Swap smart city for inclusive city

Last year I wrote 24 short essays about smart cities. They are collected in an e-book, that can be downloaded for free here. What to expect?

Smart city tales

For more than 10 years, ‘smart’ has been a ‘leitmotif’ for tackling urban problems. Companies such as IBM and Cisco, and later also Apple, Amazon and Google all emphasised that technology is the key to their solution. Many city administrators, entrepreneurs and young starters felt attracted to this idea.

But why these blinkers? Anyone who focuses blindly on technology as the solution to contemporary problems will quickly lose sight of the problems themselves. They underrate the problems caused by technology itself and also that for many problems other solutions than technological ones are indispensable.

Some examples of problems that make people worried

  • Will I come around with my income?
  • Do I find an affordable house?
  • Is there still work for the children?
  • Is the air that I breathe healthy?
  • Why is my manager so unreasonable?
  • How secure is the internet?
  • Who will take care of my mother later?
  • Can I trust what I eat?
  • Developments are all going too fast for me
  • Who is actually in charge
  • Does a world war will break out?
  • Does my child like to go to school
  • Who can I still trust?
  • Can I still say what I think?
  • Is my country still my country?
  • Why do top managers earn so much money?

Core values

Reducing these problems to four categories proved to be helpful:

  • Threat to basic needs
  • Pillage of the earth
  • Injustice
  • Abuse of technology and data

Each of these categories also refers to core values ​​that in mutual connection will improve the quality of life in a country and the happiness of its inhabitants.

Inclusive growth

 Well-being

The satisfaction of our basic needs such as livelihood, housing, education, health care, social contacts and personal growth. There is still a lot to improve here.

 Sustainable prosperity

The earth has all the ingredients for a healthy and even prosperous life for us and our offspring. This requires a circular economy based on reuse of resources, the elimination of CO2 emissions, and a less materialistic attitude. The awareness is growing, there is still a lot to do.

Justice

The fact that we live together with others is of vital importance, whether it is a partner, family, the street, the city or the country. The quality of our social life depends on the mutual acceptance of equality and diversity and the balance between give and take. Here too, humanity still has a lot to learn.

Digital connectivity

Just like all forms of technology, computerization is able to support the other core values, but is also a value in itself. ICT adds a new dimension to human creativity and inventiveness and can improve the quality of our lives. However, the virtues of digital connectivity ought not to be appropriated by certain groups. Interoperability, ‘edgeless computing’, ‘blockchain’ and the use of open software standards and open data can contribute to prevent this.

The four core values ​​can be at odds with each other, but also reinforce each other. In the latter case, I refer to inclusiveness.

In each of the 24 short essays the ‘smart city idea’ as a starting point. Sometimes politicizing, for example when it comes to the way the big technology companies take control of society, but also anecdotal, for instance in the smart cities cases like PlanIT Valley near Porto, but also very practical, for example in introductions to circular construction, electricity-generating windows and the storage of energy.

In the final essay I propose to replace the idea smart with inclusive growth. To become more concrete about what that means, I have drawn up a charter that every city or region in the world can use. I already recognize the quest for inclusiveness of a number of cities such as Barcelona, ​​Amsterdam, Copenhagen, Melbourne and Seoul. However, these and all others ones still have a long way to go.

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India’s 100 Smart Cities Mission is flawed

Tokyo, Singapore, Hong Kong, Seoul, Shanghai and Beijing compete with London, Paris and New York for the top of the global city ranking. Do not take rankings like these too serious but the absence of Indian cities in the higher tiers is not startling. According to the World Health Organisation (WHO) India releases the fourth largest amount of CO2 emissions in the world and Delhi is the world’s most polluted city. Air pollution is the direct cause of 627.000 deaths annually. The dysfunctionality of the infrastructure is not limited to transport: An official study of 1,405 cities revealed that only 50% of urban areas have water supply connections and that water is supplied on an average for only three hours a day. Waste disposal and sewage treatment plants are missing in most Indian cities, 30 per cent of the households have no toilets, the coverage of the sewage network is merely 12 per cent while the treatment of sewage is even lower at 3 per cent. Most of the untreated sewage is discharged into rivers, ponds or lakes, which by-the-way are the main source of potable water.

Without mayor changes the problem will worsen every year because of the unprecedented growth of the urban population. Between 2010 and 2050 about 500 million inhabitants must be added to the urban population of 377 million nowadays.

In the meantime, India’s economy is expanding rapidly. By 2030 it is expected to have grown by five times, buoyed largely by the country’s urban centres and resulting in a growth of its labour force by 200 million workers. India’s energy demand is expected to increase three times in the coming 10 years.

