Urban Planning and Corporate Governance.


The Sydney Morning Herald has been trumpeting a study they supported by on the future of Sydney’s public transport and urban structure. Beneath the being overly pleased with themselves, with we’re above petty politics harrumphing there is a genuine effort to talk about the policy issues in depth. That’s a big relief compared to the usual scandal mongering and whinging vox pops that we usually get from the media on the issue.

A major theme in the study is differing potential models for future development. One is a European model, which is described as a web of transport routes and urban centres across the metro area, which is officially the current plan. The other is an East Asian model which is described as a small number of dense urban centres from which public transport spokes extend, each covered by a spine of high rise residential developments and with land prices that rise exponentially with their access to these centres. The report reckons that we’re headed to the latter, which is A Bad Thing.

I am not convinced this is solely a issue of government policy though. A large part is due to decisions made by companies on where to provide jobs, and subsequently where the transport infrastructure is forced to be built to relieve what is already there. More specifically it’s about where the management of these companies decide to site their operations, particularly compared to what you might expect firms to do. I think this is partially an issue of corporate governance.

Why are companies intent on putting so much of their operations in such a narrow number of places, leading to these dense spoke systems? In NSW; The CBD, North Sydney and Macquarie Park? Why aren’t they willing to put more of these operations in outer suburbs where places like Norwest Business Park are keen to have them, or in regional centres or elsewhere? There’s good reasons why a self interested company would consider it. The rent is cheaper for a start. Workers are probably willing to trade off salary for a shorter commute as well. I think most accept a lower salary if their work doesn’t require them to live in expensive suburbs; suburbs expensive mainly because you can access jobs easily. And workers with smaller commutes are likely happier, more well rested and probably more productive.

There’s a number of possible reasons why a self interested company wouldn’t.

a) The value of networking. Workers need to be in contact with other workers and firms in the modern knowledge economy. I don’t think this explains a lot. It may be true for a variety of worker, but not most. A worker comes into a building, spends all day at their desk, eats lunch there and goes home. They do all this in front of a machine that is literally built for networking and is packed with features to do so from almost anywhere! They’re certainly not using the location itself to network. Macquarie Park, originally envisioned to link Macquarie University to corporate Australia, hasn’t even seen enough need for many footpaths, so little is the need to move between buildings.

b) They need to place themselves where the workers are, or in places the workers want to work. Of course, if the first part was true, why would there be a transport problem with clogged arteries out to outer suburbs or the Central Coast ex-urbs? The latter part doesn’t ring true. Macquarie Park has no real appeal and North Sydney and the CBD lack almost any urban appeal for the specific reason they are now just business parks, packed with offices and sombre suited and expressioned workers.

c)Firms need prestige locations for signaling. Just like banks used to signal their wealth (and hopefully solvency) by building absurdly ornate buildings, financial institutions now use prestige locations for the same purpose. This rings true a little. It does dovetail with the lack of appeal mentioned above using Jane Jacob’s model of self destruction of diversity – where financial and corporate offices seeking the prestige of an area create a homogeny that destroys the appeal they’re seeking. It can only explain so much and most industries have easier ways of signalling the quality of their service/goods.

What I think is happening is a typical corporate principal-agent problem. The executives of these businesses are siting operations based on two considerations of personal, rather than the companies interest. They want the personal prestige of an office location, and more importantly, they want to minimise their own commute.

There’s fairly limited limited housing options for a status seeking manager, and if you invest the time and effort and schmoozing it takes to climb the corporate ladder, you’re probably much more status obsessed than most. Whilst in most places suburbs rise and fall in relative prestige due to man factors, geography and harbour views mean that in Sydney the Lower North Shore and Eastern Suburbs are very stable in this position at the top of the heap.

The managers chose to live there, but they don’t want a long commute any more than anyone else, so they’re likely to make sure their workplaces are where they can get to them easily. It helps explains Macquarie Park, just over the Lane Cove River from the Lower North Shore as well and its success compared to rival business parks. Macquarie Park was also well off existing train routes until clogged roads forced a train line through last year which adds creedence to the idea that development isn’t just following the options provided by public transport.

As for the Western Suburbs? Regional centres? Buggered if I’m going out there!

