Eric Ries: Author of Incorruptible

Kara Goldin 0:00
I am unwilling to give up that I will start over from scratch as many times as it takes to get where I want to be. I want to be you. Just want to make sure you will get knocked down. But just make sure you don’t get knocked out, knocked out. So your only choice should be go focus on what you can control. Control. Control. Hi everyone, and welcome to the Kara Goldin show. Join me each week for inspiring conversations with some of the world’s greatest leaders. We’ll talk with founders, entrepreneurs, CEOs and really, some of the most interesting people of our time. Can’t wait to get started. Let’s go. Let’s go. Hi everyone, and welcome back to the Kara Goldin show today, I’m joined by an incredible, incredible author. I have been such a huge fan from his first book, The Lean Startup, but now he has done it again and out maybe even outdated himself a bit. So his newest book, which is just launching, is called Incorruptible, and it’s a book that I know is going to be as popular as The Lean Startup. So you’ll have to get both of them on the shelf if you have not read The Lean Startup. But what’s interesting is where he’s gone since The Lean Startup, and working with founders and CEOs and investors, started asking a different question, not just how companies get built, but what happens to them as they scale, and why do companies that start with a clear mission, strong values and real purpose slowly lose their way. So of interest to many people who are in it, but also maybe people who are curious about like, what happened to that company, that maybe is something that is very different from what you remember it as. So Incorruptible is absolutely awesome, and I’m so excited that Eric Ries has joined us here today to talk a lot more about it. So welcome.

Eric Ries 2:07
Wow. What an intro. Thank you so much. I’m really glad you liked it. That means

Kara Goldin 2:12
a lot to me, of course. So for listeners who are curious about the book, how do you as the author describe it.

Eric Ries 2:21
Gosh, to me, a whole generation of people learn to build these incredible companies using lean startup. So I’m really proud of that. I mean, truly, I’ve been around some exceptional founders and exceptional products that I that I love, and yet too many of those companies, I feel like I taught people how to create something worth protecting, but not actually how to protect it. And so I’ve seen the dark side of this business, and it’s it’s grim, and what I didn’t really understand as I was starting out as an entrepreneur is that the more successful an organization, the more valuable it becomes as a target. And so people are losing control of their companies. We are all we’ve all experienced this. We’ve seen brands become destroyed. I just watched an expose this morning on Panera Bread and what happened to it after private equity took over so many restaurants and brands and iconic products, they’re just they get ruined. And that’s not value creating. That’s actually value destroying. So part of my goal in writing the book, it was kind of like a double mystery. The first mystery is like, why does this keep happening? Why have founders been losing control of their companies for like, 200 years? Why do we have these best practices that are value destroying that we do in the name of profit? Doesn’t make sense. But the second mystery was, if you ask most people why this happens, they’ll tell you it’s inevitable. It’s just what happens when companies get big, humans are greedy, scale age to go public, whatever the thing is. But if it’s inevitable, why are there exceptions? And so I wanted to find the answer to both these mysteries in the book. Is my attempt to do

Kara Goldin 3:58
so, so, so interesting. So you found that it wasn’t just one industry. So it’s not the restaurant industry, it’s not just the tech industry. It’s across the board.

Eric Ries 4:11
You will find this if you if you study almost any industry, you’ll find the people that study that industry talking about how this is happening in their industry. I mean, Cory Doctorow just wrote a whole book about tech products and how they’re all getting worse all the time. But if you talk to people in the natural foods category, they complain about this all the time. If you talk to people in restaurants, I mean, restaurants is like such an epidemic. I had someone tell me the story the other day that they went into their favorite restaurant, they hadn’t been there in a few years, took one bite of the food and looked up on their phone. They’re like, Yep, I could taste it. Had been taken over by private equity. I could taste it in the food. Well, how can the capital structure of a company be edible? How can it have a taste like this has become totally pervasive. It’s so much so that I don’t think we really know what to call it. It’s like, is it mission drift? That doesn’t sound that serious bureaucracy. Sounds like, you know, just a bunch of paperwork. No. And I realized when I was working on this book, it took me a lot of years to get this book together. I realized at a certain point that our grandparents and our great grandparents would have had no trouble naming this. They would have called it corruption. Whenever someone finds a way to make money without creating value, or even by destroying value, that is a corrupt act. It corrupts the moral logic of our entire economic system. And that really put the fire in me to say, Okay, if so many of the ways that we valorize of making money today, our grandparents would have seen, not just as morally dubious, but like they would have been crimes in another era, like, what what hope do we have as mission driven founders, that we’re going to be able to survive this gravitational pressure? It’s let me on the search for a corporate structure and a set of operating principles that a company could be made Incorruptible, ethical.

Kara Goldin 5:54
Can you nail down a period of time when this started happening to companies.

