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The Fire This Time

February 1, 1994
Related Topics: Strategic Planning, Featured Article
The view from Peter Goldberg's 15th floor office overlooking Newark, New Jersey, isn't pretty. Burned out buildings—ugly scars from the 1967 riots—still mar the urban landscape. Empty storefronts, dilapidated housing projects and drug-infested alleys continue to plague the city.

It's a wrenching reminder of the extremes to which this country's poor were driven to get their problems on the national agenda: a dreadful series of conflagrations that made Newark, Detroit and Los Angeles' Watts district symbols for America's urban ills. And with memories of the 1992 Los Angeles riots still fresh, it's also a sobering suggestion of difficulties ahead. "Cities are an important part of the fabric of any country," says Goldberg, who, as president of the Prudential Foundation, is head of Prudential Insurance Co. of America's social investments. "The future well-being of this company, this industry and of corporate America is very much intertwined with the health and well-being of American society."

Cynics might note that such sentiments were rampant in corporate boardrooms back in the late 1960s and early '70s. Yet, some argue, so little progress has been made that when the jury announced its decision in the first Rodney King trial, it took three days and three nights of the worst riots in American history to vent the pent-up anger over social conditions. When the smoke finally cleared, upwards of $750 million in damage littered the landscape.

Many people took notice. Utility giant Southern California Edison established a $6.5 million job-training center in one of the area's hardest hit cities, Compton, and also is hiring disadvantaged youths for a wide array of community projects. State Farm Insurance invested a total of $1.2 million in three Los Angeles banks catering to minorities. Bank of America followed suit with a $1 million investment in a major African-American owned institution. Sumitomo Bank of California pledged more than $500 million—a full 10% of its assets—for home and community redevelopment loans to neglected areas of California. And Hyundai Motors of America currently trains nearly three dozen minority youths each year to be certified mechanics. The cost? Over $10,000 per person. But as the program's assistant director, Arlene Pendleton, puts it: "We desperately need trained mechanics, and people need jobs. This program trains them for a career."

To be sure, investing in people makes the greatest sense of all. And it's the point at which human resources departments can have the most immediate impact through recruitment and training initiatives, for example. But while job-training programs are an integral part of the solution, they certainly don't solve the entire array of social ills. Creating a sense of community and giving everyone a stake in it may be the best solution of all. And that means putting money at risk in the nation's inner cities. "The same conditions that led to the Los Angeles riots exist in virtually every major American city," points out Tom Monahan of the New York City-based Committee for Economic Development. "Unless we begin to change things, we all will pay later on."

Goldberg plans to be one of those who helps to change. While other corporations flee for more idyllic pastures, Prudential remains steadfast in its commitment to the beleaguered city. Its 24-story office tower on Broad Street is in many respects the glue that holds Newark's social fabric together. "Social investing is a powerful complement to traditional corporate philanthropy because it provides access to capital and credit for community development," Goldberg says. "It's money that otherwise isn't available."

Precisely because traditional sources of funding naturally seek low-risk, high-return opportunities, America's inner cities have deteriorated beyond even the most dire predictions. Today, for those living in such areas, finding a decent job—let alone good housing and a solid education—is often next to impossible. That's because many companies and even the government, driven by fear of crime, vandalism and a lack of skilled labor, hesitate to locate new facilities in these areas. Indeed, that sucking sound you hear is capital and jobs draining out of the inner cities. Unemployment in some urban cores now exceeds 50%, and the disparity in per capita income persists. While having a tough row to hoe may not cause all of the nation's urban woes, and certainly doesn't excuse violence and crime, it explains why over 30% of the potential inner-city work force lack job skills.

Now a growing number of companies—whether driven by guilt, social responsibility, profit motives or profound fear of a really big fire next time—are investing in America's inner cities. They are spending tens of millions of dollars opening stores, lending money, hiring residents and providing training. "Businesses are discovering that the socially troubling problems of our cities must be attended to," says Stanley G. Karson, director of the Center for Corporate Public Involvement, a Washington, D.C., organization that helps facilitate corporate investment. "Otherwise, they threaten the stability, prosperity, even the survival of the businesses themselves." Adds Monahan: "Companies are finding that they can invest in urban areas and make a nice profit."

