The success of many regions throughout the U.S. depends now on the transition from a manufacturing- and service-based economy to a knowledge-based economy. There are those who insist that corporate leaders must take an active role in community life if that transition is to go smoothly. The task then becomes one of bringing together business leaders and politicians with the understanding that their interests are ultimately one and the same.
As part of the recent Wharton Leadership Lectures, Philadelphia Republican mayoral candidate Sam Katz and J. William Mills, PNC Bank regional president of Philadelphia and Southern New Jersey, spoke on the value of merging business and politics. Their thesis: that corporate community involvement is fundamental not only to the economic vitality of the Philadelphia urban region, but to the future of business itself.
According to a January 2002 Federal Reserve Bank of Philadelphia report entitled “The Industrial Evolution: Two Decades of Change in the Philadelphia Metro Area’s Economy,” a general shift has occurred across all major U.S. metropolitan areas, away from the production of goods toward a production of services. In cities such as Chicago, St. Louis, Cleveland, Baltimore and Pittsburgh, for example, railroads have disappeared, manufacturing has dried up, and institutional and corporate interests have moved to the suburbs. “Philadelphia, like many cities that were once regional capitals, was initially a headquarters town. Over time, mergers and acquisitions changed the corporate landscape,” said Katz.
Katz and Mills contend that Philadelphia’s future, like that of so many urban areas undergoing economic deterioration, depends on attracting a new breed of business and employee – designated in the FRB report as knowledge-based firms and workers – with the right kinds of jobs and environment.
Both men cut their teeth on the concept of corporate community participation during their involvement with Greater Philadelphia First (GPF), an organization made up of 28 CEOs representing Philadelphia employers, financial institutions, healthcare institutions and universities. Their goal through this organization – which is focused on creating symbiosis between business and civic leaders – was to offer solutions to stave off what Katz deemed “the declining fiscal condition of the city” and create the necessary climate for change.
According to Katz, GPF attempted “to evolve a strategy for the region … that would take actions and support investments, programs and initiatives to help transform the region from a service-based to a knowledge-based economy. The central thesis of this strategy is that the factories of the 21st century are the universities, the medical research institutions and the laboratories.”
Supporting Local Jobs, Local Schools
Mills agrees. PNC Bank is the largest company in Pennsylvania with 27,000 employees statewide and $1.2 billion in revenues in 2002. Thirty percent of the company’s profits are derived from the Philadelphia market. He acknowledged that it is difficult to be socially responsible as a corporation in America today, given bottom-line considerations and the need for accountability to shareholders.
Yet he held up a PNC Bank processing center – 800 feet within the border of Philadelphia’s city limits – as an example of a successful 21st century factory. Forty years ago, he said, the people who work at this processing center – most of whom are high-school educated at best – would have been employed in North Philadelphia making widgets or hats. Mills made the tough, conscious decision to keep the processing facility and the jobs it provided in the city of Philadelphia, despite the fact that many nearby towns in New Jersey, Delaware, and Chester County, Pa., were willing to compete for it. He kept the facility in Philadelphia and lost no employees in the move.
“It’s a 90-day world. Every quarter it’s ‘What did you make this quarter? What did the analysts say? What did they do?’ But to ignore the needs of the community around you is determinedly short-sighted,” said Mills.
He counts the communities where his customers live and work as one of his key constituencies. First and foremost, he wants to keep his customers and employees satisfied and his shareholders happy. Despite the mergers and acquisitions that have redefined banking in the past decade, and the fact that PNC keeps its main office in Pittsburgh, Mills insists banking is still a local industry.
“We could ignore those communities theoretically, but at the end of the day that doesn’t make a lot of sense. Banking is still a local kind of a business.” PNC gives 1% of its profits every year to its foundation which then returns the money to the community to make it a better place, said Mills.
Realizing that his business is dependent on a flourishing Philadelphia, he has advocated corporate community involvement as a way to protect markets for customers, employees and shareholders. “This is not altruistic; it is totally driven by the need for the community to do well. If the community doesn’t do well, banks and businesses won’t do well.”
