There is a saying that everyone has a book in them. I am not sure about how true that is but as far as Daniel Pinto goes, his recently published book, Capital Wars, is a good page-turner and despite the topic, not remotely dry.

There is a saying that everyone has at least one book in them. I am not sure about how true that is but as far as Daniel Pinto goes, his recently published book, Capital Wars, is a good page-turner.

Pinto is the co-founder and chief executive of Stanhope Capital, the European private investment house; he also set up New City Initiative, in 2010, as a think tank for independent wealth management firms in the UK and France. He has a lot to say. A former SG Warburg banker who has been in the industry for over two decades, the dapper Pinto has penned what I rate as one of the most incisive analyses of our economic ills for some time. And that is some achievement considering that books addressing the lessons of 2008 and issues such as the rise of China have been flying off the bookshelves. In 246 pages, he explains why he thinks Western capitalism has lost its oomph and what to do about it.

There is a lot that I liked and agreed with in this book although I’ll mention a few problems I had later. On the long list of plusses for me is the book’s pungent style; its grasp of why the structure of ownership of capital is so crucial; its understanding that Western-style capitalism cannot presume that it works on any sort of global level playing field; an unsentimental attitude towards Western social welfare models (which is brave stuff coming from a man with a Continental European heritage), and a willingness to give specific proposals for reform rather than just come out with bromides. His chapter on venture capital, for example, is particularly impressive, as is his point about how CEOs should be encouraged by incentives to actually put their own wealth into a firm that they run.

At the core of the book’s message is that the way in which capital is owned and managed will play a huge part in the kind of firms that exist. Pinto reckons that as many Western firms are run by over-cautious boards worried about short-termist shareholders, and CEOs have no direct stake, this creates a timid culture. Long-term planning and entrepreneurial gusto go out of the window. In today’s corporate world, firms sit on cash and are afraid to spend lest shareholders get upset. In China or India, on the other hand, the Tatas and other business dynasties, freed from the tyranny of quarterly reporting, can plot their strategy with all the cunning and resource of a Roman legion planning on how to besiege a town. They don’t get stick over their remuneration. There are, he says, firms in the West that resemble this more family-owned, long-termist approach (such as JCB in the UK), and he says their very success proves his point. There are plenty of statistics in this book to back up his points, although he doesn’t overdo it.

Another theme of the book is that state’s reactions to the 2008 financial crisis have focused too much on punitive regulation and punishment as a way to put the system back on track, and not enough on supporting entrepreneurial wealth creators for the future. He says the state should be a “coach” – I quite like that idea, if only because it might appeal to those across the political spectrum to think more creatively beyond the usual clichés. He warns that without a large, middle ground of fulfilling, long-term business careers fostered by sensible tax rules, the young of today will either shoot for the mirage of instant success or resign themselves to working in big corporations or public bureaucracies.

Criticisms
I have a few criticisms: Pinto does not give much space to how much of the recent debt crisis was caused by wrongheaded central bank faith in the ability to manipulate economies by the printing press. What about the role of explicit government policy on both sides of the Atlantic in encouraging low-income groups to borrow money? (In the US, I would say the role of state-backed agencies such as Freddie Mac is particularly significant.) At one point Pinto claims the market crash shows how the “invisible hand” argument of free marketeers has been confounded but there was nothing “invisible” about the actions of the US Federal Reserve and its peers in arguably stoking the fires of the sub-prime property boom and the associated shadow banking system. (In the latter case, the Basel banking rules arguably added to the problem, rather than fixed it.)

Another issue I expected to see commentary on are Western anti-trust laws. In the US, it is arguable that the anti-trust suit against Bill Gates’ Microsoft for how he “bundled” software with other services did enormous damage to the business culture and was not justified. EU regulators are wrestling with Google - not a good sign.
Also, on the issue of how shareholdings are now structured and how institutional shareholders now wield what Pinto considers dangerous power, it would have been good to have more detail on how he would address that specific issue. Would, for example, he change tax treatments? He hints at it, but there is a need for more detail.

As for the rise of China, Pinto is right of course to suggest that whatever wobbles there may be (and there certainly are some worries now), the longer term outlook remains pretty positive. There is, on the face of it, however, a bit of a contradiction between lauding of how big Chinese banks can lend over the long term on the one hand, and criticising the “too big to fail” banks in the West.

Finally, there is a need to work out why, if the model of capitalism that the West once enjoyed was so much better in some ways than what exists now, how did it lose its way? After all, when politicians as varied as Thatcher in the UK, Reagan in the US, Kohl in Germany and even - after a hiccup - Mitterand in France made the changes they did, they did so after their economies were battered by a mix of inflation, ruinously poor industrial relations, the collapse of the Bretton Woods banking regime, the OPEC-driven spike in the oil price, and the decline in the purchasing power of the dollar. All of these developments suggest that pre-1980s economics had some deep flaws in it, or may have contained the seeds of its demise.

Also, is it really all so terrible that if firms are listed, their owners - the shareholders - hold managers on a leash, and ask questions regularly? (I guess here the tricky issue is getting the balance right.) If firms use public markets to raise capital, the risk they take is loss of total control. The alternative, though - ownership by secretive families or government bodies - is not such an improvement in a world increasingly demanding about transparency. The real issue is ensuring that all kinds of corporate/family business structures exist, and that there is plenty of competition between them. There is no "perfect" model.

Even so, I think the broad message of this book, particularly on ownership, is a very strong one. Who knows, there may be another book in Pinto to come.