Reinventing capitalism for impact (with Sir Ronald Cohen)

How can you help an entire industry to transform and do more good in the world … especially one as profit-driven as the venture capital industry?

In this episode, JP learns the answer to this question from Sir Ronald Cohen, or Ronnie. Known as the “father of impact investment”, Ronnie is a compassionate capitalist dedicated to relentlessly during the transformation of the corporate world, and lives by a simple principle: Do Good. Do well. 

His ambition, passion, innovative thinking and powerful conviction is something we can all learn from. 

Listen to the full episode now. 

Subscribe now to JP's free monthly newsletter "Positive Leadership and You" on LinkedIn to transform your positive impact today: https://www.linkedin.com/newsletters/positive-leadership-you-6970390170017669121/

Transcript

JP [00:00:00] In early 2007, Sir Ronald Cohen was sitting at his desk at a work in London when he got an unexpected call. 

SIR RONALD COHEN [00:00:11] I got a phone call from the British Treasury saying will you look with a more entrepreneurial eye at how we deal with the issue of poverty. However much money we seem to throw at it, we don't seem to make a big dent in it. 

JP [00:00:28] At the time, hje was one of the most successful venture capitalists in Europe managing billions of pounds of investments. 

SIR RONALD COHEN [00:00:37] I knew that I didn't want my epitaph to read. He delivered the 30% rate of return. It didn't seem like the meaning of my life, and I immediately said, Yes. 

JP [00:00:50] I'm Jean-Philippe Courtois, JP. This is the Positive Leadership, the podcast that helps you grow as an individual, the leader, and ultimately as a global citizen. 

SIR RONALD COHEN [00:01:01] Companies that are the major force creating problems today environmentally and socially. And so changing their behavior, which can be done through the efforts of investors, it's the way forward for us all. 

JP [00:01:21] Today Ronnie is Chairman of the Global Steering Group for Impact Investment and the Portland Trust, and he's recently brought out his second book titled Impact: Reshaping Capitalism to Drive Real Change. 

JP [00:01:36] So Ronald Cohen, Ronnie, a warm welcome to the Positive Leadership Podcast. Thank you so much. 

SIR RONALD COHEN [00:01:41] Great pleasure to be here with you, Jean-Philippe.

JP [00:01:42] You know, Ronnie, you've had the most incredible journey from refugee to a super successful venture capitalist to impact investing pioneer. What really stands out for me is your lifelong interest in helping others. This is something I'd like to explore in this conversation together. But first, I'd like to go right back to the beginning. You were born in 1945, in Cairo, in Egypt, the Jewish family. Yeah. So what do you remember about your time in Egypt, if you do, and what has shaped you from that time in your life? 

SIR RONALD COHEN [00:02:15] Well, what I remember was a society where Muslims, Christians and Jews got on extremely well. Religion was not an issue. When I asked my dad, I must have been seven or eight years old: what is religion about? He said to me, religions are just the different sides of the pyramid leading to the same God. And that's what I left Egypt feeling about my childhood. Now, obviously we lost everything we had to leave precipitously with a suitcase each and ten Egyptian pounds. So it was a very traumatic experience for my, for my parents. But this feeling that we can all get on and that at the end of the day we're all seeking to lead normal lives, is what has motivated me to get so involved in trying to help resolve the Israeli-Palestinian conflict. 

ZYX [00:03:15] And so you just talked about the tragic events of the time, I think it was in 1957. Right. Right. And President Gamal Abdel Nasser drove Egypt's Jewish population, the aftermath of the Suez crisis. I think you had to go. And actually, it reminds me of my own family history in different contexts, Ronnie. My parents, my two sisters, my grandma myself had to leave Algeria when the country became independent in 1962. So when I was when I was 18 months old, I was younger than yourself. But it was a complete reset for my family and we had to start again from.. not from scratch with a couple of bits of luggage and but the incredible fighting spirit. And I think this is what you did. So how did you react to this dramatic change in your circumstances? You know, in my previous podcast that Bill George would call that a crucible moment. So what was that, a crucible moment for you, Ronnie? And what did you learn from it? 