Mills maintained that giving back to the community includes more than PNC offering mortgage assistance to low- and middle-income homeowners in Pittsburgh and Southern New Jersey. It requires more than the underwriting of landmark cultural events like the Philadelphia Flower Show and large-scale art shows like “Degas and the Dance” at the Philadelphia Art Museum. According to Mills, it requires keeping jobs local and supporting local schools.
But there are those who argue that corporate involvement, while beneficial, has only a band-aid effect. Anita A. Summers, professor emeritus of public policy, management, real estate and education at Wharton, contends that the business community has limited power when it comes to improving community life. According to Summers, systemic problems, such as the decline of our public schools, are the real turn-offs for knowledge workers. These are the fundamental problems that must be solved by communities switching to a knowledge-based economy in order to remain an attractive place to live and work.
“Economists think corporate involvement is nice, but what makes a region succeed is if the underpinnings of the economy are sound,” said Summers, pointing out that the real responsibility of corporate leaders is to their shareholders. Their job is to lead the companies they work for and ensure profitability. She added that there is no shortage of caring corporate leaders willing to step in to improve community life.
She gave the example of the Philadelphia public school system as a problem area that must be sorted out in the political arena. “The underpinnings of the economy have allowed the elected leaders to grind the Philadelphia educational system down. They have allowed a hodge-podge of charter schools, vouchers and magnet schools, and there’s an incredible amount of chaos there.”
Some cities, according to Chris Mayer, research director at Wharton’s Samuel Zell and Robert Lurie Real Estate Center, have had some successes in making the transition to knowledge-based economies. He cited Pittsburgh, which suffered through the decline of the steel industry, but has managed to resuscitate itself to some degree with a broad-based economy, including a strong financial services component. He also pointed to Seattle and Portland, Oregon, as other cities that have made this economic conversion smoothly.
Mayer was skeptical about politicians when it comes to their direct participation in economic growth. “In general politicians get in the way of market transitions. There’s a sense that they entrench the status quo,” said Mayer.
It’s the Taxes, Stupid
Katz, like Summers, emphasized the importance of a political administration that steps in and advocates for the needs of the economic base. Both agreed that one job corporate leaders can undertake is to get people to vote for politicians who make economic concerns a part of their platform. Those with money and power can and should influence voters to elect political leaders who offer real and tangible change.
“Civic stewardship is a critical component of the job, but so is the evolution of policy and investment in our economic future. Business leadership must step up and push back against the politicians to get things moving in a positive direction,” said Katz.
As an example he cited how Greater Philadelphia First took on the issue of doctors’ medical malpractice insurance rates in Pennsylvania. “The Philadelphia economy has a large healthcare component, and yet … doctors were leaving the region in surprising and alarming numbers because of the huge increases in premiums in malpractice insurance. We took on medical malpractice insurance to keep doctors in Philadelphia,” said Katz.
Katz offered this theory to explain the flight of businesses from Philadelphia: “It’s the tax structure, the tax environment and the regulatory environment. I don’t think in the last 30 years, [except perhaps] when Rendell was in office, that the message here was ‘we want your business, we want to keep you here.’”
The Federal Reserve Bank report characterizes Philadelphia as having an evolving economy. Much will depend on attracting the human capital that starts new businesses and brings new ideas and technology to existing ones. Philadelphia’s ace in the hole may be the large number of first-rate colleges and universities it boasts. The trick will be convincing students from those schools to stay in the city after they graduate.
Katz pointed to some aspects of economic life in the Philadelphia region that could serve as a magnet for knowledge workers. “Once you get to a certain stage in your life … what matters to you are the things that Philadelphia and the region have in great abundance. These are diverse neighborhoods, affordable housing, unique architecture, reasonable commutes, and a diverse economy that did not get hurt as badly as a lot of other places like Silicon Valley or San Diego.”