And in person networking probably does help when you’re getting each other elected to each other’s boards and having pissing contests, in so far as these things help the company at all.

Of course, this means they pay more for real estate and wages and have less happy and productive workers, but they’re not going to be called on it. The smaller shareholders aren’t going to use their questions at the annual meeting to complain when there probably more vexing issues, and the heads of the institutional shareholders are probably guilty of the same sins. The employee’s ability to respond is buried by monosonistic alternative options.

Complaints about limited liability companies and the structure of corporations aren’t exactly new or confined to certain political beliefs. Real concerns about the financial and ethical decisions they lead to go back to Adam Smith at least! 300 years without easy answers probably means there aren’t many. Still, these problems bear considering.

Maybe if there was a form of stakeholder capitalism here things would be different. Say, if we had representatives of employees on the board like European companies, our urban outcomes would be, in Christie’s terms, more European. That of course would also bring a whole bunch of other issues .

Alternatively, a hypothetical world where companies in and of themselves are maximising agents, we would end up in urban places that required less massive infrastructure for funnelling people and less trade offs of wages for commuting time. Such companies would probably result in less savoury results as well.

All I can say is the system of corporate governance in a country can have quite far reaching effects on almost any aspect of life. Society is complex.

About Richard Tsukamasa Green

Richard Tsukamasa Green is an economist. Public employment means he can't post on policy much anymore. Also found at @RHTGreen on twitter.
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16 Responses to Urban Planning and Corporate Governance.

  1. Richard

    Reason ‘B’ may have more explanatory power than you allow. Consider the American experience:

    When I started asking developers when, exactly, they first thought it plausible to build quarter-of-a-million-square-foot office monoliths out in some cow pasture, far from the old downtowns, I found it eerie how often the year 1978 came up….The only thing I’ve discovered that begins to account for that nationwide pattern is that 1978 was the peak year in all of American history for women entering the work force. In the second half of the 1970s, unprecedentedly, more than eight million hitherto non-wage-earning women went out and found jobs. The spike year was 1978.

    That same year, a multitude of developers independently decided to start putting up big office buildings out beyond the traditional male-dominated downtown….The new advantage was proximity to the emerging work force. These Edge City work centers were convenient for women. It saved them time. This discovery was potent. A decade later, developers viewed it as a truism that office buildings had an indisputable advantage if they were located near the best-educated, most conscientious, most stable workers underemployed females living in middle class communities on the fringes of the old urban areas

    .

    Full post here.

  2. pablo says:

    It is a very comprehensive study and a real tour de force for a newspaper to devise and assemble such a panel and their analysis. I was very impressed with this fourth estate initiative on transport in an otherwise busted state.

  3. derrida derider says:

    (b) is missing the point. There is a very good reason that companies build in expensive locations next to expensive suburbs, rather than in cheap locations where they can get workers.

    It’s because the CEO lives in that expensive suburb. The people running companies would far rather have their minions commute long distances than commute those distances themselves.

  4. Richard Green says:

    Sam – I think that explanation holds alot of weight in America, my post above is very very Sydney centric. There’s very few cities in America where the prestige suburbs are concentrated towards the middle of a metropolis( e.g New York, which does follow a somewhat similar pattern of development.)so the “near workers” incentive may have more weight over the managerial commute incentive.

    Some other things that I think is relevant in the American experience is planning bias towards greenfield development that happened post war (and still exists to a large extent) and the amount of power held by local government. The planning power meant that small counties have a great incentive to offer heavy incentives to lure companies (large and explicit, and thus hard for shareholders and managers to overlook). The amount of services funded by local government also leads to considerable path dependence as well. You only need a few companies moving out and the urban government loses a bit of taxation, cuts services a bit and some more people and companies move out etc. Gaining revenue just adds more reason for the outside counties to offer more incentives.

    pablo – I even went out and bought the hard copy from the corner shop just to show gratitude for some genuine attempt at policy analysis.

