‘Father of venture capital’ Sir Ronald Cohen: We need a 'New Deal' on corporate impact
Sir Ronald Cohen, one of the UK’s foremost private equity entrepreneurs, believes the Covid-19 crisis is an opportunity to transform western capitalism into a socially responsible enterprise that values a company’s impact on society as much as its profits. Cohen talks to GlobalCapital about the tremendous challenges facing the global economy, and how it can be transformed for the better.
Cohen, a founding partner and former chair of Apax Partners, and is the chair of the Portland Trust, Bridges Ventures, and the Global Steering Group for Impact Investment (GSG).
His extensive experience in the industry and focus on impact investing earned Cohen a knighthood, and he has been dubbed the father of “British venture capital” and “the father of social investment”.
Cohen’s book, Impact: Reshaping capitalism to drive real change, will be published by Ebury on July 2.
GlobalCapital: How has the Covid-19 pandemic compared with other economic crises?
Sir Ronald Cohen: The [Covid-19] economic crisis appears to be much more serious than the  financial crisis. We have seen a multiple of the financial support that governments have provided in [Covid-19] stimulus packages than they provided in 2008. Therefore, the financial crisis is, more or less, under control.
However, the economic and health crises continue. I think it is a very serious challenge for us. The closest parallel may well end up being the Great Depression, because I can see high levels of unemployment following Covid-19. Companies which have got used to operating on a slimmed-down basis are unlikely to recruit all the people who have been laid off.
People are going to have to be retrained for new jobs. Governments are also going to be very heavily indebted, so budgets are going to be under great pressure, similar to 1929. I think this crisis has shaken our long-standing habits and beliefs and is opening the door to potentially very important changes.
GlobalCapital: In your view, how have financial markets coped when compared with the financial crisis?
Sir Ronald Cohen: Markets have bounced back a lot faster than people expected. We had more than a 30% drop, but now we are just single-digit percentages below where we were.
It has, of course, led to a rotation in the valuation of different sectors. Tourism, transport related sectors and hospitality sectors have done badly, and tech and healthcare have done well.
That masks a lot of pain in terms of our economy, but governments reacted with huge amounts of money, particularly in the US, and then Europe followed suit.
I think the financial crisis is under control. The health and economic crises are the ones that we are going to have to live with now.
The health crisis will really only end when we either very effective medication or vaccines. I do not see that coming before the beginning of next year in any quantity.
Governments have not opted to invest huge amounts of money in new testing, which I recommend they do. I think that they are hoping that testing proves to be unnecessary because the vaccine will come along. I think it’s a mistaken view, because you can’t guarantee that the vaccine will come and you will also have mechanisms for very quick boosts to testing in future pandemics. Given the small amounts of money that were involved, relative to the cost of containment and lockdown, they should have done it.
GlobalCapital: What has struck you about governments’ responses to the crisis? What are the challenges ahead for western economies as we come out of the pandemic?
Sir Ronald Cohen: What has struck me about this is that, yet again, there are huge stimulus packages that are going to create greater inequality and the most vulnerable are probably going to be hit the worst. In the effort to do things quickly, governments tend to focus on the biggest companies and the biggest financial institutions.
The most vulnerable are the single-parent families, the elderly and the disabled. These groups are hit the hardest, because they get less government support than others do. In addition, charitable organisations that helped them also get hit very hard because philanthropic donations tend to fall and governments haven’t thought of stepping in any serious way to help the non-profit sector.
I think we are going to emerge with even greater social pressures and that may put us in a situation where we are at the fork in the road we were at in the 1930s, with populist regimes that build on these frustrations.
Democratic action that focuses on a new ‘New Deal’ is perhaps the most important bit of work that needs to be done in my view. I think we need to do something similar to what we did in the early 1930s following the crash of 1929, where we focused on measuring profits more accurately.
Investors and governments realised then that everyone had been investing without companies having comparable accounting principles or auditors. So, in 1933, the US government mandated the use of the Generally Accepted Accounting Principles and auditors.
We have to do the same now with impact measuring. It is possible to measure product impact, employment impact, and operational impact of companies. It’s possible to put monetary value on those impacts and it’s possible to reflect them through their financial accounts. Just as people in the 1930s were investing without measuring profit properly, today $30tr of [environmental, social, and governance (ESG)] investment is going on without measuring impact properly.
If we bring in impact-weighted accounts then we will begin to get a hold of our financial and economic system and, through investments, persuade our companies to reduce the harm they do and bring solutions to the problems we face.
GlobalCapital: How can we reflect a company’s impact on the world?
