Governance is a single category in the environmental, social and governance (ESG) triad, but in fact, it is itself only one of three factors to measure effective policy outcomes for companies, governments, agencies and nonprofits.

The top factor is leadership. Leadership sets the vision. It is often broad and widely encompassing, a philosophy or perspective. The factor that follows is governance, which sets the policy based on leadership’s vision and philosophy. Once policy is set under governance, the factor for execution of policy is management and administration. Here is where specific processes and programs give tangible outcomes to the policies. Measurement of those outcomes is a test of both governance and leadership.

Even so, it is not enough for all three to align. The outcomes must have an objectively positive impact on those people they were designed to benefit.

For example, a company, elected official or elected body with a philosophy that good public health is vital for a well-functioning community can set policies encouraging that. Public-facing managers and administrators create and run programs providing positive health outcomes. In public health, metrics showing everything is working throughout the spectrum might be declining health care costs, fewer hospital or doctor visits, increased vaccination rates, and increased longevity. Defined metrics and measurement create an important feedback loop for not only the ongoing effectiveness of programs, but also policies, and philosophy. This allows replication and expansion of what is working well and changes to that which fall short

Contrast this against leadership that sets a tone of environmental disregard with little to no regulatory policy or programs to either enforce or encourage environmentally favorable results. Such a perspective will ultimately result in measurably dirty air and water. While the outcomes are certainly aligned with the leadership vision and create a feedback loop, dirtier air and water are nearly universally viewed as objectively negative outcomes.

Looking at governance in this context, this article is the first of a four-part series on assessing governance in municipal bond investments. Other pieces will cover technology in outcome assessment, health care crises and responses, and cyber-security.

“We know much more about a good habitat for mountain gorillas or Siberian tigers than we know about a good urban habitat for homo sapiens.” – Jan Gehl, Human Scale professor, architect, urban planner

Fall in New England means going to the local farmer’s market. It’s a seasonal tradition; tables festooned with a cornucopia of squash, pumpkins, late season corn, gourds and of course, apples. While there are many farmer’s markets, I happen to like the one in Somerville, Massachusetts on Union Square. In addition to an abundance of produce from the area’s farms and orchards, there are tasty fresh-made pastries and muffins, cheese from the local dairy, and to pull it all together, usually a blue-grass band playing.

Running nearly every weekend in the summer and fall, the whole thing is a bit of a happening. Of course, you go to get your locavore fix, but it is also a nice town event. Friends meet to catch up, families create happy memories, strangers bond over the beauty of the season’s bounty, and everyone has fun time.

Guess Who I Bumped Into?

It’s a living example of Somerville’s Mayor Joseph A. Curtatone’s “bump-factor” principle: create spaces and events for the city’s residents to interact with each other in a positive shared experience. Given Somerville is one of the most densely populated cities in America, with an estimated 80,000 residents living within its 4.2 mile geographic boundaries, you might well wonder why you need to create more bump-factors. With that many people in that little space, how could people not help but bump into each other?

Yes, people “bump” each other every day. We run errands, drop the kids off at school, drive or get on the T to get to work. But these are daily routines, our minds focused on checking the boxes of getting things done with as little engagement as possible as we head from or to. If anything, these are disconnectors.

The bump-factor is just one part of a broader public policy initiative to create a sense of community connectedness and inclusiveness in Somerville. It is something the mayor and his very astute team take very seriously and think about a lot. After all, Somerville is a very diverse community. For nearly one third of the residents, the language spoken at home isn’t English. From French Creole to Hebrew to Hindi, people converse in over 35 languages around the city. The median age is 31.5 years old. There are almost exactly twice as many residents 24 years old and under (20,279) as 60 years old and older (10,901). Forty-nine percent of the 32,453 households have children 17 and younger. The challenge for policymakers is clear—how do you make a diverse city inclusive, a “special place” to live, raise a family, work, and play?

Practical Policy

Some solutions are simple. Parks are great places for people of all ages and from all walks of life to go to unwind, play soccer or softball have fun, and meet other people living in the city. With more than 80 parks and open spaces in the city, opportunities are numerous to create comfortable interactions in a relaxed setting. To increase park utilization, the city put in tables and chairs. Park visitors increased over 50%.

Open spaces like parks and town squares also serve another great purpose—gathering places. Somerville may be diverse, but it is no Tower of Babel. These varied cultures are celebrated with numerous ethnic festivals. Throughout the year, residents get to show pride in their cultural heritage by sharing food, music, art, games, traditional dress and dance with their neighbors.

Moreover, the city conducts a “happiness” survey every two years. With questions such as “How proud are you to be a Somerville resident?” and rating everything from quality of public schools to availability of social community events, the short survey manages to be very comprehensive. Based on the responses, a recent report revealed a very positive social outcome. Somerville residents had a happiness factor exceeding that of the happiest country in the world: Switzerland.

To the casual observer, these and the many other things the city does to encourage a sense of home-spun neighborliness may seem nice to almost quaint, but hardly the stuff of serious public policy. It’s easy to think the “bump-factor” is just another one of those catchy window-sticker phrases and a survey about happiness as being, well, maybe a little hokey.

The Physics Of The Bump

If you’re thinking like that, you’re wrong. The positive outcomes of the principle of inclusion and connectedness are backed by a great deal of hard-data research. It comes from none other than the world renowned Massachusetts Institute of Technology Media Lab and its creator, Professor Alex “Sandy” Pentland. He bestows on the bump-factor the more academically rigorous title of social physics. Social physics—and there is a lot of complex, sophisticated data analysis, math and physics anchoring the conclusions drawn from this ongoing research—is at its core about the impact of our social interactions on ourselves and our communities.