Eric Ries 6:01
So this is as old as capitalism itself. I give examples going all the way back to the Industrial Revolution. One of the earliest case studies in the book takes place in 1800 so it’s been going on a long time, but it has been getting worse as we have financialized everything. So what’s happened is that you have this kind of double trend. On the one hand, financialization is increasing. So the size and scale of our finance sector is much bigger than it ever was, and therefore the size of finance relative to you as an individual organization, it’s quite immense. So it’s, I call it financial gravity, because it’s like, you the human person up against the planet Earth. It’s like, wow, it’s a very unequal power imbalance. On the flip side, though, every time you stand up, your muscles produce an electromagnetic force that is more powerful than the entire planet Earth’s gravitational field. So I was kind of on the search for like, what is this gravity that pulls things down, and what is this counter force? Why is it that some organizations are able to resist and at the same time that we’ve had the increasing financialization we have, especially in the last 50 years, started preaching an economic doctrine called shareholder primacy, which holds that organizations are not vital, beautiful living things that we create, that we birth as entrepreneurs. No, no, no, they’re just financial instruments designed to enrich shareholders. And that idea that the set of governance best practices and operational best practices that have become in vogue in the last few decades have really created a whole generation of institutions and companies organizations that are just weak. They’re not able to resist gravity. They’re actually designed to crack open at the first provocation. So I think those two trends together explain why this has gotten such so bad in living memory,

Kara Goldin 7:56
so interesting. Because I think the word private equity, even if you don’t know what that term means, maybe you think that it just means money or it’s the same as venture. You’re not really sure what the specifics and the timelines and all that that goes along with private equity, there’s a scary cloud that lives over private equity for the average consumer, the average certainly for the average founder, for sure. But the average consumer is like, Oh, I’ve heard horror stories about private equity,

Eric Ries 8:34
absolutely

Kara Goldin 8:34
versus founders. Are this, this other group of like, I often think that the average consumer doesn’t really know how hard it is to be be a founder.

Eric Ries 8:49
Oh, not Yeah, not at all, right.

Kara Goldin 8:51
And Steve Jobs is probably one of the most famous one, but it’s, you know, we glorify it in many ways. And you know, we don’t talk about the failures and all these but when you get the two groups together, the private equity, maybe at first it’s a good marriage, but then it’s like the private equity versus the founders. It’s like, no matter what industry

Kara Goldin 9:12
you

Eric Ries 9:12
see it all the time, I mean, and again, I want to be super clear, like, private equity is not the problem in itself. And there are a lot of good private equity firms that do actually fix companies and turn them around and create really long term incentive alignment. For sure, problem is that there’s too many that have figured out that why do all that hard work?

Kara Goldin 9:30
Right? Like

Eric Ries 9:31
there’s a lot of work to actually turn a company around, it’s a lot easier to just take a company that is highly trusted and loved by its customers and betray them. If you betray their trust, the whole point of trustworthiness. It’s a really valuable asset. Why is it valuable? Because if I trust you, you can betray me, and I won’t notice.

Kara Goldin 9:47
Yeah,

Eric Ries 9:47
at first.

Kara Goldin 9:48
Yeah.

Eric Ries 9:48
So so many products, so many companies that that this is happening. Yeah, you’re right. Someone who, someone not in the business, not a Silicon Valley person at all, like, I was talking to a civil, a true civilian, and they said to me, they’re like, oh, there’s this new brand. I’m. Super excited about it. Love it. I really hope they’re successful. And they pause, they’re like, Well, I hope they’re successful enough to make money, but I hope they’re not so successful that they get taken over by private equity. It’s like, there’s like a grim reaper that even ordinary people have become aware of, that like companies are being ruined. And of course, it’s not only private equity. Think about how many companies, when they go public, being a public company ruins them, or when they’re acquired, or often I tell stories in the book of companies that are just betrayed by their board for no particularly good reason, because the board is more loyal to this gravitational force, this these best practices, than they are to the mission of the company. So a big part of the book is just, how do we restore mission primacy to our thinking about why we build organizations and how that is reflected in their operational details.

Kara Goldin 10:47
So can you share in your research how a company with a clear mission slowly drifts away from it without anyone saying, wait a minute, what are we doing here?

Eric Ries 10:58
Yeah, yeah, there’s some this mission drift is super common. Let me kind of to illustrate the whole the whole thing. Maybe I’ll tell you a story about about Saul price. Okay, so in retail circles, Saul price is a legend. He’s like the father of modern retail, and he had this happen to him. But unlike a lot of the tragic stories that I wind up having to tell, this one has a happy ending. So this is actually kind of like the deep cut origin story to a brand that most people know and love. So we’ll we’ll get to that in a second. So Saul created this company in the 50s. And if you want to know how influential Saul is, the reason why they call him the father of modern retail is when Sam Walton was thinking about starting a retailer in Arkansas, he named his company Walmart as an intentional tribute to fedmar Saul’s company, because he learned so much from Sol Price. You will find that story in the origin stories of a lot of today’s retailers. Fed Mart was this really unusual company started in the 1950s a discount retailer by membership only. You had to pay money to be a member. All the products were marked up exactly 14% Saul wouldn’t mark them up $1 more or $1 less. He paid above average wages. He practiced what he called the intelligent loss of sales, meaning he only carried limited inventory of limited skews, the things that he thought were of high quality. There are so many funny Saul stories. One of my favorites is a competitor tried to drive him out of business by undercutting him on price, on certain products. He posted their Sunday circular ads inside his own store, and put up signs saying, don’t buy this product from me. You can get it cheaper down the street. So he was a person of genuine integrity. He had a business ethos, a philosophy about business. He had a very strict hierarchy. See, he had been trained as a lawyer, so he knew what fiduciary commitment meant. It meant you put the interests of someone before yourself. When asked who, what are your fiduciary commitments? He said, well, first the customer, then the employees, then my shareholders. Not because he didn’t want to make money for his shareholders, but he understood that shareholder value is a consequence of being trusted by these other groups. So this worked. Fedmart was a runaway, huge private company success, so much so that he made a fortune for himself and his investors. He took the company public, and that’s where things started to go south. See as a public company, it was always this gravitational pressure, and Saul found it bewildering. He’s like, why would investors want to break the engine of our prosperity?