Not everyone agrees that those profits are nice enough to offset the risks. For public companies, the perceived added dangers of urban investments are hard to explain to shareholders and their increasingly assertive representatives on the board, especially in an era when massive downsizings and layoffs are hitting even middle-class citizens in rural and suburban America. For example, Vons Companies, Inc., Southern California's largest grocery-store chain, admits that shareholder and board concerns were partly responsible for the fact it dithered for years over whether to build supermarkets in Los Angeles' blighted core. The riots broke the logjam, and this winter the first of nearly a dozen Vons stores will open in South Central L.A. as part of the firm's post-1992-riot, $100-million commitment, which will generate up to 2,000 jobs.

But the chief executive brave enough to face down shareholders is rare, and even he or she may blanch in the face of a plethora of other challenges. Public and private companies alike must overcome fear of theft, high insurance premiums, bloated land prices, absence of experienced workers, increased training and development costs, inadequate transportation and employee resistance—all the barriers to inner-city development that often make greenfield locations far more attractive by conventional standards. "Some CEOs believe that their job is to return money to the shareholders and not be bothered by civic affairs," complains Ted Hershberg, director of the Center for Greater Philadelphia and a professor of public policy and history at the University of Pennsylvania. "CEOs who grew up in an area and continue to work there have a far greater interest in civic affairs than those who are more transient."

That's probably true, but many executives are genuinely concerned. According to a study conducted by the Center for Corporate Public Involvement (CCPI), 56% of all insurance industry respondents indicated that senior management played a critical role in the development of social-investment programs. Moreover, 44% said that the president, CEO or chairman of the board was the key factor. And the role of senior management was further reaffirmed by the fact that at 62% of the companies involved in social investments, the decision had been made from the top.

Why did these executives feel it was necessary to make social investments in the first place? Many said they believed that a company is an important part of its community and must be involved in solving community problems. Others stated more specific reasons: deteriorating business districts and declining neighborhoods. Only 18% attributed their firm's actions to external influences. And, interestingly enough, three-fifths said that they were willing to accept below-market returns and take increased risks in order to effect change.

Yet, for every company like Vons or Prudential that's moving into an urban center, many more are leaving. And the fallout in human, social and financial terms continues to worsen. States are paying out greater unemployment benefits and welfare, while crime and social problems are increasing. "Everyone has their own reason for moving away from the inner city—it may have to do with taxes or labor or a half dozen other issues—but it has a tremendous effect," says Monahan. "It moves jobs away from vast pools of people who are concentrated in urban areas."

To reverse the downward trend, some proponents of redeveloping inner cities argue that what's needed are new standards for at least some investments. Others claim that the profits already are available to those whose fears or prejudices don't blind them to the opportunities. For example, the CCPI found that 45% of firms lending money for social investments had no higher rate of default than for standard business loans. Moreover, 54% found their rate of return greater than 7% a year. And, perhaps most important, some found that what they had initially considered a social investment—a loan they thought had greater risk or a lower rate of return—actually performed more in line with a standard investment.

Prudential figures that even if it couldn't earn a return on its downtown Newark investments, the long-range benefits outweigh potential short-term losses. Over the last 16 years, the insurance company has shelled out more than $525 million for social investments—nearly 25% earmarked for Newark. It has helped build a $1.1 million six-theater cineplex, child- care facilities, the city's first central-area supermarket since the riots of 1967, affordable housing in the city's poorest neighborhoods and now the New Jersey Performing Arts Center in Newark. "The best way to help a community grow is to involve it in its own development," Goldberg says. "The children of today are the consumers and work force of tomorrow. In Newark, we want to be able to draw from an educated, qualified work force."