  5. conrad says:

    Having lived in medium density (Europe), high density (HK), and low density (Australia) places, I really don’t understand why Asian style uber housing is a Bad Thing — there are many advantages, like being able to get out of the cities in 30 minutes instead of 1.5 hours, having excellent public transport, and having anything you want at your hotel (a gym, a hotel bus, security guards, a pool etc.).
    .
    Also, I imagine one reason why companies use the city centre is that anyone that lives on a train line can then work there. Anywhere else means people need two train trips, which is a pain in many cities (god knows what the attraction of Macquarie Park is).

  6. Patrick says:

    Conrad is right. The analysis of b overlooks the fact that the centre is a ‘least-worst’ outcome as far as proximity to actual homes goes and a best outcome as far as proximity to the most transport goes.

    Also, the networking analysis is superficial. City centres provide proximity to corporate advisors of every stripe for corporates, and proximity to each other and to clients for corporate advisors. It is a strongly-reinforcing virtuous circle.

    Overall your lack of practical experience is very obvious, because you haven’t considered proximity to restaurants and night-life as an aspect of each factor listed.

    You will also be cheered to know that there are some very value-conscious companies. GE’s Australian headquarters are not in the CBD at all and I understand that their internal policies make it unlikely that they would build/rent in a CBD. PwC in Melbourne, as well as ExxonMobil, Vanguard and many others, are in Southbank, a short walk across the bridge from the more prestigious CBD. Relevant to my previous point, this may not have been possible in PwC’s case if not for the excellent restaurants along Southbank.

    None of this is to denigrate the relevance of corporate managerial prestige, though.

  7. Nabakov says:

    The Rubicon here is building an Underground/Tube/Metro/Subway pre-WW2.

  8. Nabakov says:

    “None of this is to denigrate the relevance of corporate managerial prestige, though.”

    Of course not. We’ve been shown time and time again they’re quite capable of doing it themselves.

  9. Jason Soon says:

    Yes Patrick is spot on.

    The problem with locating in the suburbs is that there is no one suburban area where all your workforce is going to live. Changing trains is a pain in the butt and some suburbs don’t get as regulat trains. Plus I think nothing could be more depressing than going into another suburb to work and leaving late, within walking distance in the city you can at least get a decent nightlife and leisure facilities and everything hasn’t been shut down yet.

  10. Paul Frijters says:

    nice post.

    The trouble empirical observation with the principal-agent story is the issue of head-offices of foreign companies. Why should they be in the CBD? If you are right, they should take advantage of the suburb-solution because its a foreign ceo making the decision on where others are going to be located.

    I think the CBD has more advantages than you give credit for. Its close to the airports, shorter on average to get to than many suburbs, and closer to rival businesses from which companies can poach workers.

  11. MikeM says:

    Reason A is significant in a way that is different from day-to-day networking. If I work in finance I want to be in the Sydney CBD because if I change jobs to work for another employer, the chances are that my daily commute, lunch spots, after work pubs and all the rest of it will stay much the same.

    Similarly there was a time when if I was in advertising I would have wanted to work in North Sydney.

  12. Don says:

    You say the advantages of a outer suburban business parks are that:

    The rent is cheaper for a start. Workers are probably willing to trade off salary for a shorter commute as well. I think most accept a lower salary if their work doesnt require them to live in expensive suburbs; suburbs expensive mainly because you can access jobs easily. And workers with smaller commutes are likely happier, more well rested and probably more productive.

    I agree that the rent is cheaper. But I’m not convinced about the other advantages.

    1. Workers are probably willing to trade off salary for a shorter commute …

    Quite likely. But to take advantage this they’d probably have to move house. Buying and selling houses is disruptive and costs a lot of money. How long will the job last?

    2. I think most accept a lower salary if their work doesnt require them to live in expensive suburbs; suburbs expensive mainly because you can access jobs easily.

    Probably. But many of the organisation’s high value employees will have a spouse who works and children who attend school or university. A shorter commute for worker may result in a longer commute for other family members.

    Workers will typically avoid uprooting their families.

    3. workers with smaller commutes are likely happier, more well rested and probably more productive.

    Agreed. But I suspect that workers choose housing based on long term considerations. Buying a house near your current job may mean an even longer, more difficult commute for your next one. A good strategy is to locate somewhere with access to an abundance of job opportunities.

    If businesses are anything like the public service, outer suburban or regional head offices will last long enough for an employee to buy a house and settle their kids into a good school. Then a new CEO will move the office back to the CBD.