SIR RONALD COHEN [00:04:16] Again, so interesting that we should share similar backgrounds as refugees, Jean-Philippe. In the case of my parents who were in their mid-forties, they presented everything as a challenge to me. So the biggest impression that was made on me at the time of, of my arrival in the UK is when my dad took me to visit the headmaster of a state school and he had to gain admittance for me. And he said to the headmaster, look, it's not because he's my kid, but if you take him, he'll be top of the class. Now, you can imagine for an 11 year old shifting country in rented accommodation, then a small apartment, trying to get into school, the sense of responsibility that they gave me to perform at. I was aware from about the age of 16 onwards that I would have to look after my parents, that I would have to sustain them financially in the later years. And I suppose as time went on and I went to Oxford, which I did thanks to an unbelievable teacher that I found in this state school, Richard Farley, to whom I owe a huge amount. At Oxford in the sixties, was a very idealistic time, not unlike the period that millennials represent today. This was the period of anti-nuclear armaments. This was a flower power... And so the combination of these values and the necessity for me to become financially independent, to support my parents, eventually led me to this notion of doing good and doing well, which I tried to do through venture capital. 

JP [00:06:32] You know, one of the things that I think is important for a positive leader to be able to do, and I was talking about this on the podcast with a guest called Mo Gawdat, who is the best selling author of Solve for Happy, is to be able to define your ambition when managing your own expectations in life and to be bold in that ambition. I think you are very bold in your ambitions fairly early on. Back in 1972, you just briefly talk about that, I think when you were 26 years old, decided to create one of the very first venture funds in the UK, Apex Partners. And Apex went on to become one of Europe's and globally leading private equity firms, providing seed funding to companies including Apple, Waterstones, Virgin, AOL, and many more, I think. 

So what was your ambition, your bold goal at the time, Ronnie? When you set up Apax in a way where you saw certain that creating this new form of finance could work. 

SIR RONALD COHEN [00:07:32] I felt that the sky was the limit, Jean-Philippe. I was brought up to be very ambitious. I wanted to build something of real significance, and I felt I could achieve anything that I set my mind to. Now, I think this is what characterizes entrepreneurs. Ventures grow to the size of their entrepreneur's vision. An entrepreneur with a small vision will build a small company. You very seldom find an entrepreneur starting out with a small vision and ending up with a massive company. It tends to be that if you think big, you achieve big. And then my first book, The Second Bounce of the Ball, I deal with this question of climbing the north face and getting to the top, picking a really big challenge and achieving that. Now, part of it is my background at home. A Jewish mother is the great incentive in life because you wake up every morning being told you are the best and the most handsome and the and the cleverest, and that you should go for it. But a lot of it had to do with my time at Oxford, actually. And then when I graduate, I was about to graduate with my degree in philosophy, politics and economics. I went home and asked my dad, I said, What am I going to do now? He said to me, Why don't you go to Harvard Business School? I've never discussed Harvard Business School with him before. And he gave me the opportunity to think about something that turned out to be just the right step for me. And I was lucky to get the scholarship. And I went to HBS. I discovered venture capital there and the rest that followed. 

JP [00:09:28] When Ronnie took the idea of venture capitalism back from Harvard to London, the concept was so new that very few people even knew what it was. In 1972, he was one of the founders of Apax Partners, one of Europe's first venture capital firms. The early years were tough, backers were thin on the ground. Half the partners gave up on the business. And Ronnie was about to give up, too, but his father's encouragement once again was crucial, and he persuaded Ronnie to stick with it and carry on. Over the next two decades, the business thrived and Ronnie was recognized as a great financial innovator. But by his early fifties, he was feeling dissatisfied. 

SIR RONALD COHEN [00:10:16] I was very focused on social issues. I had gone into venture capital because I thought that was a way of doing good and doing well. It was a way of making money, certainly, but it was a way of creating jobs as well and improving the opportunities that the people from very simple backgrounds would have to acquire wealth. But as time went on, I realized that I was actually helping to increase the gap between rich and poor. And so I decided to leave Apax to devote my life to two issues: the Israeli-Palestinian conflict resolution and social issues. 

JP [00:11:03] Then as luck would have it, Ronnie got that call from British Treasury asking him to find ways to solve poverty through entrepreneurial methods, giving him  an opportunity to align his personal and professional purposes. 