Kara Goldin 13:31
It

Eric Ries 13:32
doesn’t make sense. Here we are trying to create low prices and high wages. That’s the magic formula. But what did, what did the what did Wall Street want? Well, he felt like they wanted high prices and low wages. He was always being pressured to do this, and so over time, he felt like the company was losing its way. Now in order to fix that, in order to resist, he thought he would find new, better investors. See, this is the constant way we teach entrepreneurship, we teach leadership today is we always focus on that personal dramas. If something’s wrong, you don’t have the right investors, you’re not you don’t have the right stuff, you don’t have the right team, and we ignore the structural factors. This is the same thinking that got Saul in trouble. So he found a very sophisticated set of retail investors, people who had been retailers, and knew the retail business really well, he arranged for them to buy out 51% of the public market investors to effectively reassert private control over the company. He got a new board of directors, and he picked people specifically because they understood his vision. And this helped, not at all because the new board was under the same gravitational influence and hypnotized by the same best practices we’ve all been taught in the era of shareholder primacy. So what did the new Board want? You’ll be shocked. They wanted higher prices and lower wages. They wanted faster growth. They didn’t care about his principles, and they didn’t care if they lost the trust of customers. In fact, I think when I look at the story, Saul never said this, but I think while he was alive, he never really understood what the investors understood. They understood something he never got. They understood that precisely because customers trusted fedmark, that the company could betray them and get away with

Kara Goldin 15:17
it.

Eric Ries 15:18
And then that was they just viewed that as free money. So what happened in 1975 after Saul had been building this company for more than 20 years, he comes into work one day and he can’t get into his office because they changed the locks on the door. Didn’t even tell him he doesn’t work there anymore. Okay, in business history, we rarely get these natural AB test experiments. But this is one, because you can say, well, in corner a what happened to fed Mart? Nothing good. The board got what they wanted. The company was turned into best practices, faster growth and all that stuff. It was bankrupt by 1982 it took them only seven years to destroy what he had built over 20 years, but in corner B, we have Saul, undaunted, classic entrepreneur. He did not take this lying down. He took two weeks of vacation, two weeks off, and then he was back at work. He leased the office upstairs from Fed Mart, and he created a new company because he understood that the system that he had built, the engine that he had built, was not tied to any individual people, or it wasn’t about the contracts or the warehouses or the inventory. It was an engine. It was a system. And therefore he could do it again. And he did. He created a company called Price Club. Now today, Price Club is not well known, but when I was a kid, that’s where we shop, that was like a dominant retailer. Growing up, I didn’t even know as a kid that his name was Saul price. I just thought this was a place we went for low price stuff. You know, I did no idea who he was, but my family had a very intimate relationship with Him, because we understood his ethos, what he stood for. We didn’t have to read some manifesto. We lived it every time we shopped in the store. Now, the reason Price Club is not that well known today is because of a second thing that happened when Saul got fired, a bunch of people from Fed Mart quit in protest, and one of those people was a guy named Jim Senegal.

Kara Goldin 17:15
He

Eric Ries 17:15
had worked his way up from stock boy to executive at fed Mart, and he left in protest. Now he’s famous today as the founder of a different company that he built with Saul of blessing, he also understood this engine, and a few years later, his company and Saul’s company would merge to form a company that they called price Costco.

Kara Goldin 17:37
But

Eric Ries 17:37
we just call Costco today. Costco is a $400 billion public company that is the exception. The exception to every business rule. Whenever people talk about exceptions, they always, always be like, you know, every company acts like this. Oh, except Costco. Only companies that are this kind can do that. Oh, except for Costco. They are a universally accepted exception. But why? Why is it that what happened to fedmart Hasn’t happened to Costco? I used to think that Wall Street wouldn’t dare try it, because Costco has been one of the best performing stocks in the SMP over the last 40 years, but no Wall Street tries. Every couple of years, there have been more attacks on Costco than almost any other company trying to rein it in, trying to get it to comply with the best practices. So why has it endured? Because Costco combines the two critical elements we need to build an Incorruptible company. First, it has the ethos of Sol Price, fiduciary to the customer, the cap, margins. All those ideas are alive and well in Costco today. But it has a second dimension. It has what I call structural integrity. It is protected by a governance fortress that protects it from outside pressure. So when Wall Street attacks, the attacks bounce right off. And the board of Costco therefore sees its job very differently than the board of fedmart. The Board of fedmart thought its job was to be a fiduciary to investors, maximizing their returns, amplifying the best practices of the governance class the board of Costco. Charlie Munger was a longtime board member. They understood that their job is to act as a bulwark to protect the mission of Costco so that it can endure and generate returns over the long term. And that’s kind of the story, in a nutshell

Kara Goldin 19:18
that’s so interesting. And so the board is actually made up. I made it. It’s, it’s so unique. I’ve never heard it described that way. But you see it in the returns, like you said with Costco. I mean, it’s, it’s fascinating. And do you think that’s a gym? Just like deciding this is, you know, this is the way that will stay true.

Eric Ries 19:43
Yeah? Listen, Jim’s a great leader, but he’s been retired for many years.