  13. Richard Green says:

    I should stress I’m not entirely discounting centrality/accessibility theories of company location. I think it just doesn’t explain enough by itself. It makes sense for the CBD, it sort of makes sense for North Sydney, but it doesn’t make sense for Macquarie Park.

    I started thinking about this when I lived over the road in North Ryde. I came back from work in the city at 7-8 am and was on mind crushingly slow buses filled with miserable snoozing commuters who had already changed transit from other buses or trains in the city and were funneled through harbour crossing bottle necks to a suburb with very little appeal. Why was Macquarie Park popular in a way that other sites weren’t, because it sure wasn’t accessible.

    That’s why I figured something else was playing a part along side the obvious factors.

    Paul – I’m not sure if this is the counter factual we could look for since I’m not sure the decision is generally made by the CEO overseas, as opposed to a foreign manager living here. Anecdotally, and the anecdotal evidence I have is skewed heavily towards Japanese firms in Sydney, the latter is the case (and the local managers all live on the lower North Shore (Artarmon, Neutral Bay, Northbridge and other points on Middle Harbour. If we could differentiate firms by who where made the decision that would be great though.

    Mike – The question then becomes why are so many industries clustering there. Finance in the CBD makes sense for prestige reasons, but a given industry could cluster in almost any place. Why disproportionately here?

  14. conrad says:

    “The question then becomes why are so many industries clustering there.”
    .
    I would think a lot of that is just historical. Banking, for example, has been around since when it probably wasn’t too expensive to stick your office close to the city centre, and once the city became too expensive it just spilt over to North Sydney. IT, which is newer, located around the North Shore to start, and I assume this is because it arrived later.
    .
    As for Macquarie Park — it would be interesting to look at what particular incentives were used to attract the bigger companies (and for that matter the early North Shore IT companies). I also wonder whether some companies simply consider it an extension of the North Shore.

  15. Paul Frijters says:

    Richard,

    fair enough. I dont know either who actually makes the location decisions of foreign headquarters but merely assumed it would more often be someone who didnt have to live there themselves. You seem to have better info on that than me.

  16. Tel says:

    I going to agree with Partick #6 and Conrad #5 on the reason why business is attracted to transport hubs. Supposing your business requires skills that are available in 5% of the population and these skills are physically distributed evenly amongst available housing. Placing your office at a transport hub gives you the best possible access to potential workers, so you will be hiring from a larger pool. Placing your business out West away from any transport hub gives you access to a much narrower selection of workers.

    Norwest business park has no train station at all, you need to get out at Parramatta and switch to a bus. Given that the Norwest is a predominantly Christian area they probably don’t want to be hiring from too broad a pool anyhow so they know the inner city gays and alternative lifestyle freaks never go West for any reason and that no doubt suits both parties just fine. That’s just your local Sydney prejudice at work :-)

    There’s a clear positive feedback loop: an area becomes a transport hub, so business is attracted to that, so workers are attracted to those businesses, so officialdom sees the need to upgrade transport for that location. Land prices move as a negative feedback (the transport hub starts to price itself out of the market) but as pointed out above, prestige is approximately in proportion to land prices and prestige is positive feedback (our business must be successful because we can afford a stupidly expensive office, so you should be a customer/supplier/investor of such a great enterprise).

    You can see Parramatta as an excellent example of positive feedback in action. It has always been a second city hub (since the colonials) but growth really kicked in when government courts and offices were moved to Parramatta. In addition, a decision was made to move the most significant bus terminus away from Granville (note that Granville is the logical rail hub for that area) and also lots of work was done upgrading and modernising the bus fleet. Now with that seed started, we have private legal business and accounting business deciding that Parramatta is an attractive place to setup shop, so the IT/computer shops are coming to support the offices and so the ball starts rolling with workers getting attracted from nearby regions, etc.

    IMHO the next big growth push for luxury apartments is going to be along the Parramatta river. What used to be industrial land is getting cleaned up (industry has moved to Asia now) and no doubt there will be huge environmental pressure to clean the entire river system, so the old industries are doomed forever in that area. Probably the river will eventually be once again used as a transport corridor for workers on the daily commute to either Parramatta or the city.

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