The West has killed its entrepreneurs and replaced them with bureaucrats
IF WESTERN economies have lost considerable ground to emerging powers over the last two decades, it is not simply because we lack the cheap labour of China and India or the natural resources of Russia and Brazil. It is because we have killed our own entrepreneurs at a time when our competitors made business creators the cornerstone of their success.
While Asian firms – like Mittal, Tata, or Li Ka Shing’s holdings – have largely remained in the hands of empire building owner-managers, Western companies have fallen into the grip of professional chief executives who, for the most part, operate like unadventurous administrators-in-chief. Disinclined to make the heavy investments needed to ensure the long-term leadership of their companies, they have become the vassals of nomadic financial shareholders for whom the enterprise is but a line item in an investment portfolio. Chief executives have turned into producers of quarterly results, spending half 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.
Why should we be surprised? The average holding period of a stock 20 years ago was five years. It is now five months. This does not even factor in the impact of high frequency trading, which represents 70 per cent of volume traded on the New York Stock exchange and where holding periods are measured in seconds, not months. Even worse, the US is now spending $250bn (£149bn) a year – 2 per cent of GDP – in costs associated with lawsuits.
If you are at the helm of a large publicly-listed company, why invest bravely in the future if it means spending your professional life surrounded by lawyers? The irony is that this attitude is endorsed by corporate boards, where standards of so-called “good governance” have sanitised the decision-making process and turned our largest companies into bastions of conservatism. In short, we have become our own worst enemies.
Our small businesses are not in better shape. Five years after the crisis, the banks are still not lending. 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 keeping our moribund welfare states alive.
What should we do? Are we doomed? Probably not, provided we counter two prevailing attitudes. On the one hand, there are the defeatists who, the minute they hear the word change, look at you with a resigned smile and reply, “What could we possibly do?” On the other, there are the ayatollahs of legislation and regulation who fail to see that, as long as our capitalist societies have not undergone a cultural revolution, smart minds will always find ways around the rules. And the merry-go-round of booms and busts will eventually finish off whatever is left of our system.
In Capital Wars, the book I recently published, my contention is that it is only by putting the entrepreneur back at the centre of our economic model that we have a shot at returning to the path of real economic growth. Should the prospect of the UK growing by 2.4 per cent this year, according to the IMF, be cause for such celebration, as encouraging as it might seem? Couldn’t we do 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 sectors?
Achieving this goal is not beyond our reach, but will entail acting at many levels. To name but a few examples, the chief executives of our largest corporations should be encouraged to behave like business owners and be incentivised on periods of at least five years, as opposed to the much shorter time frames which have unfortunately become commonplace. 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 expansive monetary policies than actual value creation. Shareholders could be encouraged to become more loyal to the companies in which they invest, through a two-tier capital gain tax system more favourable to long-term holders. We could also find more creative ways of pushing banks to reopen the credit taps.
There is no miracle cure, but if we want to put the patient back on its feet, at least start with the right diagnosis. For the past 20 years, we have not been the victims of globalisation but of our own business conduct. The West is suffering from a chronic Attention Deficit Disorder. It needs to be addressed.
Daniel Pinto is chief executive and founding partner of Stanhope Capital, founder of The New City Initiative, and author of Capital Wars: The New East-West Challenge for Entrepreneurial Leadership and Economic Success (Bloomsbury).