Kara Goldin 19:47
Yeah,

Eric Ries 19:48
cosplay, I think, on its fourth CEO now. So although I do think he deserves a lot of credit for establishing the pattern, the culture and the structure, his insight, and I think we see this in a lot of. The Outlier companies. His insight is that this problem is structural, so the solution also must be structural. And Jim also didn’t believe in founder control. He didn’t vest control of Costco in himself as Emperor for life. He built it into the bones, the exoskeleton of Costco itself. So that’s another pattern we see in a lot of great, lot of great, lot of great companies. But I don’t want to take away his accomplishment. Like, I think we live in such a drama driven, personality driven media environment that it’s like, Oh, if it was structural, then it’s not a big like, obviously, his leadership mattered a great deal. And I think he exhibited this pattern I see in a lot of the greatest leaders. I call it the principle of harder is easier where they are willing to make really difficult upfront commitments that require extra work, but they understand that in the long run, that will make it easier. Think of Steve Jobs like very famously yelling at engineers over the visual design, the layout of the wires inside a computer that Steve didn’t want to allow customers to open the case to ever see,

Kara Goldin 21:04
and

Eric Ries 21:05
they would say to him, like, what do you care? No one’s ever going to see this. No one’s ever going to know. What do you care? He would say, but we are going to

Kara Goldin 21:11
know.

Eric Ries 21:12
Right? The point of this, we have this principle design is quality. This is our number one principle, so we’ll never violate it, no matter what the great leaders, they relish this difficulty. And of course, Costco, Jim has maybe the most famous example of this of all time, which is the dollar 50 hot dog.

Kara Goldin 21:30
Do you know

Eric Ries 21:31
the story already? I don’t know. I mean, this is a very famous story, so I’m not breaking new ground here. But for those that don’t know, since 1986 Costco has been selling a hot dog and soda combo in a cart outside its stores for $1.50 in 1986 a McDonald’s Big Mac was about $1.60 Today, that same Big Mac in California is roughly $7 Costco has been selling the same combo. It’s still $1.50 Now, the reason the story is so famous is because of something that happened in 2008 the then COO of Costco came to Jim and said, Listen, boss, we’re getting our butts kicked on this hot dog. We’re losing money. We got to raise the price of the hot dog. And Jim said, Okay, that’s fine, but if you raise the price of the effing hot dog, I will kill you. Figure it out. Okay, that quote is so famous you can buy a t shirt with it on it. Okay? The very famous story, and what’s so interesting to me about this story is it’s like, you can’t imagine how much extra work Costco has had to do to hit this price target, because they don’t want to do it as a loss leader. That’s not their ethos. So they have vertically integrated their hot dog production facilities. They built their own factories like they were going to just insane extra work to keep this promise to customers, because of those three little words at the end of the quote, figure it out.

Kara Goldin 22:46
When

Eric Ries 22:46
we force our team to figure it out, we’re doing two things at once. One, we are relishing the difficulty as an opportunity to teach. You can believe that coo when he himself became CEO one day, which he did, he remembered,

Kara Goldin 23:01
you know,

Eric Ries 23:02
and it wasn’t just about the hot dog. It was the symbol of what it meant, right? This is just the tip of a whole integrated iceberg. There are 1000 decisions that you have to make at a company like that. Jim Senegal called the conventional way of business. He called it the business equivalent of taking heroin that. And this is, like, really wild. Costco is huge, so they’re so big, they sell, by the way, more hot dogs in this cart. They sell more hot dogs in a year than every major league baseball stadium combined. So they could easily raise the price of the hot dog and make an absolute fortune if they did so. He said they could raise prices on every product in the store by 3% and no one would ever notice if they did that, because they’re a low margin business, they would literally double their net income instantly. So why don’t they do it? He said, Well, that’s the heroin. You do it once, and you’re going to have to do it again, because, of course, now Wall Street has baked in that growth into your forecast, so now you’re going to have to do it again and again and again, and pretty soon you’re not going to be a low price retailer in the innovation department of business schools, we teach this principle,

Kara Goldin 24:06
except

Eric Ries 24:06
we teach we teach it as Jeff Bezos famous dictum, that your margin is my opportunity. So in the finance class, we teach students that margins are a source of strength power you want to have the highest margins you can in the entrepreneurship class, we teach that margins are a liability. So which

Kara Goldin 24:22
is it?

Eric Ries 24:22
Saul price understood, margins actually are a liability for the reasons we talked about, the way you maximize value creation is actually by limiting your temptation to act do acts of betrayal. That’s really what makes the magic of Costco go that principle. I said it has two benefits. The first is, you get this teaching opportunity. But the second benefit is you often discover breakthroughs that you wouldn’t otherwise have been able to discover, because you’re not willing to take the easy out, you’re actually driving your team to work harder to discover some way that we can both accommodate the principle and what reality. Demands

Kara Goldin 25:01
so interesting. So obviously there are examples of when private equity gets involved in companies that it turns out okay, but there’s so many that don’t right. So why don’t boards or investors catch this problem earlier? I mean, your story that you shared seven years. But why don’t they catch it earlier? If they know that the end game is

Eric Ries 25:27
you are asking the question like an entrepreneur would ask it, yeah, this is a disease, and we have to catch the disease early, because you internally, you have what I call the builder’s intuition. You understand intuitively that the best way to make money is to create more value than you capture. So you see a company as a living thing that generates creates value when it’s healthy. But that is not what we teach boards these days. The best practice is what I said before. It’s called shareholder primacy. So I took in the book, I analyzed for the book, several of the governance rating systems that we use that these kind of investors and private equity firms and all those folks. I call them the governance class in general, investors and the people that service them, they have all these rule books for what constitutes good governance. And in several of them that I analyzed, the word mission is not mentioned in the document, so they don’t see what we’re describing as an illness. They actually think this is the goal of good governance. Now, what’s weird about this is we’ve been living with this idea long enough that we have data to see why it’s such a bad idea. So for example, in the public markets since 2008 so we’re talking about a pretty big sample. Now. I’ll think about all the public companies that have existed since 2008 if you divide those up into companies that have been rated as having good governance versus bad governance, the bad governance companies have outperformed the good governance companies. So this is being done in the name of shareholders, but because it’s value destroying, it’s actually quite bad for sure. Quite bad for shareholders. So yeah, unfortunately, boards are taught today that their fiduciary duty is only to shareholders, and therefore they are trained to act almost like auctioneers. So if someone wants to buy a company, their job is to get the highest price. If someone proposes something that is exploitative or that is damaging to the brand or mission. Think about the like, the incredible like spectacle, the disgusting spectacle of these CEOs that are, like, practically orgasmic with their excitement about laying off their whole team and replacing them with AI, like, It’s so pathetic. It’s so sad. It’s like, do you hate your own people so much that you’re so eager to get rid of them? What’s going on? Well, what’s going on is, we on is we have been taught. We basically built a system that rewards cost cutting, but never holds people accountable for the brand damage of the cost cutting consequences. So as a result, boards investors, all these people are being trained to reward this way of thinking, this exploitative, extractive way of thinking. And because of that, we are seeing like value being destroyed on just an absolutely epic scale.