The Mission

Against the background of these challenges, prime minister Modi presented a ‘Mission’ in 2015 named “Digital India” announcing the foundation of 100 smart cities across the country. This plan is envisaging making India a leader in digitally delivering a broad array of services:

  • Adequate water supply
  • Assured (green) electricity supply
  • Sanitation, including solid waste management
  • Efficient urban mobility and public transport
  • Affordable housing, especially for the poor
  • Robust IT connectivity and digitalisation
  • Good governance, especially e-Governance and citizen participation
  • Sustainable environment
  • Safety and security of citizens, particularly women, children and the elderly
  • Health
  • Education

The Mission is definitely not lacking in ambition!

Project management

A competition that took two years resulted in the selection of 107 areas where the new cities are supposed to appear. Each project is funded with $150 million spread over five consecutive years. Hiring foreign project management is mandatory. For instance, the city of Kota is collaborating with the Dutch HaskoningDHV.

Artist impression of the World trade Centre of Dholera Special Investment Region.

Taking into account the total costs of the realization of each plan, the available funds are peanuts, which necessitates the acquisition of additional sources. Options are public private partnerships, commercial bank’s lending, take out financing, infrastructure financing institutions, external commercial borrowing, and foreign direct investments.

The competence of the incumbent administrative bodies was judged to be inadequate to lead the projects. Therefore, Special Purpose Vehicles (SPV), acting under company law and headed by a CEO have evoked. The private sector might even become the biggest single shareholder of an SPV, so long as the combined shareholding of the state and local government is bigger. All rights and obligations of the municipal council with respect to the smart city project will be delegated to the SVP, including the power to collect taxes!

Artist impression of Gujarat International Financial Tech-City

A strategic turn

At first the ‘Mission’ had two strategic equally weighted components: Area-based developments and pan-city initiatives. The former are aimed at transforming existing precincts through retrofitting and renewal, and to develop new extensions to cities through greenfield developments. The latter envisage the application of appropriate smart solutions to existing city-wide infrastructure.

Reviewing the proposals which have been accepted, contrary to the original requirements, 71% of the funding will be spend on area-based development, the beneficiaries of which are about 4% of the city’s population on average and it involves less then 3% of the total area.

Under area-based development, plans have proposed redevelopment of old and creation of new central business districts, retrofitting infrastructure within these districts such as water supply, sewerage, and creation of public spaces. The proposals for the entire city, however, are limited to IT-based services like a CCTV-monitored central command system, “smart” education portals and “intelligent” water and traffic management systems and do not include investment in the infrastructure itself.

Artist impression of Vijayawada Smart City

So you’re not even going to have 100 smart cities. You’re going to have 100 smart enclaves within cities around the country, predicts Shivani Chaudhry, executive director of the The Housing and Land Rights Network

The interests behind IT-centred thinking

The direction in which the plans have evolved is unmistakably orchestrated by the bunch of IT-companies that is involved in the development of smart cities world-wide from 2006 on, when IBM started its ‘Smarter Planet’ campaign, Cisco followed with its Smart+Connected Communities initiative, Siemens launched its CityCockpit, and Microsoft presented its CityNext programme. U.S. Deputy Secretary of Commerce Bruce Andrews expressed this perfectly in his speech at the Smart Cities Summit in Mumbai: I am joined today by representatives from 18 leading American environmental technology companies, all of whom are looking for new business opportunities in India’s growing infrastructure market. Indeed, business opportunities seem abundant: The consultancy firm Frost and Sullivan estimates the global smart city market to be worth $1.56 trillion by 2020.

Cultural awareness instead of indifference

The pictures in this post are taken from glossy brochures and video’s of the plan. They reveal the direction in which the wannabe smart cities in India are supposed to develop. Let yourself be impressed for a while by the animation of Dholera Special Investment Region.

You will see fascinating architecture, futuristic transportation systems and multi-lane express ways. Not to forget, the air is blue and fresh.

Indian master architect Doshi warns that the urban vision behind the smart city proposals will destroy the informality and diversity that is the cornerstone of the country’s rural and urban society. In his view people do not have to live in multi-story towers in the age of the internet, and he rejects the necessity of expanding cities as long as adequate choices and opportunities can be generated in rural areas. I think the land pressure is actually an illusion. Why should you be close-by all the time to a million people? he asks.

Artist impression of smart Bhopal

Urban designer Rajeev Kathpalia suggests that India needs to build smart cities which respond specifically to its culture and rural networks. We have to rethink the concept of cities as centralized entities. In stead he advocates the conception of independent and self-supporting settlements at different scales, each one complete by itself or moving towards completion.

Mumbai-based urbanist Rahul Mehrotra agrees: The problem with the notion of ‘smart cities’ is that it sets up the environment to be fashioned in a single image, it’s not about cultural specificity.

Whatever problems the Mission will solve, these are not the dismal services nor the on-going growth of the population. We have to deal with the basics first, Shivani Chaudhry said. The basics are housing, employment and infrastructure and not technology as such. The Mission will not provide big public investment in expanding urban infrastructure except for enclaves where businesses and prosperous citizens are welcomed. She accentuates that Instead of trying to mitigate the effects of urbanization, the government should aim to address its causes -the agrarian crisis, rural distress, failed land reform, and forced migration.

