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U.S. Germany japan

U.S. Germany japan

Exhibit 1.6 Annual Financial Returns in Corporate Sector 1974-19931

Exhibit 1.6 Annual Financial Returns in Corporate Sector 1974-19931

Two centuries ago, Adam Smith postulated that the most productive and innovative companies would create the highest returns to shareholders and attract better workers, who would be more productive and increase returns further—a virtuous cycle. On the other hand, companies that destroy value would create a vicious cycle and eventually wither away.

Exhibit 1.7 Market Value Added (MVA) and Productivity

In today's terms, we believe that a company that focuses on building shareholder value is served well by being a good corporate citizen. Why? Simply because such a company will create more value for its shareholders. Consider the employee stakeholders. A company that tries to fatten its profits by providing a shabby work environment, underpaying employees, and skimping on benefits will have trouble attracting and retaining high quality employees. With today's increased labor mobility and more educated workforce, this kind of a company will be less profitable. While it may feel good to treat people well, it's also good business.

The empirical record also strongly supports the conclusion that shareholder wealth creation does not come at the expense of other stakeholders. For the second edition of this book, we analyzed the relationship among labor productivity, increases in shareholder wealth, and employment growth across a range of industries in the United States, Japan, and Germany. Those results are shown in Exhibits 1.7 and 1.8. Our conclusions are that companies with higher labor productivity are more likely to create more value than those with lower productivity, and that these gains do not come at the expense of employees in general. Companies that are able to create more value also create more jobs.

Exhibit 1.8 Market Value Added (MVA) versus Employment Growth

1983-1991 (percent}

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