Prudential isn't the only company that has learned how to profit from investments no timid chief executive would consider. Albert B. Ratner, chairman and CEO of Cleveland-based Forest City Enterprises, Inc., already has two major restoration projects under his belt. In 1980, he bought Terminal Tower—a 52-story office building—and a rundown train station in Cleveland's central district, which had been deteriorating for 50 years. His real-estate development, construction and building materials firm then pumped $400 million into Tower City Center and by 1990 transformed it into a gleaming landmark that redefined the city's downtown. Thousands of people now work in the structure, which houses more than 100 companies.

Four years ago, his firm managed an equally impressive feat in New York. Forest City, along with other investors, spent $1 billion to construct a 4.2 million square foot commercial, high-tech and academic development on 16 acres in Brooklyn. The project, called MetroTech, has generated some 16,000 jobs and an annual payroll of over $500 million. More importantly, it helped rescue a neighborhood that had been in steady decline for years.

But Ratner doesn't let his social desires, however benevolent, get in the way of making solid business decisions. "I am a hard-nosed business person. The only justification I have for taking on a project is that I can make money. The thing that many business people don't fully understand is that you can make a profit by solving social problems."

And that's exactly how he approached MetroTech. At the time, former New York City Mayor Ed Koch saw his worst fears coming true: companies fleeing Brooklyn and the outer boroughs for the New Jersey suburbs. So, Koch—and his successor, David Dinkins—worked with Ratner to stop the hemorrhaging with something more than a Band-Aid approach. With a $500 tax credit for each employee, a waiver of some real-estate taxes and other incentives, the project went ahead. As a result, companies like Chase Manhattan, which alone had planned on moving 5,000 workers to a new out-of-state location, decided to stay.

It takes a concentrated effort to break out of the business-as-usual mentality. Back in Los Angeles, Vons had been concentrating its building efforts in the suburbs for the last two decades. After all, the guaranteed number of households in each planned suburban community took a lot of the guesswork out of site selection and facilities planning. Moreover, it's easier to develop stores where there's open land than where several parcels must be accumulated and existing structures razed. Compounding the problem, many urban land owners—upon learning Vons was interested in assembling parcels of land in urban areas—began asking inflated prices. "It was simply a matter of going where there appeared to be the easiest opportunity," explains Mary McAboy, Vons' corporate communications vice president.

But finding locations to build supermarkets is only half of the equation. Vons' HR department has found itself facing the formidable task of assembling a reliable work force. The company is hiring many people who have never before held a job, so it's working with local religious and community leaders' help to find good candidates. The California Employment Development Department provides skill-based training while Vons uses its own training program as well. It has even created a position for vice president of urban development in order to oversee the effort.

Los Angeles is not the sole recipient of this renewed fight against decay. Two-and-a-half weeks after the L.A. riots, for example, Seattle-based Seafirst Bank introduced a $2 million loan program for small businesses that wouldn't normally qualify for bank financing. The bank provided the loans of up to $100,000, with no principal or interest payment for three years. After that, borrowers pay only 5% interest for the seven-year loan. The bank uses college students—many of them minorities themselves—to serve as consultants and advocates for the borrowers.

Seafirst didn't stop there. When Seattle's mayor asked his city's businesses to hire 500 inner-city youths for the summer, bank chairman Luke Helms decided to hire more than 100 youths and teach them skills they could apply to a profession. Seafirst promptly handed out 4,000 applications at community agencies, schools, churches and civic groups, and wound up with 350 qualified applicants from low-income households. After three days of interviews, the bank's human resources department had an ethnic cross-section of teenagers. Some were no longer living with their parents, some were having trouble at school, a few were functionally illiterate and a handful were homeless.

During the summer, the bank put the students to work in the community earning $6.20 an hour. But when the time came for them to go back to school, Seafirst kept 95 of the 108 youths on its payroll. They worked as tellers, receptionists and data-entry clerks. The youths put in up to 20 hours a week after school and received continuing training in broader subjects like job readiness, computers and writing. Those who had problems with their school work also received free tutoring.

"We didn't know how supervisors would react when we asked them to take on these 108 students," says Diane Mackey, a Seafirst vice president who previously headed the youth training program. "We had to explain to them that it was a big commitment. It wasn't just an easy way to increase the size of the bank's staff. It would take a lot of hand-holding and a lot of energy. We wanted the kids to be successful in a work environment. Still, the supervisors' enthusiasm was great."