Indian papers are critical too. They question the role of SPV’s and the curtailing of democratic control. The ‘Mission’ is a flight ahead, not only leaving the already mentioned problems unsolved, but it is unrealistic itself, as the lion’s share of the investment capital is still missing.

Artist impression of Amaravati Smart City

What would a better Mission have looked like?

Personally I believe that – in contrast to what actually happens – a pan-city approach, including a whole city and its rural fringes should have been be prioritized. The competition could have focussed better on master plans for the development of territories of let’s say 1000 – 5000 km2. These plans should have taken into account all aspects of the existing infrastructure, the expected population growth in the next decades, the options for sustainable growth and development and the cultural identity of the region. Within this master plan a handful of pilot projects could have been selected, offering a spectrum from a down-town business centres – if necessary – with 21th century high-rise buildings, to industrial areas where clean industry and housing are realized within walking distance and to small rural towns surrounded by agriculture. Delegation of power to a centralized body is probably wise, but not at cost of democratic participation. And without realistic funding any plan is a pie in the sky.

An initial experiment in ten regions might have increased the credibility of the Mission. I would have selected proposals that equally address economic challenges, infrastructural problems, and a decent life for all inhabitants as well. My winning plans will unlock the potential of the whole rural – urban continuum, promise to spread the prospective growth of the population, realize sustainable solutions, preserve environment and culture and have been developed in dialogue with inhabitants. And not to forget, they deploy the enabling potential of ITC.

Are smart cities also sharing cities?

Aside from smart and resilient, a growing number of cities is wielding the adjectieve sharing. Seoul was in 2013 the first self-appointed Sharing City in the world. In 2015 Amsterdam claimed to be the first one in Europe. 

San Francisco

However, the most eyecatching initiatives with respect to sharing originate from one city in particular – San Francisco – the hometown of sharing-oriented start-ups like Twitter, Dropbox, Lyft and Airbnb. A sharing aptitide is characterizing the life style of many of its millennial population: co-working, co-living (also due to sky-rocketing rents), eschewing car-ownership and a preference for living in the city center.

sharing cities San Francisco brand of ‘sharing’ is commercial in the first place and has beside winners also many losers, for instance the drivers of companies like Uber and Lyft and those in other taxi-companies. The unprecedented influx of tourists in cities like Amsterdam and Barcelona due to the succes of one of the sharing economy icons, Airbnb, also will not contribute to its popularity.

For this reason Duncan McLaren & Julian Agyeman plea for a brand of real sharing cities, based on just sustainabilities. In their seminal book Sharing cities’ (MIT Press, 2015) they elaborate examples from Seoul, Copenhagen, Amsterdam and Medellin to clarify a more inclusive communal sharing paradigmthat goes beyond commercial motives. Real sharing cities relate questions with respect to social needs and welfare – economic opportunity included – to social justice and environmental limits imposed by supporting ecosystems.

Summing up, sharing means that more persons use the same product or service without owning it. This can apply to the (re)use of bikes, cars, appartments of books. But the sharing paradigm includes also includes recycling, common facilities for water and energy, credit unions and cooperative banks. Sharing might be motivated by cost reduction by social justice or by decreasing our ecological footprint.

Seoul

Communal sharing is connected with the sources of wellbeing: Fresh air, water, energy, education, cure and care, socializing, inclusion and liveable space. The city of Seoul offers many examples in this respect. The concept of jeong plays a key role. People believe that being kind and cooperative will benefit all in the long term. More specific, the administration of the city is promoting and supporting collaboration and caretaking in the densely populated apartment blocks. At the same time mayor and eldermen value listening to the inhabitants. People can easily utter complaints and requests talking in the ‘listening ear’ in front of the town hall (photo below).

sharing cities

The city administration also plays an intermediate role in the economic development. Start-ups are supported by the ‘Dreambank’, a pooled facility of 20 banks.

Medellin

sharing citiesOther cities offer additional insight in the intermediate role of city government to enhance the ‘sharing potential’ of their towns. An striking example is Medellin, the second town in Colombia and the former center of drug trafficking, also known as ‘murder capita’ of the world. After that military shot the infamous gangleader Pablo Escobar, the city government started to repair the ruined social fabric of the town. It invested large sums in education and communal facilities, often in iconic buildings like the Biblioteca de Espagna in the middle of poor areas, to enable their inhabitants regaining some feeling of proudness.

At the same time all isolated parts of the town were connected by a new public transport system of metrolines, gondolas and escalators. Participatory budgetting was introduced an instrument to increase citizen involvement.

