Article published by The Financial Times on 20 November 2017
Written by Will Hutton & Clare Chapman
Featuring: The Big Innovation Centre’s Purposeful Company Taskforce called for the allowing pension funds to invest in more risky start-up company assets and the creation of a £2.5bn national investment fund to be managed by the British Business Bank.
Commercialising great ideas will result in failure and success, say Clare Chapman and Will Hutton.
There are three elements to any worthwhile industrial strategy: public investment in the necessary soft and hard infrastructure, expectations of buoyant demand and, above all, a critical mass of companies willing to seize the opportunities so created.
Hats off to the UK government. In its spending on infrastructure, its industrial strategy is a serious and, given the financial constraints, worthwhile attempt at meeting the requirements of the first prong. But if the government wants to build a critical mass of fast-growing, knowledge-intensive companies in all parts of the country it will need to attend to the other two prongs urgently.
First the good news. Commitments on skills, raising investment in research and development to 2.4 per cent of gross domestic product, and transport infrastructure are welcome. The key will be how research monies are dispensed in the newly established UK Research and Innovation body, which brings together all the research councils, and how much autonomy Innovate UK, the operating name of the Technology Strategy Board, a non-departmental public body, will have within the new structure to do what it is good at. It needs to make sure that risk-taking is not snuffed out by civil servants who inevitably see no rewards for taking risks. If we want to commercialise great ideas more aggressively, be sure there will be some failures among the successes.
The decision to allow pension funds to invest in more risky start-up company assets along with the creation of a £2.5bn national investment fund to be managed by the British Business Bank are imaginative moves. The Big Innovation Centre’s Purposeful Company Taskforce has called for both. Neither the previous Labour nor coalition governments could manage such initiatives — indeed New Labour actively opposed them — so this is something of a breakthrough moment.
The case for more long-term patient capital, especially focused on start-ups and scale-ups, has been evident for decades. And at last the British Business Bank has some firepower. But investing in a world in which investment is in intangible knowledge assets, from patents to the sophisticated algorithms that support clever iPhone apps, is notoriously hard. What is the value of such assets? How are they accounted for? How do they fit into the company’s business model?
Here the white paper could have gone much further. It is right to say that the future will be driven by technologies of the fourth industrial revolution — intangible investment is running at nearly twice the rate of investment in tangibles — but we need those same technologies to be applied to company reporting and for the whole body of company law, corporate governance, regulation and investment stewardship to be fourth industrial-revolution friendly. It is not. It is stuck firmly in an analogue universe made worse by short-term, narrowly defined shareholder financial interests in company decision making.
Pension fund risk investment, angel investment or British Business Bank investment will not come forward in sufficient scale if the capital providers are flying blind. British accounting needs to be overhauled. We need systematic strategic reporting, in particular of how intangibles are used in the business model, and robust guidelines about how intangibles are valued, so that investors know they exist and can compare their relative deployment between companies. Independent systems of valuation need to be established, even markets in intellectual property rights, to permit as much transparent market-based valuation as possible, along with innovative ways of insuring their value so they have the same attractions as collateral as tangibles. No 21st-century industrial strategy can be complete without such advances.
That is only a beginning. Too many companies and their investors do not understand that existing company law gives them significant scope to think and act more long term, and to build in the interests of all those stakeholders who contribute to creating long-term value. The white paper should have underlined this reality, and signalled aggressively that it wanted to see more of these attitudes, embodied in codes of governance and investor stewardship. Every part of Britain deserves a critical mass of purposeful companies committed to long-term value creation that will take advantage of the new opportunities in training, research and innovation the government is creating. It falls to the government to create an ecosystem that favours their creation. The opportunity has not been seized sufficiently.
Similarly, the government could have used publicly owned pension funds, in particular the newly consolidated local-authority pension funds, to take a lead in fostering better long-term attitudes to investment. The Japanese Government Pension Investment Fund has performed this role; it is one of the reasons for Japan’s recent innovation renaissance. Britain should reproduce the same impact. This should be part of a flotilla of initiatives to develop a stewardship culture across the investment chain, with more concentrated blocks of shareholders capable of and interested in effective long-term engagement with managements.
Yet for all that — and the worry that too little has been done to avert the risk of a recession-inducing downward lurch in aggregate demand that is hardly supportive or a risk-taking innovation — the white paper is to be welcomed. It heralds a new era of market-friendly public economic activism, and attempts to redress longstanding British economic weaknesses. We are witnessing the beginnings of the repurposing of British business along with efforts to put the right tools in its hands. It should have been done a generation ago. But better late than never.