Kara Goldin 28:09
Yeah, it is so true. And I think your comment about AI, I’ve had the same feeling as well. It’s like, how can you do that? But it’s cost savings in their mind, right? And it’s going to

Eric Ries 28:20
be Jack Dorsey, when he cut 40% of block, I can’t remember the numbers now. I think the stock went up so much that day that he made like, $2 billion personally. So that’s financial gravity at work. Listen for what I’ve heard, that layoff had nothing to do with AI and probably like, other issues going on, right? But, but because he framed it that way, and because he was so publicly handsomely rewarded. You have all these other executives realizing, oh, that’s going to be me too. That’s what the market wants. Therefore, I have to do it. And that’s that’s gravity at work. This is an unconscious values transmission mechanism. So you say you put people first, you say you love your employees, or whatever, but unconsciously, you’re being influenced to see the human beings who work for you as a cost center to be reduced or eliminated. You’re being trained to care more about supposed efficiency and ROI rather than quality or design or safety or performance or whatever it is that you came into business really valuing.

Kara Goldin 29:14
Yeah, it’s so interesting. And I find too that the private equity firms so often what they care about is profit. And then, by the way, growth, I mean, is, is important too. But if you don’t have the profit, then, you know, that’s what they lead with, right? And then when it’s and then it’s too late, because, to your point, they don’t necessarily care about the loyal consumer. And you know, that’s

Eric Ries 29:41
absolutely

Kara Goldin 29:42
that’s the one that’s going to help you grow. Ultimately, one of

Eric Ries 29:46
the, when you remind me, one of the stories that really I thought was, was I was really glad to be able to get it into the book, is the story of

Kara Goldin 29:52
Eileen Fisher,

Eric Ries 29:53
and she she goes, she’s been very vocal about these issues, and for her, it’s very personal. It’s very visceral, like her name is the name of the company. Me, there’s so many companies like this that once I know people who like their name is the name of the company, and they don’t work there anymore, and now the product that carries their name is being, like, turned to garbage. And it’s like, very it’s a very stressful thing. Anyway, she tells the story she was on the road show. You know, I mean, fish is a very successful company, so she was on the road show. She was gonna take her company public. And she talks about being at this investment conference on the road show, and she looks out on the audience, and she realizes it’s all men in suits.

Kara Goldin 30:25
So there’s not

Eric Ries 30:26
one person in this room who wears my company’s clothes. They don’t care about my customers at all. And she’s meeting with CEOs anyway, so some big conglomerate wants to buy her. And she says to the CEO of a conglomerate, why do you want to buy my company? And they’re like, oh, we can’t make our 10% growth target without

Kara Goldin 30:45
it. So

Eric Ries 30:46
it’s like these people all she’s just put it so well. These people only wanted to talk to me about what they could get out of my company, not what they could put in. And so she made a different choice. She she decided to turn over ownership of her company to her employees, which is becoming an increasingly popular way of solving the long term mission alignment problem, but not the only way. It’s one of what goes by the name of alternative governance structures that we talk about in the book. There’s quite a few of them, and these alternatives are not new. That’s what’s so interesting to me. I thought when I first encountered this problem, I was going to have to invent new solutions that no one had ever heard of before. But a lot of the solutions are well known among academic experts, and yet, most founders, most leaders, most board members have never heard of them before, so I’ve gotten used to telling people listen, just because something is new to you, does not make it new, does not make it

Kara Goldin 31:39
new. Yeah, I loved, I loved those options. So can you clarify for people, too, that, let’s say you’re a founder, that you just heard the story of the employees buying it back. I mean, is that something that you have to have in place from day one, or is it possible to actually make that decision later on?

Eric Ries 31:59
Yes, I went out of my way in the book to show examples of companies at every conceivable life cycle, stage, from inception to, you know, succession, because the founder is retiring, you know, everything in between public companies, private companies, even nonprofits and non I mean, we have a lot of examples in the book of the ways that this can be done. However, the most important question in the whole book, because the book is really not a manifesto. It is a is a blueprint, yeah,