SIR RONALD COHEN [00:11:20] And that gave me the opportunity to delve deeply into the reasons why we haven't dealt with poverty more effectively. And because of my background in venture capital, I realized that we had not given investment to those who want to improve lives. And in 2000, the Social and Investment Taskforce, which I led, published a report saying basically we need to innovate in ways of bringing investment to those who want to improve lives – people in the social sector, more than the world of business. Then that effort then through a number of milestones, led to the discovery ten years later at Social Finance, which I founded and co-founded in 2007, of the first social impact bond. 

JP [00:12:21] Can you tell us more about that concept? Because I recall, of course, reading your book that you decided to really focus on a very specific issue in the UK, the re-offending rate of short-term male prisoners released from the Peterborough jail in UK. And I think it was a success. You brought down reoffending rate by 9% and you paid out a dividend of 3% to investors. So why does it work? Because it’s a very new model for investors. 

SIR RONALD COHEN [00:12:54] So Social Finance was three years old and I had the team of 18 people working in the basement of my office in Portland place. And two young people, 30 year olds, came up to my office one day and said, you know, we've been trying to work out how to innovate in reducing the rate, as you were saying, of at which prisoners go back to jail, which is over 60% across the world. What do you think, they asked, if we link a reduction in the number going back to jail to a financial return. I said to them, you've found the key to the capital markets for social entrepreneurs. We've all assumed that we can't measure anything in the social area, but we can measure a percentage reduction. May not be a measurement of the quality of life of a prisoner, but we can measure a percentage reduction. So the idea is if you promise to pay – you, the government or a group of philanthropists or aid organizations or a combination of all three – promise to pay for social improvement achieved, then that promise to pay, that contract, enables you to raise money from investors who then take the delivery risk. It means that the government doesn't have to put the money up. But very importantly, like venture capital, it gives fantastic focus to the leader of the organization trying to reduce the recidivism rate. It leads to the generation of great data so that you can do a better job at doing it. It means you're managing the process and improving the process of rehabilitating these prisoners. 

JP [00:14:48] Nobody had ever attempted to use financial mechanisms to solve societal problems before. It was entirely untested. Ronnie took his ideas to the Secretary of State for Justice, Jack Straw. 

SIR RONALD COHEN [00:15:01] And we said, look, we were raised £5 million. And famously Jack Straw, so after he'd heard that pitch, said that to his colleagues, I know we shouldn't do anything for the first time, but we're going to do this. Okay? 

JP [00:15:19] The launching of this first impact bond was one of the proudest moments of Ronnie's career. Now, his task was to develop this innovative approach and see where it would take him. 

SIR RONALD COHEN [00:15:33] It's led the way now to over 230 similar bonds in 35 countries, tackling 15 different social issues. But government hasn't really seized the importance of it, and nor have philanthropists. And so $500 million has been raised in social impact bonds against one and a half trillion dollars in the bond market and the loan market. So it's time for government to play a big enabling role here at a time when government doesn't have the budgets has mounting social and environmental issues, this is its opportunity to bring innovation and capital to its side to achieve its priorities. The world cannot continue with a level of inequality that that we face today or with the environmental damage that we are causing. 

JP [00:16:30] I was speaking a few months back, Ronnie, to a social entrepreneur and philanthropist Akhtar Badshah, a friend of mine, on the podcast and he said something that really struck with me. He said, don't try just to build organizations, build a movement. And as I, as I love meeting with a lot of social entrepreneurs in my life as well, I'm supporting a community of entrepreneurs in my own country, in France, as I shared with you, I'm certainly very, very sensitive to that kind of movement concept. So this is something that you've been consciously trying to achieve from the very beginning, in a way. So beyond the prisoner re-offending, right? Yeah. What is the movement you were able to create and sustain and you aspire to see even bigger now? 

