July 17, 2017

CT at center of corporate relocation strategy

Illustration | By Rawpixel.com, shutterstock.com
Illustration | By Rawpixel.com, shutterstock.com
Rendering | Contributed
A rendering of Aetna’s New York City corporate headquarters in a trendy section of Manhattan.
John Glascock, real estate professor, UConn
Marissa King, professor of organizational behavior, Yale School of Management
David Cadden, business professor, Quinnipiac University

Health insurer Aetna's decision to relocate top-level employees to New York City, while maintaining the bulk of its workforce in Hartford, is part of a nationwide management trend in which companies are increasingly separating their corporate executives from the rest of their workforce.

General Electric followed a similar path when it decided to move a few hundred top C-level execs to Boston, while maintaining thousands of workers in Connecticut.

Travelers Cos., which employs around 7,000 in Hartford, has its corporate headquarters in New York City.

Companies separate and/or move their top brass to larger cities for myriad reasons — recruitment of talent, fostering university partnerships, and having better access to clients — but a major consideration is so executives can manage their firms from afar, experts says.

It allows for decision making to become less personal and more strategic, said John Glascock, a real estate professor at UConn.

"When we fire people or outsource, it happens at a distance," Glascock said of executives removed from the majority of their workforce. "We also do not know [those employees] personally."

In the '80s and '90s, when firms downsized, Glascock said, they found it disrupted the flow and ability of corporate headquarters and the firm to work effectively. Many workers who survive a layoff feel guilty for being left behind and/or wonder if they'll be next.

"Thus firms have decided to separate their corporate headquarters from most workers and to allocate different parts of the firm to different locations with the headquarters clearly separate," he said. "This is about strategic management of the firm."

Glascock said that other examples include Exxon moving its C-suite from the New York City area to Dallas and Boeing to Chicago, while workers are in Seattle and South Carolina.

Another example, he says, is HSBC, which has headquarters in the Canary Wharf section of London, while most of its operations are in Asia and many — if not most staff — are in Hong Kong.

Relocation drawbacks

While some companies are choosing this bifurcated strategy, not everyone agrees it's a good idea. Marissa King, professor of organizational behavior at the Yale School of Management, said there's no substitute for having executives located with the rest of the company.

"Morale, communication and innovation suffer when executives are separated from their core business. A video conference can never replace the value of a chance meeting in a hallway," King said.

In addition, moving large business units is difficult, King added.

"Employees have families and are a part of communities — they don't want to be moved," King said. "This results in a hybrid solution of moving the C-suite."

Another problem is it creates the perception of an elite status for top executives, said David Cadden, a Quinnipiac University business professor.

"This generates resentment on the part of the other members of the corporate headquarters staff," Cadden said. "All in all, I can see very few rationales to move only the top portion of your executive staff to a new corporate headquarters."

Attraction of big cities

Many companies choosing to separate their corporate headquarters are transplanting their execs to big cities for myriad reasons, including the ability to recruit top talent, which is increasingly found in larger, urban environments, Cadden said.

Cities are attracting Millennials and others with strong social media and IT skillsets, which are increasingly in demand.

Meantime, many CEOs are looking for greater relevance.

"There is a desire by CEO types to be in a relevant city — Hartford is not one of those," Glascock said. "GE's CEO clearly had that in mind as well as the other factors. Moves usually have more than one motivation."

Joel Grieco, a commercial real estate broker at Cushman & Wakefield in Hartford, said taxes, overall cost of doing business, financial incentives, access to labor/clients and building synergies with universities and/or other companies are also factors companies take into account when deciding their location.

Cadden echoes that, saying cities like New York and Boston are top notch when it comes to university linkages with corporations. "Even [Gov.] Malloy said that Hartford can never really match Boston and New York," Cadden said, adding that those cities make it much easier for universities to pair up for research projects, which is important to companies.

Cadden said there is a theory that states the greatest number of ideas come from the most populous regions. "If you have a critical number of people together, they start getting smarter, they feed off each other," Cadden said.

In Aetna's case, because it is an insurance company, moving to New York City makes the most sense, Glascock said.

"They see changes to the insurance industry and want to be ready to shift if needed — thus New York offers more flexibility in options and in talented people than does Hartford," Glascock said. Glascock said bright young talent is moving to core cities where they and their potential spouse can get jobs.

Seeking solutions

While Connecticut's economy and image have taken considerable hits in recent years, the state can take steps to keep companies from relocating, experts say.

For one, getting the state's fiscal house in order would be a move in the right direction.

Grieco said that Connecticut is one of only four states with a corporate tax rate at 9 percent or higher.

"Corporations don't care about the obscure ratios that are cited to defend Connecticut's tax structure, such as total tax burden versus gross state product. That obfuscates the issue," Grieco said. "Connecticut corporations with over $100 million in revenue pay an additional surtax on top of an already comparatively high tax rate. But it's not just the corporate income tax that makes it expensive to do business in Connecticut. It's energy costs, property taxes, personal income taxes, regulatory costs, sales taxes."

Cadden said there must be a solid commitment in the legislature to deal with the financial issues affecting the state, "particularly funding the state's pensions."

Policymakers could also "create a tax system that would be consistent for the foreseeable future. Corporations want to be able to accurately forecast what their tax obligations would be in the near future."

Other steps include developing corporate/university partnerships "where corporations can tap into the individual talent of universities and university students and faculty can develop product ideas and be economically rewarded from their linkages with corporations," and helping companies and educational institutions to develop worker re-training programs, Cadden said.

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