Copenhagen and Amsterdam

McLaren & Agyeman also feature Copenhagen and Amsterdam as examples of ‘social urbanism’, because these city’s sharing policies are community motivated in the first place. Copenhagen has improved the liveabllity of its city center with an infrastructure based on the use of bicycles. Amsterdam did the same with its dense public transport network and creating bikelanes as well. In addition Amsterdam’s social housing policy has accomplished more integration of its immigrant population than many other cities. The city also facilitates a huge number of ‘commoning’ activities.

sharing cities

Reflecting upon the cases above, a couple of concepts demand clarification.

Collaboration

Collaboration is used often as an equivalent for sharing. This is not necessary true. Collaboration refers to collective action to get things done; sharing usually involves individual action. Collaboration happens in the economic domain – for instance cooperative work, self-managed companies and community currences and in the social domain as well, for instance commoning activities like gardening, cooking, the exploitation of collective housing, community shops and even swimming pools and transport. Apart from the direct benefits of collaboration, its value is also the growth of social capital. As a consequence, collaboration is a necessary extension of the concept of sharing.

Connectivity

Commercial sharing depends heavily from the availability of IT-platforms, think of Airbnb and Uber. But connectivity is also critical for certain social forms ‘sharing’, for instance instaneous mapping of damagein case of earthquakes or flooding in order to support rescuing activities.

Sharing versus smart

Sharing and smart are not equivalents; however accentuating its sharing capacity, might be a way to for smart cities to be more specific about its characteristics. My description of Smart City 3.0 includes many characteristics of the sharing city that are described above.

Amsterdam is profiling itself for some years as a smart city. Recently, the city also embraced the adjectives ‘sharing’ and ‘collaborative’. I doubt the wisdom of this policy. The content of the missions of Amsterdam Smart City and Amsterdam Sharing city do not differ that much. Therefore applying two adjectives is confusing, given that most citizens still have to become acquaintant with the benefits and challenges of living in a smart city. From a communication viewpoint, I would have chosen to clarify being smart with a small number of key words. Sharing might be one of these. My choice of the other ones would have been: citizen-based, inclusive, entrepreneurial, collaborative, sustainable and IT-enabled. Maybe my advise is still useful.

This article was published before in the Smart City Hub

How stupid can ‘smart cities’ be ?

home for every new yorker
Demonstration for affordable housing – Photo: Getty Images

Smart cities intent deploying big data, information and communication technology to become more sustainable and livable. At best, they proceed not only in favour of their citizens but together with them in the first place. In addition, they enable citizens to develop initiatives of their own. So far so good.

Who is invited to the party?

The question is arising: who are those citizens? Or using Suketu Mehta’s words: Who is invited to the party? After all, making a living in big cities becomes unattainable for many. Buying an apartment in New York City is virtually beyond reach even for double-income couples. Not to speak about renting one. A mattress in a room in Chinatown NYC during an eight hours timeslot a day, costs you $ 200 a month.

Chinatown

Chinatown apartments – Photo: Getty Immages

Already now 50 percent of households in NYC spend more then 30 percent of their income at housing. Thirty percent of all households spend more than half of their income. As a consequence, 14 million households in the USA have already moved out of urban areas during the last decade. In the same period in Chicago only, the number of school children decreased by 145,000. We are in the middle of a large-scaled process of de-urbanization.

The real estate revolution

Saskia Sassen has been studying real estate in world cities since the eighties. Throughout this period, the size of speculative investments has increased annually. Over the past five years, rise has been spectacular. In 2015, it went up to $ 1 trillion, compared with ‘only’ $ 600 billion in 2014. More striking is that nowadays real estate transactions often include whole territories, for instance old industrial areas or railway yards. The purpose of these investments is demolishing existing structures and erecting fancy offices and expensive apartments. A recent example is the acquisition of Atlantic Yards in NYC for $ 5 billion. Currently a territory with small industries and homes. They will be replaced by fifteen giant apartment complexes.

Atlantic Yards

Atlantic Yards, NYC – Photo AP

A similar phenomenon can be observed in London. The sale of entire areas – for instance the area of the Battersea Power Station –  is accompanied by the privatization of public space. Granary Square near Kings Cross station is one of the biggest London ‘pops’ (private-owned public spaces) with its own rules and guards.

Granary Square, Kings Cross London – Photo: John Sturrock (the Gardian)

Booming housing costs: A global phenomenon

Booming housing costs are a global phenomenon. Even a sharp rise in rentals (sometimes 300%) indicates the beginning of gentrification in the favelas in Rio de Janeiro, which have become safer places due to pacification programs. The next next step will be large scale housing in cheap high-rise apartment buildings, as happened happening in many Asian cities. Leaving a lot of empty space for prestigous destinations.

The tragic human cost of smartification

In Africa, the process of smartification also took off. A number of smart cities are being built from ‘scratch’, for instance Eko-Atlantic City in Lagos (Nigeria). Bulldozers and police force are mighty tools in the process of their creation. Recently, the High Council of Nigeria has stopped the demolition of Mpape, a neighborhood of at least 300,000 inhabitants adjacent to the capital city of Abuja, because of the absence of any prospect of rehousing of the expelled residents.

