considered thus far. In particular, this function may well be dynamic and relative in nature: different corporations, at different times, may be shareholder-benefit-maximizing or stakeholder-benefit-maximizing—or something else altogether. An appeal to presentist social functionalism can also make it clearer when and which corporate behaviors (such as anti-union advertising) are corruptive, and what regulatory changes may promote fair, equitable, and honest dealings between a corporation and its employees. The next chapter consider exactly this issue in more detail.