Can Stakeholder Interests Be Reconciled?  13 AIDS-related illnesses and then raised the price per pill by more than 5,000 percent. The tactic prompted outrage and a wave of government investiga- tions. The CEO was even derided as “the most hated man in America.”20 But far more often, the lines between creating and destroying value are gray. Companies in mature, competitive industries, for example, grapple with whether they should keep open high-cost plants that lose money, just to keep employees working and prevent suppliers from going bankrupt. To do so in a globalizing industry would distort the allocation of resources in the economy, notwithstanding the significant short-term local costs associated with plant closures.21 At the same time, politicians pressure companies to keep failing plants open. The government may even be a major customer of the company’s products or services. In our experience, not only do managers carefully weigh bottom-line im- pact, they agonize over decisions that have pronounced consequences on workers’ lives and community well-being. But consumers benefit when goods are produced at the lowest possible cost, and the economy benefits when oper- ations that become a drain on public resources are closed and employees move to new jobs with more competitive companies. And while it’s true that em- ployees often can’t just pick up and relocate, it’s also true that value-creating companies create more jobs. When examining employment, we found that the U.S. and European companies that created the most shareholder value from 20 Z. Thomas and T. Swift, “Who Is Martin Shkreli—‘the Most Hated Man in America’?” BBC News, August 4, 2017, www.bbc.com. EXHIBIT 1.1  Correlation between Total Shareholder Returns and Employment Growth Compound annual growth rate,1 2007–2017, % 0 European Union2 Employment growth United States –50 –40 –30 –20 –10 10 20 30 40 50 60 –25 –20 –15 –10 –5 0 5 10 15 20 25 TSR Employment growth 0 –50 –40 –30 –20 –10 10 20 30 40 50 60 –25 –20 –15 –10 –5 0 5 10 15 20 25 TSR 1 Samples include companies with real revenues greater than $500 million and excludes outliers with more than 20% employment growth. 2 Sample includes companies in the core 15 EU member states. 21 Some argue that well-functioning markets also need well-functioning governments to provide the safety nets and retraining support to make essential restructuring processes more equitable. 14  Why Value Value? 2007 to 2017—measured as total shareholder returns—have shown stronger employment growth (see Exhibit 1.1).22 Consequences of Forgetting Value-Creation Principles When companies forget the simple value-creation principles, the negative consequences to the economy can be huge. Two recent examples of many ex- ecutives failing in their duty to focus on true value creation are the Internet bubble of the 1990s and the financial crisis of 2008. During the Internet bubble, managers and investors lost sight of what drives return on invested capital (ROIC); indeed, many forgot the importance of this ratio entirely. Multiple executives and investors either forgot or threw out funda- mental rules of economics in the rarefied air of the Internet revolution. The notion of “winner take all” led companies and investors to believe that all that mattered was getting big fast, on the assumption that they could wait until later to worry about creating an effective business model. The logic of achieving ever-increasing returns was also mistakenly applied to online pet supplies and grocery deliv- ery services, even though these firms had to invest (unsustainably, eventually) in more drivers, trucks, warehouses, and inventory when their customer base grew. When the laws of economics prevailed, as they always do, it was clear that many Internet businesses did not have the unassailable competitive advantages required to earn even modest returns on invested capital. The Internet has revo- lutionized the economy, as have other innovations, but it did not and could not render obsolete the rules of economics, competition, and value creation. Shortsighted focus can breed dishonorable dealing, and sometimes the con- sequences can shake confidence in capitalism to its foundations. In 2008, too many financial institutions ignored core principles. Banks lent money to in- dividuals and speculators at low teaser rates on the assumption that housing prices would only increase. Banks packaged these high-risk debts into long- term securities and sold them to investors who used short-term debt to finance the purchase, thus creating a long-term risk for whoever lent them the money. When the home buyers could no longer afford the payments, the real estate market crashed, pushing the values of many homes below the values of the loans taken out to buy them. At that point, homeowners could neither make the required payments nor sell their homes. Seeing this, the banks that had issued short-term loans to investors in securities backed by mortgages became unwill- ing to roll over those loans, prompting the investors to sell all such securities at once. The value of the securities plummeted. Finally, many of the large banks themselves owned these securities, which they, of course, had also financed with short-term debt they could no longer roll over. 22 We’ve performed the same analyses for 15 and 20 years and with different start and end dates, and we’ve always found similar results.