The abolition of Otodo Gbame, Lagos (Nigeria) – Photo: Common Edge

In the end, the result of unbridled speculation might be that only the rich will benefit from smartification. Amsterdam too must be vigilant. During 2013 – 2014, property sales to investors increased by 248%. In 2016, the average price for housing increased by almost 23% compared with 2015 . Affordable rental is virtually non-existant.

Because of the exclusion of a large group of citizens, the process of smartifcation is at risk turning into a proces of foolification. Foolish cities are sterile cities, inhabited by a rich cosmopolitans. Without young people socializing at in the squares, craftsmen in their workshops, middle classes people in their shops and a diverse and plural group of inhabitants, they will become dead cities, in spite of all smart technology.

This is the second of a sequence of six reviewing aspects of the smartification of cities. Fiction or reality, mission or marketing, progress or illusion. This article has already been posted in The Smart City Hub.

If smart cities are the solution, what was the problem?

Looking for an answer to this question[1] I found the proceedings of the symposion Beware of Smart People! Redefining the Smart City Paradigm towards Inclusive Urbanism held in Berlin on 19 – June 20, 2015[2]. This post is partly based on this report, in which I recognize many ongoing discussions.

The world’s population is growing and concentrating in cities. Needless to say that this causes major problems, especially in emerging countries. At the same time, business also concentrates in urban areas. Consequently, cities compete at world level and – inspite of all problems – position themselves as global, affluent, mundane, and smart.

The concept of a smart city refers at a loosely connected set of confluences between data, digital and other technologies, and urban proceses. The promise is of the digitally-enabled data-driven, continually sensed, responsive and integrated urban environment and a manageable entity[3]

Whether this promise will be kept is questionable: What remains to be seen, is the extend to which the smart city agenda is anything else than another instantiation of corporate power grabs, entrenching surveillance, private control over urban management and repacking neoliberalism in the dressing of seductive technologies and reimagined municipalities and citizens[4]. The modern city is a battleground of market forces, an icon of consumerism, and it is characterized by growing inequality, alienation and intolerance. Digital technologies are associated with control and power.

Naamloos3
Control center in Rio de Janeiro

Opposite to the technology-dominated image of smart cities is the concept of commoning: Citizens share, shape and maintain their living space together based on principles of share-economics and direct democracy more than on the basis of technology. Residents’ initiatives to enforce an alternative land-use at the former Tempelhof airport in Berlin are a frequently cited exemple.

Naamloos 2
Commoning at the former Berlin airport Tempelhof

Another way to frame the smart city is the perspective of urban utopia. Examples are Songdo (South Korea), Mazdar (UAE), Dholera (India) and PlanIT Valley in Portugal, who are all developed from scratch. Investors value these cities as assets in global competition, because of attractive living conditions, full-featured office space, outstanding connectivity and accessibility and high environmental standards. Residents are considered as benificiaries but in a lesser degree as active participants. In spite of the huge investments, these smart utopias rarely are a successful. In some cases they turned intp ghost cities, like Ordos in China. Songdo (South Korea) is sucessfully attracting residents from the adjacent overcrowded town of Seoul but the number of international companies remains far behind expectations. Trafic on the $ 1.4 billion,12 km long six-lane suspension bridge connecting the city to the airport is low while a fast rail link with Seoul is seriously missed.

Naamloos 5
An artists’ view of Songdo

One might wonder whether these different approaches of smart city are compatible.

I believe that the the answer is confirmatory. However, four questions must be answered in advance:

  1. What is the most desirable use of urban space, seen from a multi-actor and multi-stakeholder perspective?
  2. How can all residents maximize their participation in urban life?
  3. What mix of companies generate the most diversified sustainable employment?
  4. What is the best way to involve as many citizens as possible in decision making at all levels?

The role of data, digital facilities and other technologies must be considered in conjunction with answering these four questions. The ‘real’ smart city needs to start with the city and its attendant social problems, rather than looking immediately to smart technology for answers[5]. Proceeding this way prevents narrow technologal thinking and opens the road to low-tech or no-tech solutions. Consequently, a city can claim to be ‘really’ smart if “… investments in human and social capital and traditional (transport) and modern (ICT) communication infrastructure fuel sustainable economic growth and a high quality of life, with a wise management of natural resources, through participatory government.[6]

A special contribution during the symposium came from Gautam Bahm from India. In his opinion, the smart city does not exist; placeless concepts have no meaning. A smart city in India is something completely else than a German one. In Indian cities commoning is the norm: Big parts of cities are auto-constructed, deploying another logic than planners and architects do. However, there is a great need for a basic infrastructure: About 17% of the ground is covered with ramshackeled pipelines for water supply and sewerage. The same goes for the wires for electricity and telephone. Here is an tremendeous challenge for urban planning, which is willing to adapt the existing fabric of local communities, rather than destroying it, as is happened in China and many other places.