Kara Goldin 32:24
and there’s

Eric Ries 32:25
a lot of tactical details. I tried to be very just like lean startup. I’m like, Look, if you’re going to do this, I want to give you the tools to do it. Okay, so we have the operational tools and the structural tools are both available. But if you’re going to do it, the most important question is not actually what to do, but when to do it? And it’s like that famous old proverb that the best time to plant a tree is 40 years ago, but the second best time is today. The best time for most people is right now. Today. It will only get more difficult from here, but not because it’s too late. It’s just that when you talk to people about these ideas, they’ll generally it will be rare for lawyers or bankers or investors, they don’t usually say, No, you can’t do it. They’ll kind of be very condescending, and they’ll pat you on the head and be like, Oh, that’s nice, but it’s too early to worry about that. You can always do it later. It’s not No, it’s not yet. But then yet comes around, and I’ve been in the room where the CEO has turned to their CFO and be like, did we ever do that thing? And they’re like, Oh, you were serious about that. Oh, you should have said so. I did say so, but you told me it was too early. It’s like, well, now it’s too late. How can it go straight from too early to too late? Did it ever pass through the intervening stage of the right time? No, it’s never the right time. If you want to do this stuff, you got to get on it, because you will eventually lose the leverage that you need to do it. And just, can I tell one more horrifying, yeah, totally. Okay, all right. So so many people tell me, like, I can put this off because I have control of my company. I like, I have the majority ownership, I have the board seats, I have whatever I’m safe. I’m like, Oh, really, if you’re so safe, what are you going to do? Tell me your plan. If the most evil company in the world, whoever you consider you don’t have to be my values, whoever you consider to be the most evil company in the world, what if they show up tomorrow and try to buy you for $1 more per share than what your company is worth you selling? Every founder I’ve ever met says, hell no, actually, they usually use more colorful language than that. So it’s like, okay, you’re not going to sell. But did you know that, according to your own legal documents that you yourself signed, most governance experts believe you have a fiduciary duty to say yes. So if you don’t do this stuff, you’re literally playing roulette every day. You are hoping that this evil company doesn’t show up and try to buy you, because once they’re there, you can’t do anything about it. Now, most founders don’t believe this. They think they’ve been told not to worry about stuff like this. This is like a spooky ghost story. You know, they don’t have to worry. Not real. So to make it real for you, let me just tell you one more story. I’ve been using this hypothetical exercise where I ask people who then, who’s the most evil company in the world? For many years. I was raised by a pulmonologist, so of course, to me, Philip Morris is the most evil company in the world because they sell cigarettes to children. What could be more evil than that? Now, sure you want to pick a different your values are different than mine. You want to pick a different company. Follow along with me. You know, fine, fine, fine. But and people accuse me of exaggerating. I always tell them this story. There was this company in the UK named Victora. They were a university lab spin out from the University of Bath. They made inhale inhaler therapeutics, like inhalers for asthma and COPD, very successful company, conventional governance. They went public on the London Stock Exchange. And then one day, I think in 2020 the actual Philip Morris tried to buy them like no joke. Somehow, someone convinced Philip Morris that they should try to diversify beyond nicotine, and so they went around buying health care companies. Now, here was, here are the specific options available to the board of vector. Philip Morris had had bid 165 pence per share for the rights to buy the company. A American private equity firm had bid 155 pence per share. So the board had three options. Option one, do nothing. There was no problem to be solved here. The company was doing fine. So they could have just done nothing. They could have accepted the private equity fund for 155 or they could take the money from Philip Morris for 165 will you be shocked to learn that the board voted unanimously and without very much deliberation at all, to sell the company to Philip Morris, an inhaler health care company to Philip Morris, citing their fiduciary duty, to say, well, we have no choice. It’s our fiduciary duty. You want to guess what happened? You all can imagine what’s going to happen next. Within three years, the company was utterly destroyed. Philip Morris took a $650 million write down and sold the company for piece parts. It was utterly destroyed. Lots of people made money on this transaction. Philip Morris, executives got bonuses. Stock traders who traded the term the volatility made plenty of money. I’m sure the bankers who advised on both sides of the transaction, everyone made fees, but the people whose lives depended on this technology, the employees that worked there for them, they were not so lucky. So yeah, whenever someone accuses me of exaggerating, I say, yes, $1 per share was an exaggeration. In real life, it was more like 15 cents. Was all it took to get the board to sell this out. So if you think that can’t happen to you, and you have a conventional corporate charter, you’re in big trouble. And this is the disconnect I see so many companies have a mission statement, but their legal purpose is something different. This disconnect is what we typically cause, is what we typically call mission drift, but it’s not mission drift. If someone says I’m mission driven, but the mission statement is at odds with the company’s true mission. They are lying to you no matter what their intentions are, and I feel like we are living through an epidemic of organizational lying, and that’s why nobody trusts anybody anymore.

Kara Goldin 37:58
Yeah, it’s, it’s so, so true. So the book is so so good.

Kara Goldin 38:03
Oh, thank you. Thank you.

Kara Goldin 38:06
So from a founder’s perspective, but maybe you’re also in private equity. Maybe you’re not the head honcho, but you’re maybe you’re not even sitting on some boards. But what do you think is like, the most important from both angles as we look at how to kind of live and and survive and thrive in the environment that we have today.

Eric Ries 38:32
So let’s first talk about founders, and then we can talk about other people, because one of the challenges with writing this book is it’s very urgent for founders, but the audience for the book is much more important to me that it’s read by future builders,

Kara Goldin 38:45
not just

Eric Ries 38:46
people who are founders today, but people who may found a company in the future, or people who will be in positions of leadership or influence. Anyone who shares that builder’s intuition. We need you to develop an ethos before the crisis comes. This

Kara Goldin 39:01
is one of

Eric Ries 39:01
the biggest learnings I had studying this problem, is that the most important leaders who have made the most impact here, who’ve made the most money, who’ve had the most success, they often entered into positions of leadership with a pre existing ethos. It wasn’t the first time they’d ever thought about it. The day they started the company, they’d thought about it before. So that’s we really need that to happen. So first for founders, some of the things in the book are quite difficult. Okay, I’m not going to sugarcoat it. Some of the stuff is hard. That’s why I had the principle harder is easier. It’s hard, but it’s worth it, but, but a bunch of things in the book are actually really easy to do, and you really should do them. So let me just give you one incredibly easy thing you could do tomorrow. This is the easiest thing in the book by far, if you have a company right now that’s already incorporated. I’m willing to bet you’ve never read your own corporate charter. Most founders never even look at it. They treat it like a building permit. I’m guilty as charged too. Okay, I’m not I’m not criticizing anything I wouldn’t criticize in myself, but your the charter is like your constitution. It’s actually a really important document,

Kara Goldin 39:59
and.