SIR RONALD COHEN [00:17:21] That's a great question, Jean-Philippe. The answer is yes. We were trying to create a movement, but the ideology of the movement, the ideas supporting it evolved. And again, it's a question of luck. In 2012, because of the success of Bridges Ventures, which was the first impact venture capital firm which I co-founded in 2002, because of the success of social finance, because of the success of Social Impact Bonds, the Cameron government asked me to chair a G8 taskforce on Social Impact Investment. And this was a seminal effort. And the report we wrote is a seminal report. And interestingly, it's titled The Invisible Heart of Market, as opposed to Adam Smith's invisible hand of markets. What we saw was that what the social impact was doing, which was we could then express as optimizing risk return of impact, was happening in the world. You could look at 13 trillion of environmental, social and governance money to date. Over 40 trillions, nine years later, You could define a field of impact investment where you have the intention to create the impact, but you also measure the impact created. And so the notion then shifted from saying, we've invented a new instrument that can help charitable organizations or businesses seeking to achieve social or environmental improvement to fund themselves in very imaginative ways. And by the way, the idea has caught on in financial markets now. And there's one and a half trillion, trillion, not billion, trillion dollars, Jean-Philippe of sustainability linked bonds and loans inspired by the social impact bond. But that idea of pay for success was only part of the story. The question then arose, if the world is moving to risk return and impact, which is the way to tackle social and environmental issues -what's required for this shift of system? And the answer was simple. Impact measurement. And so the idea shifted from funding the non-profit sector business to trying to do good, to changing our economic system and moving to impact economies. And we're well on our way to achieving them now. 

JP [00:20:27] I'd like to go back to that. Actually, Ronnie it’s is a great development, obviously, of history of capitalism as well. I think you would agree about the fact that capitalism is confronting an unprecedented identity crisis, when you look at where we stand against the United Nations Sustainable Development Goals, we are falling behind. Inequality is increasing. Climate change is obviously burning literally. But it's also a fact that capitalism, and I’m certainly part of the corporate world, so I can relate to that, that's proven to be the most formidable engine of prosperity, enabling all societies to live at levels of development that we could not even conceive two centuries ago. So given all the involvement you had, as you said, at the core of government, of actually of the G8 and more. How do you see the role of government bring about the change? And yeah, let's start with that question. 

SIR RONALD COHEN [00:21:29] Okay. What is driving capitalism today? And the answer is there's a very big change in what's driving capitalism. There’s a huge change in values, which started ten or 15 years ago with young people who refused to buy the products of firms that were creating harm or to work for those firms. And that became noticed by investors, and they realized that it had implications for the profitability of their companies. And then asset managers who are also under pressure from their clients. Pension funds were under pressure from their savers to do the right thing with regard to the environment and society. And now, as we were saying, you're talking of tens of trillions. You're like half of all professionally managed money is following ESG guidelines seeking to achieve impact as well as profit. Now, that's a big change in terms of capitalism. Huge. The second thing is we're seeing a second leap in technology that is as significant as the invention of the microchip has been. But this time, the technology is coming together with the values I just described to deliver impact at the same time. And Tesla is a good example of it because that's the didn't go out to just optimize risk and return. It went out to optimize risk, return and impact. It may not have done so perfectly because we don't measure all that impact. Maybe it's a net harmful company rather than the positive company bringing solutions. But you have to recognize that a key to its success was the impact dimension. Consumers who wanted to buy their products, talent who wanted to work for them, investors who wanted to invest in companies that were doing good, doing well, and 156 million of venture capital in 2000 years turned into a trillion. And the third force, which is a major, major change that goes with the change in values and the leaps in technology is that the technology enables us to measure the impact of companies in ways we have never been able to do in the last half a dozen years. Big data and computing and machine learning and artificial intelligence have enabled us to calculate the monetary value of the impact that companies create from their operations on the environment, from their products, on people and the environment, from their supply chains, on people in the environment and from their employment, on people. 

JP [00:24:41] Ronnie’s case in a nutshell is that companies traditionally have been permitted, even incentivized, to pursue business models that create widespread environmental and social damage. And this damage never appears on the books, but is instead passed on to governments through public taxes who try and fix it but really struggle because the damage keeps coming untapped. The solution, Ronnie argues, is impact weighted accounting, augmented from a traditional financial accounting that explicitly costs in the social and environmental externalities of a corporation's assets and activities. Harvard Business School, as a project team, were dedicated to this development. It is called the Impact Weighted Accounts Initiative and Ronnie chairs it and they have already posted the datatset for more than 15,000 companies showing some of the impact in monetary terms. 