Naamloos 1
Commoning is the hard of many cities in India

The concept of ‘smart city’ might become an icon of a new digitally facilitated form of living in urban space. This requires a view of the city as a place that is inclusive, shared and negociated and that considers residents as active producers and contributors because of their thorough local knowledge, expertise, creativity, networking skills and entrepreneurship

This post has already been published in the Smart City Hub

[1] Free paraphrased expression of Cedric Price, architect (1933 – 2003) who wrote: “Technology is the answer, but what was the question?

[2] Find the report at https://goo.gl/cgDemx.

[3] This and the following quote are from Colin McFarlane’s contribution (p.89)

[4] Smart cities are strongly pushed by IT-companies. These companies are the main investors behing PlanIT Valley in Portugal.

[5] Robert Hollands: Critical Interventions into the Corporate Smart City Cambridge Journal of Regions, Economy and Society. Vol 8 (1) 2015, p. 61.

[6] Andrea Caragliu, Chiara del Bo en Peter Nijkamp: Smart Cities in Europe, Journal of Urban Technology, Vol 18(2), p. 652011, 70).

Own country second, world first!

Redeeming the losers of globalization

Multinational companies[1] worldwide earned gold money in the years 1980 – 2013. In 2013 their profit after tax reached $ 7200 billion, almost 10% of the gross national product of the world. Half of the 2013 profits belong to North American and West European corporations[2]. The tremendous increase in profits is a direct consequence of globalization: The expanding global trade of goods and services at ever-lower prices, made possible by global competition, automation, offshoring, and low cost of raw materials[3].

Samenleving - olifantscurve

The question is who has benefited most from the increased wealth and who least? For many years the Serbian-American economist Branco Milanovic has focused  on answering this question[4]. He divided the world population into 10 groups for 30 consecutive years: The poorest 10%, the second-poorest 10% and so on. He calculated the change in income for each of these groups within this period. The graph below depicts the outcomes. This graph is called the elephant curve because of the eye-catching similarity with the back of an elephant.

The-Elephant-Curve

Worldwide, there are two groups of winners and two groups of losers.

The winners:

  • The richest 5% of the world, the 1% richest in particular. Half of the benefits of economic growth went to this group. Fabulously wealthy people can be found in all countries. However the majority are living in North America and West Europe.
  • The middle class within Asian countries. Its income increased about 200 to 300%. Hundreds of million people are involved, but the total monetary value of this growth is relatively limited as incomes were low.

The losers:

  • The poorest 10% of the world population. This group has gained nothing in 30 or more years. In the Republic of Congo, the average real income remained unchanged in 100 years due to corruption, self-enrichment by the rulers, natural disasters and wars.
  • The middle class in the rich countries. This group has also seen no progress in 30 years. As a matter of fact, many jobs were lost due to offshoring and automation in particular. Many people who belonged to the middle class in the end of the 20th century now have to settle for a job in the lowest paid sector. Here they enter into competition with migrants, who belong to the other group of losers.

Samenleving - wrong side of capitalism

Social democracy in Western countries has failed to notice this structural change and as a consequence its voters left for the extreme right or the extreme left. In the USA, the frustrated middle class helped Donald Trump to power and in the UK it voted for Brexit.

Policy makers in Western countries can learn from the elephant curve. Among others, the following policy measures will support the revitalization of the middle class worldwide:

  • Reduction of difference in status and income between jobs
  • Redistribution of jobs through a reduction of working hours and flexible retirement, supplemented with the option of a basic-income
  • Fair tax payment by companies, among others to co-finance the external effects of automation.
  • Realistic prices for raw materials and agricultural products for the benefit of the workers in poor countries and the farmers in rich countries
  • Supporting entrepreneurship in developing countries
  • Discouraging labour migration, among others to limit brain-drain
  • Continued support for peacekeeping in conflicts around the world, therefore strengthening UN rather then NATO.

In the long term fighting inequality is in everyone’s interest.

[1] Included are listed and unlisted companies with a turnover of at least $ 200 million. See: https://hbr.org/2015/10/the-future-and-how-to-survive-it

[2] Companies around the world still make huge profits, but the share of ‘Western countries’ has decreased as the distribution over the world of production is becoming more evenly . Further, especially in Western countries small innovative companies take over part of the production of the powerful but rather inflexible multinationals.

[3] He is from 2014 professor at New York University and was a researcher at the World Bank. For a recent interview: Humo February 8, 2017: https://blendle.com/getpremium/item/bnl-humo-20170207-132032

[4] Where necessary, he further subdivided these groups.

 

The failing doctrine of shareholder value maximization

In the last decades of the 20th century management as a profession has fallen into a deep crisis. The preceding decades had revealed a promising development: From the beginning of the 20th century, companies hired professional managers who supervised companies on behalf of the owners. As dedicated professionals they took into consideration the long-term interests of all stakeholders.