Eric Ries 40:00
And the most important sentence in the documents right at the beginning. So even if you just read the first page, you will learn a lot. You will say something like, the Acme Corporation is hereby incorporated to pursue and then it’s like a mad lib just a blank line and you fill it in. Almost every company today is given that line. It says, I incorporate it to pursue any lawful act or activity. And people read that and they’re like, that sounds pretty good, pretty open ended. Gives me the freedom to do what I want. Wrong, wrong, wrong, no. First of all, under the doctrine of shareholder primacy, any lawful act is now routinely interpreted to mean maximize shareholder value.

Kara Goldin 40:40
So

Eric Ries 40:40
if you have a mission statement that says we are trying to create quality products, or whatever, improve customers health, or any other statement, but you have this document, you are lying to your customers and your employees. You are not actually pursuing health. You’re only allowed to pursue health insofar as it is beneficial to your investors. That is not as no way to run a company. So the most important, easiest thing to do is to write something else into your charter.

Kara Goldin 41:05
It

Eric Ries 41:06
turns out this is really easy to do in Delaware. You can do it doing the form that is called the public benefit Corp conversion, or PBC. It’s not the little b with a circle in it that you’ve seen at the farmers market. This is something different. This is just the ability to write the mission into the document. Now founders hear that and they think, gosh, that sounds hard. It’s not hard. It’s a two page legal filing. Your investors can prepare it for you. It can be done tomorrow. It’s very easy. But they also say, really, what’s wrong with keeping my options open? Why do I have to commit to something specific? If you ask your lawyers, should I do this thing that Eric recommended, they’ll generally tell you not to do it. They’ll say, Listen, the path to maximum valuation is to keep your options open. And when they ask, when they say that to you, I want you to ask them this simple question, does keeping my options open when it says any lawful act? Does that include turning my customers into Soylent Green if I can get away with it and eating them? You’re expecting your lawyers to say, no, no, of course, it doesn’t include that. Of course, then you’re like, Well, great. Could we exclude that? Exclude that? But that’s not

Kara Goldin 42:04
what they’ll say.

Eric Ries 42:05
They will say, you never know what you might need to do. Keep your options open. They’re serious about this. But if you’ve ever wondered why nobody trusts you, it’s because you have legally reserved the right to stab them in the back, if you can get away with it, much better to establish the corporate purpose, to make it consonant with what the company’s actual mission is. So that’s if you’re a founder. Should we talk about some other roles too?

Kara Goldin 42:33
Yeah, definitely. So maybe, well, I think actually in the in the case of that example, but what if you have a private equity firm already involved in your company, and they’re not going to sign off on that, right? So are you?

Eric Ries 42:50
Jefferson famously said, The time to protect against tyranny is before the let the wolf into the hen house or something like that, right? Like, of course, but, but again, first thing is, we tend to assume that investors will be mercenaries and not want to do this. But that’s actually not as true as you think. Why did they invest in your company in the first place? A lot of investors are builders themselves, and actually do care. And if you can make the case to them, you actually can get them to go along with these ideas. In fact, I have a whole section in the book called How to Talk to your investor about these ideas, because I’ve had some practice of this, but let’s say that you can’t get them to do it. I certainly know plenty of companies that cannot do the public benefit Corp conversion, because if you wait too long, the conversion requires investor consent, and they won’t consent. Okay? First of all, just knowing that you’ve asked and they’ve said no, is a really valuable signal about what kind of partner they are, okay? So first of all, it’s very useful to know where you stand on these questions, because maybe you don’t want to stay there. Lot of founders feel trapped in their companies like Atlas, who can’t even shrug, but you have options. You’re not an indentured servant, and they know you have options. So if you’re asking, you never know what your leverage might turn out to be. But a lot of things in the book do not require investors consent or approval at all. They’re actually operational disciplines. So if you think about Saul price, Saul Price’s idea that he’s a fiduciary to the customer, he didn’t mean that as a legal matter to him, that was an operating principle that he taught his employees to follow, to sacrifice on behalf of the customer so as to build trustworthiness. So many of the techniques in the book are actually operating techniques to build a highly coherent culture that is aligned around these principles, and that is also a source of power and strength that, over time, not only makes you more money. The evidence shows, I’m sure. I hope your listeners all know this, but if you have never seen this evidence, it’s in the book. You can

Kara Goldin 44:40
look in the footnotes,

Eric Ries 44:41
yeah, notes. I mean, there’s a lot of that companies that are mission driven, that are purpose driven, that are trustworthy, they get these almost unbelievable business superpowers. So that’s cool. The problem is, we tend to assume that the way things are now is the way they’ll always be. It’s. So why experience that’s not true. The more you start to create this magnetic alignment, the more leverage you have over everybody, including over investors. Like I’ve been a lot of boardrooms where the conversation is about doing the right thing. Now, I personally think companies should do the right thing for its own sake, because that’s what it means to be the right thing. I don’t have no trouble with that, sure, but I understand a lot of people have trouble, like, they find that difficult to convince people, but so I’ve been a lot of rooms where companies do the right thing for the wrong reasons, and that’s fine. So like, I’ve been in the room where someone will be like, listen, we got to do this public benefit Corp conversion. You explain all the reasons why it’s the right thing. People say, I don’t care. You say, Well, listen, if we don’t do it, our employees are starting to demand this advice, we’ll