Sir Ronald Cohen: You do not have to limit this to environmental impacts. What Covid-19 enables us to do is to have this focus on the impact that our businesses have and the impact our investors have by investing in these businesses.
Later this year, we, the Impact-Weighted Accounts Initiative at Harvard Business School, led by professor George Serafeim, will publish accounts of 2,500 companies weighted for their environmental impacts.
Next year, we will add product impact and employment impact — and this is all from public information. There is an effort to push it through now. I think the world needs to move to generally accepted impact principles.
GlobalCapital: Can you see a more sustainable and fairer economy being built after Covid-19?
Sir Ronald Cohen: We have to do what we did in the 1930s: we have to use this opportunity to move forward. The way I view it is we have a self-defeating economic system. Companies create a lot of damage in the search for profit — either environmental or social damage — and governments tax us all to try to remedy it.
But the scale of the damages are something we can no longer remedy. We have to stop creating this damage and we have to begin to use our companies to bring solutions.
That means shifting our economic system from being driven by profits alone, to being driven by profit and measurable impact. I say in the book, in a way, this is the next step after Adam Smith and the invisible hand of markets. Impact is the invisible heart of markets that guides that invisible hand.
By measuring the impact of companies, you begin to create a race to the top where companies compete, not just on their profit performance, but also on their impact performance. I believe that the returns from optimising risk, return and impact will be greater than the return from optimising risk and return.
The reason is that when you begin to take impact into account, you reduce the risk. You reduce the risk of consumers, employees and investors deserting. You also reduce the risk of taxation and regulation. You also open the door to new sense of opportunities that you wouldn't otherwise have uncovered on the return side.
So I think, as Michael Porter of Harvard Business School has said, these concepts of shared value are going to be the big disruptors now. I think the tech revolution created the water on which every ship has to sail, and that impact investing is going to come on top of that and put another layer of water on it.
Every business is going to have to have impact integrity and prove it. It’s not unlike the situation in the early 1930s, when you had the populist movements we all fear, but you also had Roosevelt’s New Deal which led to welfare states.
I like to think that while we may get some populist regimes, a mass of democracies will actually continue to move forward and improve our economic system. In the book, I talk about shifting from selfish capitalism to impact capitalism.
Companies are not going to do this voluntarily, although some that I mention in the book are setting an example. However, most companies think they don’t need this. But investors are demanding it, particularly the younger generation, and we are beginning to see a movement spreading now among pension contributors. For example, there is an effort being launched in the UK on June 30 called ‘Make my Money Matter’, which is focusing on pension savers because there’s $38tr of pension savings across the world.
[GlobalCapital will be publishing an exclusive interview with Richard Curtis, the celebrated film director and screenwriter, and co-founder of ‘Make My Money Matter’, soon to discuss directing pension funds towards more ethical investments.]
GlobalCapital: How do we fund that new economy? Is it government’s responsibility or should it primarily be the role of capital markets?
Sir Ronald Cohen: I think government has to play an enabling role. If governments mandate this reform today, two years from now, companies will begin to publish impact-weighted financial accounts.
This will begin to manage the impacts of bringing solutions instead of creating problems, but it’s basically driven by investors and companies. I think the difference between the environmental impact movement and the social impact movement is the environmental impact movement started at the top 40 years ago trying to influence governments. The social impact movement invented social bank bonds, development bank bonds, outcomes funds and, in fact, capital wholesalers — it started from the bottom.
The last big change in investment thinking — as opposed to investment themes like tech versus non-tech — was risk thinking, and that came in during the 1950s. When I kicked off as a 26-year-old creating what became Apax Partners, the average holdings of the biggest institutional investors were just the bonds and the stocks of their country. With risk thinking, you had the concept of risk adjusted return and that brought the concept of diversification.
That opened the door to venture capital and private equity. It also opened the door to investments in emerging countries and the door to globalisation. I think impact thinking is going to transform our portfolios in the same way as risk thinking.
We don't measure risk 100% accurately — we measure it effectively. We look at the volatility in past times and we try to deduce from that what future volatility would look like. I think you can measure impact a lot more accurately than you can measure risk.
I think shifting our portfolios to risk, return and impact is going to create a major rotation of types of companies that you invest in. Just as technology did, it’s going to disrupt every business model.
What lessons do you feel we should take away from Covid-19? Do you think we can return to the pre-Covid world, or are we inevitably entering a new one?
I'm of the belief that we will move on to a different system. The shock of Covid-19, the high unemployment, indebtedness of governments, the environmental threat and the social threat to the cohesion of our societies from inequality, require us to use different means of solving our problems. I think the answer is to drive our economies not just with profit, but to measure impact in a similar way to profit.