SIR RONALD COHEN [00:25:42] We've shown at the Impact Weighted Accounts Initiative at Harvard Business School, that you can create frameworks which we have published, we’ve published more than 23 reports over the last three years, that show how you measure the different categories of impact. You can measure environmental impact. You can see that ExxonMobil creates $39 billion of pollution from its operations a year. You can compare it with Shell 23 and with BP at 13. And you can see within the fossil fuel areas that some companies are better performers from the point of view of impact and others are laggards, and the money is going to the better performance. We see already a correlation, not necessarily in the fossil fuel industry, I don't remember. But across many sectors, you see a correlation between higher pollution and lower stock market valuation. You can do the same for employment. Jean-Philippe I think this is a mind-blowing step forward. You can look at the issue of diversity in a company’s employment. You can compare the demographics inside and outside the facilities. You can put an average salary on the missing numbers of people from gender groups or ethnic groups. You can measure advancement and you can measure differences in pay, and you can come to the conclusion that Amazon has a six and a half billion dollar diversity debit a year versus Apple 2.5. And if you relate it to wage bill, Amazon's actually the better performer with 16% to the wage bill and diversity debit versus Apple's 24%. 

JP [00:27:40] Yeah Ronnie, I'm with you. And obviously there's already tons of work happening throughout many institutions as well. But the key to me is how do you how do you establish global standards? You know, how do you create that accounting integrity when it comes to ESG? And, you know that super well, because you've been so close to the gap system emerging in the old days. What is the new gap system that globally could become relevant for all business so that there's one version of the truth that can be really analyzed in the same way. Are we going to get there, you think? 

SIR RONALD COHEN [00:28:19] We're definitely getting there and we're going to get there within the next 3 to 5 years. Why? Because the data around the impacts is stock price sensitive, as we've been saying. And the more data abounds, the less verified data, the less comparable data there is, the bigger the problem for regulators who want to maintain orderly markets. That's why you see standardization coming in now through the FCC and the ISSB. Now it's coming on quantity metrics, tons of carbon, litres of water. But the effort of the IWAI at Harvard and now the new International Foundation for Valuing Impact, will be to standardize the valuation coefficients to go with these metrics, and then you will have generally accepted the impact principle. Now if we have a minute, Jean-Philippe, I just want to say humanity has already been there. After the crash of 29, investors sat up and realised they had been investing in companies without understanding what profits they made. Every company could pick its own accounting policies and there were no auditors to verify the numbers. It took four years to get to the mandatory use of gap accounting and the use of auditors. Two years after COVID-19, we already have efforts to standardize the impact metrics of quantities and we're accounting on the valuation front. So what's happening is that we have found the way now to bring impact into financial analysis and the valuation of companies. And it's going to have to become mandatory because that information needs to be made available to every investor, and that's the role of regulators. 

JP [00:30:25] Well, I'm glad to hear that you are optimistic about that urgency to happen in terms of standards, measurement, accounting, because I think is going to be foundational to making that investment thesis you have real across the world and get the corporate world to certainly, you know, take this path to the to the challenges. Now, I'd like to finish a couple of questions and shift gears a little bit, Ronnie, to talk about leadership. And, you know, in your case, you've been an entrepreneur, you've been investor, a CEO, a chairman, government advisor, philanthropist also, and many other things. So, you know, in all those capacities, you've been able to make an impact by bringing the best of finance to serve the social good in the world. As you reflect on your unique strengths and talents, what would be your advice to a young person on how to be the change they want to see in the world?

SIR RONALD COHEN [00:31:26] They should bring impact to their core values. If you want to work for a company, work for a company that's delivering positive impact. If you want to be an entrepreneur, create the business model that has impact at its score. The more sales and profits you create, the more impact you deliver. If you want to work for a non-profit organization, measure the outcomes that you create. Use these new tools of impact investment to supplement traditional grant giving. And if you want to be an investor, then realize that optimizing risk return of that impact is the best way to deliver superior returns today. Superior returns. That's the new game. How to use Impact to drive superior returns and get your portfolio to align with the creation of impact. And if you want to work for government, then get yourself into the impact unit of the government. Here in France, where you’re based, there’s an impact unit in the Ministry of Finance, with eight people in it. Get yourself into that unit and drive this revolution forward. 