However, the rise of neoliberalism – in politics and science – put shareholders in the role of the owners of listed companies. Increasing shareholder value became the primary task of a company’s management.

samenleving-greed-484x336

The income of top managers – worldwide – increased explosively during the last years of the century because their remuneration package consciously consists of a large part of shares (options). The idea is that shareholders’ interests were guarantied if they coincided with the financial interests of managers. Professional managers sold – so to say – their soul[1].

Recently, a prominent business school has disclosed the unsustainability of this view. Cass Business School, part of City University of London, initiated for two years the Purpose of the Corporation Project[2]. This project was completed in Brussels on 28th September 2016 in a meeting of scientists, politicians and business leaders from Europe and the US.

Unknown.png

Maximization of shareholder value is inherently a short-term policy. It has several effects that harm the profitability and even its existence in the long term:

  • Declining investment in research and development
  • Irresponsible risk-taking
  • Externalities like loss of confidence from society, undermining monetary stability and exploitation of the environment
  • Cost reduction resulting in restructuring and related closure of business establishments (mergers, acquisitions, buyouts)
  • Tax evasion, limiting the resources for investment in infrastructure

The only viable perspective is a “corporate purpose” in favour of the creation of value for all stakeholders and to contribute to social welfare and environmental quality.

The final report is build on five so-called Modern Governance Statements regarding business law, management, accounting, economics and public policy. These statements are based on an extensive review of literature. A significant number of scientists have discussed and approved each statement.

Here is a selection of edited quotes from the five statements:

  • Almost in any country, the answer to the question ‘who owns a company with a legal personality’ is ‘the company itself’. By no means shareholders do.
  • Companies can raise capital, for instance by issuing shares. Shareholders are entitled to receive dividends and to raise their voice in a number of clearly defined subjects.
  • In almost all legislations the fiduciary duties of the management of a company include its long-term survival.
  • No law requires management to pursue maximum profits for shareholders. If they do, it is because they succumb to pressure from activist shareholders or for their own gain.
  • In the ’90s monitoring the reporting of companies passed from national governments and parliaments to the International Accounting Standards Board. As a result, the focus of the reporting narrowed to the provision of information to investors and the calculation of the assets based on market value.
  • The idea of a social partnership between civil society institutions – including businesses – went lost.

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The final report of the Purpose of the Corporation Project[3] kept two options to managers and shareholders: Whether persisting the current direction, which will ultimately result in the disappearance of the company or redesigning the company as a social institution serving the interests of all stakeholders.

How? Here is a selection of the recommendations in the report.

  1. Values (“Purpose”)
  • Companies explain their values and goals and define their responsibilities with respect to all stakeholders such as employees, customers and shareholders and society and nature al large.
  • Management establishes the implications of the purpose for strategy and (investment) policy and also how to reduce associated risks.
  • Companies accentuate their intentions with regard to the achievement of social objectives by adopting the status of B(enefit) Corporation.
  1. Operating as a community
  • The intensified control of the employees has resulted in loss of their engagement and quality of their work as well.
  • Employees who organize their work independently perform better and feel more satisfied. After all they have product and market knowledge and maintain relationships with suppliers and customers.
  • New organizations deploy less hierarchy, reduce of the number of managers and transfer management tasks to employees.
  1. Revision income stimulus
  • Top management will receive a fixed salary that is part of the remuneration structure of the company. All incomes are transparent.
  • Variable remuneration applies to all employees and is linked to the achievement of long-term objectives and the satisfaction of the customers as well.
  1. Participation of stakeholders
  • Representation of employees, clients and shareholders in the board and in the General Meeting will strengthen the relationship between the company (management) and its stakeholders
  1. Search for patient capital
  • Distinguishing between different categories of shareholders will stimulate stewardship by shareholders with a long-term interest.
  • Making shareholders’ rights dependant from the duration of their involvement in the company.
  1. Protection from hostile takeovers
  • In order to protect their long-term policy, companies deploy mechanisms to prevent hostile takeovers, for instance by transferring shares to a foundation.
  1. Reporting
  • The method of reporting is geared to long-term policy. The Integrated Reporting Framework is an alternative for common accounting rules who intend to inform investors in the first place
  • The main goal of reporting is disclosure of value creation in the broadest sense, including in relation to non-financial capital.

The Purpose of the Corporation Project has provided a new benchmark for corporate governance, the financial world and professional managers. But it is also a new benchmark for the relation between society and business. Finally, it is a signal for shareholders to avoid short-term thinking.

