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A Return to Entrepreneurial Capitalism

A Return to Entrepreneurial Capitalism Daniel Pinto

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The decay of Western capitalism started well before 2008. Commentators, along with politicians of all stripes, are quick to point fingers at the supposed culprits: the Wall Street banker, the City speculator, the Chinese manufacturer, the Indian entrepreneur, or the Russian oligarch. The convenient wisdom is that disease is always caused by others. In fact, they are trying to deny a much harsher reality.

If Western economies have lost considerable ground to emerging powers over the last two decades, it is not because we lack the cheap labor of China or India, nor because we are without the natural resources of countries such as Russia or Brazil. It is because we have killed our own entrepreneurs at a time when our main competitors made business creators the cornerstone of their success. By locking stakeholders into a system plagued with divergent interests and obsessed with immediate results, Western capitalism is effectively committing suicide.

The Growth and Governance Crisis

In a way, the failure of Western governments to handle chronic debt and reinstate the necessary conditions for growth parallels the governance crisis we see in business today. On one hand, short-term financial gain is pursued compulsively and financial markets are fed a diet of figures that never satisfy. On the other, electoral gain is pursued at any price; hollow promises are made within time-frames that have no relation whatsoever to longer economic cycles. And because we cannot afford to deliver on these promises, we borrow again and again until inevitable financial disaster ensues. In both cases, lack of patience and the valorization of personal short-term interests lead to disaster.

Whilst Asian firms have largely remained in the hands of owner-managers such as Mittal, Tata or Li Ka Shing who are natural empire builders, Western companies are now run by professional CEOs who, for the most part, operate like unadventurous 'administrators-in-chief'. Disinclined to make the heavy investments needed to ensure the leadership of their companies in the long term, they have become the vassals of nomadic financial shareholders for whom the enterprise is but a line item in an investment portfolio. The apparatchiks of modern capitalism, these executives are able to amass vast fortunes when successful but have little to lose personally when they fail.

The Effect of 'Good Governance' on Decision-Making

Our CEOs have turned into mere producers of quarterly results, spending half of their time in soul destroying roadshows and the other half trying their best to avoid making any decision likely to trigger shareholder and product liability lawsuits.

And why should we be surprised? The average holding period of a stock twenty years ago was five years. It is now only five months. This figure does not even factor in the impact of high frequency trading which now represents 70 percent of volume traded on the New York Stock exchange and where holding periods are measured in seconds, not months. Even worse, America is now spending 250 billion dollars a year - 2 percent of its GDP - in costs associated with lawsuits. So if you are at the helm of a large, publicly listed company, why invest in the future if no one else cares and if it means spending the rest of your professional life surrounded by lawyers?

The irony is that this attitude is endorsed by corporate boards where the cult of independence and accepted standards of so-called “good governance” have sanitized the decision making process and turned our largest companies into bastions of business conservatism. In short, we have become our own worst enemies.

SMEs and Business Creators

Our SMEs are not in better shape unfortunately. Five years after the crisis, the banks are still not lending to them. Venture capital has dried up. And in most of Europe, in spite of the rhetoric, politicians are still sacrificing business creators on the altar of promises aimed at keeping our moribund welfare states alive.

So what should we do? Are we doomed? Probably not, provided we counter two prevailing attitudes. On one hand, the defeatists who, the minute they hear the word change, look at you with a resigned smile and reply: “What’s the point? What could we possibly do?” On the other, the ayatollahs of legislation and regulation who fail to see that as long as our capitalist societies have not undergone a cultural revolution of some sort, smart minds will always find ways around the rules. And the merry-go-rounds of booms and busts will eventually finish off whatever is left of our system.

A Return to Entrepreneurship

In my new book, Capital Wars, my contention is that it is only by putting the entrepreneur back at the center of our model that we have a shot at returning to the path of real economic growth. Should the prospect of the UK growing by 1.9% this year – as encouraging as it might seem - be cause for such celebration? Couldn’t we do much better if we were truly able to unleash the creative forces which have turned the likes of Dyson, JCB or WPP into world leaders in their sector?

In the East and the South, an authentic brand of entrepreneurial capitalism has prevailed: one fueled by audacity and patience inspired, ironically, by the very model which once built the economies of the West. In these 'emerging' societies, what drives decision-making are not quarterly results or the threat of lawsuits but the urge to build for the long term, in a determined and premeditated manner. In China and India, decision-makers have only one question in mind: what can they do today to steer their companies to the top five 10 years from now?

The BRICS undoubtedly have to implement substantial economic, social and political reforms to make their success more sustainable and broad-based. However, it would be a mistake to assume that the difficulties they have been experiencing of late, along with the prospect of America becoming energy self-sufficient in the next 20 years, are signalling a return to the old world order. The die is cast.

How the West Might Progress

Achieving this goal is not beyond our reach but will entail acting at many levels. To name just a few examples, the CEOs of our largest corporations should be encouraged to behave like business owners and be incentivized on periods of at least five years as opposed to the much shorter time frames which have unfortunately become common place. They should be assessed on the basis of simple metrics including revenue growth and profit margins rather than the evolution of their company’s stock price which, as we have seen over the last few years, can have more to do with skillful monetary policies than with actual value creation. Shareholders should be encouraged to become more loyal to the companies in which they invest through a two-tier capital gain tax system more favorable to the long-term holders. We could also find more creative ways of pushing banks to reopen the credit taps.

At a time when Western heads of state fight for the honor of an audience with the Chinese President, we have no choice but to accept the central role that self-delusion has played in bringing about the downfall of the West.

The tragic irony of our situation is that this brand of entrepreneurial capitalism, all-conquering and open to the world, which has propelled emerging countries to the forefront of the political and economic world stage, used to belong to us. The subtle but powerful alliance between the entrepreneur, the state, and capital markets serving the economy, and not the opposite, was in fact invented by us.

The only good news in this gloomy picture, and the thrust of Capital Wars, is that it is still possible for us to claim it back. We will have to show courage, patience and creativity, but it is up to us to reinvent the values and methods that made our economies great, and to adapt our societies to the new challenges of a multi-polar world.

There is no miracle cure for our ills but if we want to put the patient back on its feet, let’s at least start with the right diagnosis. For the past twenty years, we have not been the victims of globalization but of our own business conduct. The West is suffering from a chronic Attention Deficit Disorder. This is what needs to be addressed.

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Tags: boom and bust , Brazil , BRICs , capitalism , China , East , entrepreneurship , globalization , Japan , Li Ka Shing , Mittal , Russia , small medium enterprise , sme business , South , Tata , UK , US
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