The London office of Stanhope Capital, one of Europe's largest independent investment firms, with some $9 billion of assets under management, is a most unlikely setting for radical ideas, proposals that could be utterly transformational for companies, stock markets… capitalism itself. Yet the man who established Stanhope, Daniel Pinto, is embarked on an evangelical crusade no less revolutionary than Luther's.
Cleansing the Augean stables of Western capitalism is, for Pinto, a huge but vital task. For him, a cabal of poor corporate and political leadership brought Western capitalism to its knees, where it remains today; without more intelligent corporate and political leadership it's in danger of falling flat on its face.
All kinds of phoenixes have arisen from the ashes of the recent financial crisis. One of the most promising birds is Capital Wars, a book first published by Pinto in his native France in 2013 and that is now available in English-language markets. Capital Wars is a chilling diagnosis of how the West has, through its own short-termist, instant gratification mentality, lost ground to the rising economic powers of Asia. Its subtitle – 'The New East-West Challenge for Entrepreneurial Leadership and Economic Success' – well summarises what follows: the financial capitalism eagerly embraced by the West in the past few decades, vastly rewarding senior executives who have little or none of their own wealth invested in the company they run, has "booted out [the] entrepreneurial capitalism" that remains at the heart of economies in the East.
The book fizzes with reformist ideas, not least of which is a sliding scale of tax rates applied to capital gains; the longer shares are held, the lower the tax. "This measure would have a two-fold impact: first, it would rebuild bridges between companies and their shareholders; second it would reduce overall market volatility."
For Pinto, a former SG Warburg (and later UBS) senior banker specialising in M&A, the relative decline of Western capitalism while Asia's has powered ahead is the consequence of a series of mistakes that Western companies, states and voters have colluded in making. Meanwhile, we have lost sight of the pivotal role of the state. As Pinto asserts: "Somewhere between the redistributive state and the saviour state there is also the partner state …We in the West have almost completely abandoned the concept of industrial policy … Genuine industrial policy involves identifying the key industries in which the state is willing to dedicate resources over the long term and stimulating the private sector to better co-ordinate its efforts."
For Pinto, "the problem with business leadership in the West today is that it has moved from an owner-managed model to a place where leaders are no longer owners. They have become professionalised, reporting to a shareholder base that is faceless, and both CEOs and shareholders are only focused on very short-term results. There is an urgent need to fix this leadership deficit."
While the owner-managed enterprise has all but disappeared in the West, and the state has withdrawn from what ought to be its prime functions – planning and co-ordination – and withered to the point where it is perpetually firefighting inexorable welfarist problems, Asia's stateentrepreneurial and family capitalism can rely on a stable shareholder base, which allows their companies to build for the long term. "Western business leaders live under the dictatorship of the next analysts' meeting and are required, implicitly or explicitly, to make decisions for tomorrow, not the day after. The central problem is not globalisation. It's the fact that the West has killed the entrepreneurial spirit.
"We have Sarbanes-Oxley [the US Act of 2002 requiring board directors to individually certify the accuracy of financial information] now applied everywhere, but we have still ended up with the boards of many public companies not being competent enough to run the company."
Why? Because boards have become emotionally detached from their businesses. What, for example, does a non-executive director of a soft drinks company know about how to run a bank? Just because they are supposedly 'independent' doesn't mean they can make a better contribution. Such directors turn these boards into bastions of conservatism."
Pinto would like to see a bit of backbone when it comes to boards – and remuneration to change accordingly. "Directors should be properly incentivised. If a director gets a fee of Åí100,000 a year then that fee should be tied to failure as much as success. When a CEO is appointed to run a company, they should be asked to invest 10 per cent of their own wealth in that company, to demonstrate that they believe enough in the business that they are prepared to act like an owner of that business. It's not a magic number, it might be more, or less, but it should represent a significant portion of that person's wealth. We need to recreate the conditions of owner-managed businesses, change the relationship between CEOs and the business they are in charge of." Among the many ideas Pinto has floated is the suggestion that entrepreneurs who sell out of their companies quickly should face punitive tax rates, while those who stay the course for one or two decades and really build their business should be rewarded by much lower tax rates.
For Pinto, the financial industry has become too powerful; it should be there to serve, 'to pass the plates'. Today, banks in the West are everywhere in the food chain, and have lost sight of their function. As he says: "The bad news is that the planet's main financial institutions have become too big to manage. It has become near impossible for them to control their own risk." In order to combat this shorttermist mentality, in 2010 Pinto founded the New City Initiative, an association of independent, owner-managed British and continental European fund managers who pledge themselves to a long-term approach to investment – yea's not months – and who each invest their own wealth in the funds they sell to clients, ensuring alignment of interests between manager and client.
According to Pinto, in the West: "There is a direct correlation between the ephemeral nature of our corporations' shareholders, the short-term thinking of our business leaders and our general loss of competitiveness. As long as we fail to break this chain, we will be unable to regain the initiative." In essence, Pinto wants us – in the business and political worlds – to rediscover leadership. Pinto is that truly rare thing – an intellectually gifted business leader with a practical vision, who knows from two decades of experience what he's talking about. Without this kind of practical thinking we are destined to decline further.
About Daniel Pinto
Pinto has considerable experience in wealth management and merchant banking, having advised some of Europe's most prominent families and industrialists for over 20 years. Formerly Senior Banker at UBS Warburg in London and Paris, he holds a Harvard Business School MBA, and an MSc in Finance from Universite Paris-Dauphine. He is currently Chairman and Founder of the New City Initiative
Feliks Polonski is a freelance journalist specialising in international business affairs
Photos by Daniel Hambury/STELLA PICTURES ltd.
Odgers Berndtson global study of university technology research reveals dearth of UK specialists.
With long-standing resistance to change and low productivity, the construction industry needs to...