Professor Pentland notes that it’s the mixing between communities that’s the source of a lot of the innovation and creative output in a community. “It’s the banging together of ideas that causes innovation and better social outcomes,” he notes. Like a social outcome where a community is happier than the happiest country on earth.

Betcha you want to take a deeper look at the data behind that happiness survey now, don’t you? Not so hokey now.

You Measure What You Care About

For these forward-thinking public leaders and managers who embrace evidence-based public policy, the motto is “you measure what you care about.” That means data measurement and analysis.

There is considerable measuring behind each and all of the initiatives Somerville engages in. The centerpiece of quantifiable public policy decision making is the city’s SomerStat program, a data-driven performance management system. It is not by accident that Somerville has the most data scientists per capita of any city in America. As part of the city’s Open Data Initiative, anyone can click into the Somerville Data Farm (seriously, that is the name) and pull data sets on nearly 70 different financial and public services performance metrics. You’ll find the happiness survey data there. If you’re not a data scientist, the city’s SomerVision2040 report graphs and charts of many of the metrics captured.

It’s been very effective. There is a reason Somerville’s mayor is highly regarded as a national leader in better management through measurement. He teaches it at Harvard University’s Kennedy School of Government, he and his team practice it every day. It’s in large part why Somerville consistently ranks as one of the most influential cities nationwide and one of the best-run cities in Massachusetts. In fact, public managers from other Massachusetts communities–and from cities as far away as Ireland and Korea–regularly visit Somerville for briefings.

From Data to Dollars 1.0: The Transportation Case Study

Still, even with solid academic underpinnings, increased happiness and inclusion feel somewhat intangible. It’s implied these desirable positive emotions correlate to positive economic outcomes, but quantifying the link seemed elusive.

So, back to the data. Professor Pentland’s research found that “banging together” outcomes aren’t entirely random. “It varies by the density of the city and the transportation infrastructure,” Pentland observed. “So, if it is a very dense setting with a really good transportation infrastructure, you run into a lot of different people, there’s a lot of ideas banging together, and you get a lot of innovation.”

And more than innovation. He went on to make a bold statement: “If you tell me the density of the city and the transportation infrastructure, and actually you just need to tell me the average commute time, I can tell you the GDP almost perfectly.”

With that, now it should come as no surprise the mayor vigorously spearheaded the city’s effort to bring the MBTA Green Line Extension through Somerville. When completed, it will mean fully 85% of the city’s residents will be within walking distance of mass transit. That works the other way too. Commuters can come into the city by public transportation to work, shop, eat, play, or stay.

Moreover, it is a safe bet the new transit stops will attract jobs into the city. That’s proven a successful strategy already. The opening of the Assembly subway station was done hand in hand with the development of Assembly Square. The square is comprised of several compatible, well-planned commercial and residential projects. There is Assembly Row, a multiuse development with outlet stores, restaurants, a movie theater, coffee shops and similar venues with a walking path on the Mystic River. Additionally, 1,000 housing units were built in conjunction with the shopping and entertainment complex. Finally, Partners Healthcare invested $465 million in a new office campus in Assembly Square. It is a perfect Pentland-triangle for high GDP—high density population, strong transportation infrastructure, and very short commute.

From Data to Dollars 2.0: The Pedestrianizing Case Study

The mayor has been equally vigorous in adding more bicycle lanes. In 2009, there were barely 4 miles of bike lanes. Now crisscrossing the city, bike lanes exceed more than 17 miles, with the goal to expand that further. Where cars often drive through town without stopping (parking being a major friction point), shop owners on bike lanes showed increased sales. In fact, for the monthly SomerStreets festivals, some roads in the city are closed altogether so folks can walk or bike to enjoy a host of different events without any vehicles interfering.

This “pedestrianizing” of city streets creates a dynamic urban streetscape, increasing public life and with it, economic activity. Again, Somerville has the data to prove it. As these initiatives for more open spaces, more social events, better transportation infrastructure were implemented, the population began to increase, adding nearly 15,000 people since 2010. People came to stay—hotel/motel excise tax revenues jumped over 115%, looking to close 2019 at $1.3 million. And play—the meals tax revenue is up nearly 100% at $2.17 million.

This measured governance translates into fiscal soundness. With strong fund balances, reasonable debt, and consistently improving revenues balanced against prudent budgeting, the City of Somerville, Massachusetts enjoys a credit rating of AA+ from bond rating agency Standard & Poor’s. The city is not rated by either Moody’s or Fitch, but with such a top-drawer rating from S&P and modest debt issuance, it doesn’t need those.

Governance Metrics

For investors looking to check the governance box in their portfolio’s ESG assessment—and that’s not just municipal bond investors, but businesses looking to locate or relocate, or real estate developers considering a project, both of these major investments in their own right—the parameters are clear.

First, look for communities with leaders and managers embracing and implementing evidence based public policy. Second, examine the rationale as to what data is being collected and measured. More data is not necessarily better. Third, see how data analytics are being applied in public policy initiatives. Fourth, assess if the public policy outcomes are consistent with applications drawn from the data. Are there quantifiable desired outcomes and, if not, why not? For those who like ratios, one key metric to add to the analytic arsenal is “data scientists per capita.”

The Final Bump: When a Chainsaw meets a Pumpkin

As expected, there is Halloween-themed festival in Somerville this year for everyone to come and have fun. There will be cemetery tours and face painting and so forth, but the event that I’m most interested in is the giant pumpkin chainsaw carving. A chain saw? A pumpkin? You have my attention. I can’t wait to see who I bump into at that event.

Check out this article in Forbes