[1] In 1993 CEO’s of the top 25 companies in the US earned 195 times the salary of an average worker. In 2012 their salaries were raised to 354 times the salary of an average worker. Institute for Policy Studies
1112 (16th Street NW, Suite 600)
Washington, DC 20036

[2] Overview of the background of the project: https://goo.gl/vNJQjr

[3] The final report reads like an up-to-date introduction to corporate governance: “Corporate Governance for a changing world: Final Report of a Global Roundtable Series” https://goo.gl/bdEaQp

 

“The Big Shift” No single organization will be the same

Looking back in 2050 at the first decade of the 21th century our (grand)children will probably recognize the characteristics of another industrial revolution. The Edge, the research institute of Deloitte is speaking of The Big Shift’[1]. The ‘Big Shift’ is the joint effect of two processes:

Distributed growth of knowledge

The old Philips buildings offer workplaces to many small innovative companies

During the past 10 years, ICT – bandwidth, memory, speed, and especially software – has improved tremendously. Connecting ICT-power with other devices has enabled 3D printing, Internet of things, wearables and robotics. Its disruptive influence at industry is only in the first stage. However, even more important is that the underlying knowledge has become distributed and is no longer limited to small groups of scientists in universities and R&D centres. Worldwide, millions of young entrepreneurs prefers the live of an explorer and innovator in garages, empty industrial buildings, science parks or wherever over being employed in a large bureaucratic company.

Global competition

Until recently, a centre-periphery model sufficed to characterize the economic relations in the world. The centre (Europe and the USA) bought raw materials, and mass products in the periphery in exchange of high-end products, knowledge and (financial) services. Nowadays, a multitude of centre-periphery relations has come into being. The old centre has to compete with rapidly developing competing centres. The winner is going to be the owner of the most distinguishing innovation capabilities. Besides, the development of ever-changing new products requires a high degree of inter-firm cooperation. Here too, small and agile new market entrants seem equipped best.

“Traditional” companies have to reinvent themselves In order to cope with the ‘Big Shift’. The first step is dividing itself in smaller flexible entities. Further, the process of reinvention has to put knowledge workers in the centre of operations at the expense of the until now dominant position of managers-class. The feasibility of a redesign depends from the degree of engagement and intrapreneurship of the work force. In this respect, recent studies are not encouraging.

Engagement

Each year Gallup is collecting data of the engagement of the global workforce[2]. Employees are characterized as being ‘engaged’, ‘actively disengaged’ and ‘not engaged’. The table beneath gives an overview, showing that the USA, Australia and Canada have most reasons for optimism.

Engaged employees worldwide 2The lack of engagement is caused by the “low strain” characteristics of the majority of jobs, the authoritarian behaviour of many bosses, the uncertainty of keeping one’s job and work pressure.

Intrapreneurship

I prefer the term intrapreneurship over ‘passionate explorer’, as deployed by Deloite[3]. Intrapreneurship is based upon specialist business knowledge, the drive to explore new frontiers and a feeling of urgency to cooperate. The ‘Big Shift’ report reveals that only 12,5% of the workforce is ‘intrapreneurial’. Probably the lack of engagement is prohibiting quite a number of latent intrapreneurs to act.

The lack of Intrapreneurship is quite understandable. The 20th century companies have organized their production according to well-chosen strategic principles empowered by detailed planning, control and quality systems. Consequently, skillful and accurate performers dominated the workplace. Competence management systems guaranteed the right employee at the right spot. Room for intrapreneurship was limited.

It is this lack of intrapreneurial opportunities that has causes a true exodus of talent from companies in the USA and other countries. Each year, about 2 millions of employees have given up well-paid jobs. The estimated damage caused by the departure of high-potential employees is about $200 billion each year. The independent workforce in the US nowadays counts about 17 million people.

The conclusion is obvious. Above all, the strongly-needed reinvention of companies depends from the retrieval of engagement and entrepreneurship al main characteristics of the work force.

Engagement will increase as soon as the workforce feels more respected and recognized and if managers do better jobs as coaches. Structurally, workplaces have to become more demanding. Theresa Amabile has discovered that employees are motivated in the first place by ‘the progress principle’, the meaningfulness of their contribution [4]. In order to comply, workplaces have to combine a sufficient degree of challenge with a corresponding degree of autonomy.

Retrieval of intrapreneurship is more demanding. Needed are: decentralization of the governance of firms, servant leadership, reduction of management, smaller differences in compensation of managers, active promotion of (open) innovation, and deploying collaboration opportunities outside the firm.

Anyway, most companies worldwide have a long way to go. The most innovative firm will be the firm that is succeeds in the improvement of engagement and intrapreneurship.

[1] http://goo.gl/QaNXdy The report is a comprehensive study of global development, innovation and entrepreneurship in contemporary history

[2] See for more results: http://www.gallup.com/poll/165269/worldwide-employees-engaged-work.aspx

[3] http://goo.gl/oQEQzi. Research with respect to the passion of the workforce included 4000 employeed in different branches in the US.

[4] TED-talk Theresa Amabile: The Progress Principle: https://www.youtube.com/watch?v=XD6N8bsjOEE&feature=youtu.be