JP [00:32:57] So thanks so much for your coaching for many of our listeners, Ronnie, and for youth in the world in a way that can actually drive impact in their lives. As we said all along in this podcast, I think you remain an incredible optimist. You refer to this forum, I think, where you talked about the future of capitalism, that you had in University of Chicago's Booth School of Business, where you said there are three major forces around acting in the world to improve it today: environmental and social values, technology, innovation and impact measurement. So I believe, like you do, that those three forces can be for good, actually, when they are well combined together. But it seems to me that we also need something else. We need a new leadership model, new leadership mindset. We need leaders who are purpose-led, who can drive positive energy in everything they do, who are striving to change the world for good. So what will it take to bring about this new generation of what I'm calling positive leaders, who can nurture the common good? 

SIR RONALD COHEN [00:34:06] So we asked the same questions when technology came, right, Jean-Philippe, how do we, how are we going to get a new generation of managers who understand technology? The answer is entrepreneurship and a huge venture capital and private equity sector now $10 trillion worth. When I started out my first fund in Europe, 1981, £10 million, latest Apax fund, 14 or 15 billion. Right. The venture capital industry is a very powerful engine. $25 billion went into venture investing last year related to crime alone. Right. So this combination of entrepreneurship and available capital is what is going to drive this disruption. And those that don't embrace impact thinking are going to be left behind, like IBM was left behind by Microsoft and Apple and others. So this is a megatrend and if you’re young today in the same way that I felt something was in the air when I was 26 and that technology and entrepreneurship was going to be a huge thing globally, it wasn't just going to be in the United States as some people thought it might be. Then similarly today sense what's in the air today. Sense that we cannot solve our social and environmental problems without a change in our system. It's our system, stupid. It's our economic system, stupid. Right? And to change our economic system, we have to drive capitalism to optimize, not just risk and return, but risk, return and impact. 

JP [00:36:03] Talking to Ronnie, it's impossible not to be swept along by his enthusiasm or moved by the power of his convictions. It is a great example of why purpose driven leaders can have such positive impact to generate this incredible energy that creates a movement and inspires others to do more. We have the power to change the system, Ronnie reminds us. We hold our destinies, you know, in our own hands. This message is empowering. It resonates deeply with me. 

One of my favorite books is The Second Mountain by David Brooks. So just to share his vision for our listeners, the first mountain, he said, is the individualist worldview, which puts the desires of the ego at the center. The second mountain is what you might call the relational worldview, which puts relationship, commitment and the desires of the heart and soul at the center. Eventually, most people realize that the central joy of modern life is to move from being all about me to being at the service of others. So David Brooks calls it The Good Life, and he wrote: Relational life is a challenging life, but ultimately it is a joyful life because it is enmeshed in affection and crowned with moral joy. So, Ronnie, you are obviously well on your way to the top of your second mountain as you reach what David Brooks calls moral joy and do you feel that deep sense of joy inside yourself every single day of your life? 

SIR RONALD COHEN [00:37:51] I'm a great admirer of David Brooks, and I read his articles. I would love to read his book. I have said something similar, and in my books I have said fulfilment comes from a balance between what you do for yourself and what you do for others. And I find fulfilment in the last 20 years, which has been 80% to improving the lives of others and and the environment and trying to resolve the Israeli, or help resolve the Israeli-Palestinian conflict. I have found more fulfilment in that than anything else in my career. And it isn't our duty to solve everything. It's our duty to start the process of solving everything. And so I totally agree with David, with David Brooks. And I think the millennial generation is with me.

JP [00:38:53] Fantastic Sir Ronald Cohen. Again, it was really a delight to have this conversation with you and to feel not only this invisible heart of capitalism, but actually to feel the vibrant heart of new capitalism and new leadership as well. So thank you so much for being part of that podcast. It was really a privilege. 

SIR RONALD COHEN [00:39:16] Thank you very much, Jean-Philippe. Thank you for all you do. 

JP [00:39:20] You've been listening to the leadership podcast with me, Jean-Philippe Courtois. Exciting news! You can listen to the full uncut version of the podcast now on YouTube. Check it out. And if you enjoyed this episode, don't forget to leave us a rating or comment and subscribe wherever you get your podcasts. Goodbye.