Kara Goldin 45:41
be at a

Eric Ries 45:42
competitive disadvantage. We won’t be able to recruit the best talent. Oh, in that case, we better do it. Oh, we’re gonna get slammed in the press unless we do it. Oh, then we better do it right. Like, that’s not a good reason to do the right thing, but if it gets the job done, I think it’s okay to use those kinds of arguments. And I bring this up because there’s a flip side to this whole book. If you read to the end, I mentioned this in the final chapters, the whole book can be read kind of backwards if you

Kara Goldin 46:07
want, not just

Eric Ries 46:07
literally. You can read the chapters in reverse order if you want, but also the stories can be understood in reverse. See, I’m a founder at heart. I can’t help but tell the story of Saul price from Saul’s point of view, from Fed Mart’s point of view. But of course, you could tell that same story from the customer’s point of view. Why was fed Mart so successful? Because customers chose to shop there. Ultimately, why is anthropic so successful? It’s because the best talent chooses to work there. The choices we make as customers, as employees, as investors, even with our entire retirement savings, as leaders in our own life, they have gravitational force also. So I’ll just give one last suggestion. If someone is excited about these ideas, wants to commit to a world that is like really optimizing for human flourishing instead of extraction. People ask me the question all the time, what can I do? And I got a question, a really earnest question from someone. I really appreciate it. They said, Look, I really want to said, Look, I really want to do something, but I need a job. So what can I do in my job search? And they were like, caveat, I am not a courageous person, so I need a no courage required, plan. What can I do? I feel like someone asked me, like, for a no bake cookie recipe. You know, it’s like, Hey, here’s a plan, here’s something you can do with no courage required. All you. Here’s what you do. So here’s the plan. You have your interview. It goes great. You’re a great candidate. They’re excited. At the end they ask you, do you have any questions for us? They always ask and you say, Yes, I do. Is this a mission driven company? And what are they gonna say? They’re gonna say, Yes, great. How do you know? Ask them to tell you, and they’re gonna say, Well, my boss is really nice to me. We donate free copies of our software to the local charities. We volunteer. I don’t know what they’re gonna say. They’re gonna say a bunch of stuff. Doesn’t matter. Whatever they say, be like, That’s so cool. I have such an interesting mission. Is it in the company charter too, is that our legal mission or just a mission statement? Now the power of this question is, you’re just asking questions. You’re not telling them it should be or you don’t have to jump up on the table and say, if they say that’s a dumb question and be like, Oh, just curious. No big deal. But I guarantee you, first of all, the person you’re asking this question to is not going

Kara Goldin 48:22
to know the answer.

Eric Ries 48:23
They’re going to have to ask someone to find out the answer. See, every modern company, when they do their job recruiting process, it’s somebody’s job to make sure that every candidate’s question gets answered, and all the hiring managers know how to answer these questions. So if a question comes up that’s genuinely new, you can believe that she’s telling her boss to ask her boss. Someone’s going to get an answer to this question. And I’ve actually been in the boardroom where this kind of stuff comes up, someone asked this, what are we supposed to say? Maybe by asking, you’re helping the CEO have the courage to do the right thing, because now they’re seeing the benefit. That’s if one person asked,

Speaker 1 49:00
What if two people asked,

Kara Goldin 49:03
yeah,

Eric Ries 49:03
what if 10 people asked, right? So you have more power than you realize, and one of my goals with this book is to help people realize how to wield this power, not just for their own benefit and the acceleration in their own careers, which I do think it will give you, but to see your values realized in the world.

Kara Goldin 49:20
Yeah, I love it well. Eric Ries, author of Incorruptible, thank you so much for joining us today. Excellent, excellent job, and great book and as as you’ve touched on, it’s such a great resource. It’s not just about the stories that you share in the book and your knowledge, but it’s one that you want to keep on the shelf and keep going back to, and even if not for yourself, for other founders, other people that are thinking about starting a company as well, so so good. And for everyone listening, please share this episode. Thank you again, Eric, for coming. Coming on and congratulations, so So, so needed in today’s world.

Eric Ries 50:05
Oh, Thank gosh. Thank you for that. That is such a kind thing of you to say, Yeah, everybody like and subscribe, obviously, but, but I wanted to say thank you to you, you know, I feel like you know, first of all, for all of your work, and thank you for for saying such kind things about the book and for spreading the word, and on behalf of every startup who has been fueled by hint water over all these years? You don’t you don’t have any idea how much impact these things have. So thank you. Thanks for all that you

Kara Goldin 50:30
do. Absolutely thanks. So much. Awesome. Thanks again for listening to the Kara Goldin show. If you would please give us a review and feel free to share this podcast with others who would benefit, and of course, feel free to subscribe so you don’t miss a single episode of our podcast, just a reminder that I can be found on all platforms. At Kara Goldin, I would love to hear from you too. So feel free to DM me, and if you want to hear more about my journey, I hope you will have a listen or pick up a copy of my Wall Street Journal, best selling book undaunted, where I share more about my journey, including founding and building hint, we are here every Monday, Wednesday and Friday. Thanks for listening and goodbye for now.