It wasn't always easy. Most of the teenagers had never held a job before and didn't understand basics, like calling in when they were sick or getting back from lunch on time. Others became lost in the daily routine and had trouble seeing the bigger picture of learning lifelong job skills. Regular bank employees often had to take time out from their routines to set the students straight.

But the program has achieved what it set out to. Many of the students began displaying a far greater interest in their studies, and virtually all began taking more pride in their communities. And the additional income provided many families living on marginal means with much-needed money for groceries and household goods. "We wanted to make a major impact because we recognized how great the need is," says Mackey, adding: "If we are able to get even a percentage of these kids into college or vocational school, then we have achieved a very important goal."

Another positive sign is that more and more companies make enough profit while stepping up to social problems that they can keep at it for the long haul. A case-in-point is Protective Life Insurance of Birmingham, Alabama. Since 1987, it has made loans to 13 shopping centers and business ventures that are either in predominantly African-American communities or are black-owned. One $4.8 million loan turned a group of vacant lots into an 84,000-square-foot shopping center, with a supermarket, drugstore and the state's first black-owned McDonald's franchise. Protective Life's senior vice president of investments, Steve Williams III, says the firm has always realized solid returns on investments that other companies shy away from.

Nobody has more experience with the subject than Prudential Insurance. It has taken a three-pronged approach to the maladies of the inner city: it makes social investments, including subsidized and low-interest loans; it provides grants to non-profit groups through the Prudential Foundation; and it offers in-kind gifts and encourages employee volunteerism. The company's main focus has been to address problems like housing, education, drug abuse and a debilitated business district.

The social investment program has paid dividends for everyone. Three years ago, Prudential provided $7.2 million in long-term financing to build a supermarket in Newark's central ward. Today, the market provides over 400 jobs. Since opening two years ago, the store has already turned a profit. It also has allowed locals to save as much as 30% on their grocery bills. Just down the street is the cineplex—the first neighborhood theater built in the city since 1967. And over the years, Prudential has put up funding to build dozens of low-cost housing developments and invested in a myriad of smaller businesses—pumping in as much as $15 million a shot. "Both the supermarket and the movie theater are rooted in the belief that a neighborhood must consist of more than just housing. There must be facilities—health centers, public schools and entertainment—to keep a city going," Goldberg says. "Our challenge is to take the funding the company makes available and apply it in the most successful and effective manner we can."

Government incentives are often necessary.
Of course, when private and public sectors work together, companies are able to address human needs as well as financial ones. And with the government's assistance, an organization is able to take a greater risk than usual.

But the ties that bind government and industry remain tenuous at best. President Clinton's proposal to create urban enterprise zones—where companies could invest and receive a tax break—has met with a lukewarm reception. Other proposals, many enacted by cities or community redevelopment agencies, have not achieved what they had planned. Some companies that want to help are discouraged by the difficulties of establishing programs, such as the constant stream of red tape. Small wonder that urban blight and ramshackle neighborhoods still abound.

There is no one solution. While small business is the primary generator of jobs in the U.S. economy as a whole, the ability of communities to foster entrepreneurs is going to be a big factor in the health of cities. At the same time, job training goes a long way to building a stable community and a future customer base. "It can be risky, it can be difficult, but the rewards can be enormous," Seafirst's Mackey says. "The fact is, everyone has to do their part."

Indeed, it is in everyone's interest to invest in our cities and people. The point isn't that a company should toss money at anyone in the inner city who needs funding. It's picking spots carefully and making sound investments that count. "Virtually every city and town in the U.S. has small companies and projects that are undercapitalized but worthy of support," points out Stan Karson, the CCPI director. "And much has been learned over the last 20 years about how to fashion long-term investments so they can work in the inner city." Says Forest City's Ratner, "There's no reason why everyone can't profit from rebuilding our cities."

Personnel Journal, February 1994, Vol.73, No. 2, pp. 60-67.

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