Category Archives: Economy

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.

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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.

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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.

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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.

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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 published in the Smart City Hub: https://goo.gl/7e2Wqo

[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).

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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.

 

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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.

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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.

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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

 

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“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

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