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- [00:00]
A
Welcome to High Impact Growth, a podcast from Dimagi. For people committed to creating a world where everyone has access to the services they need to thrive. We bring you candid conversations with leaders across global health and development about raising the bar on what's possible with technology and human creativity. I'm Amy Vaccaro, VP of ComCare Growth and Strategy at Dimaghi and your co host, along with Jonathan Jackson, DiMaghi's CEO and co founder. Today we're joined by one of the most influential voices in modern business. Eric Ries is the creator of the Lean Startup method and the author of two New York Times bestsellers, the Lean Startup, and his new book Incorruptible. He's also the founder of the Long Term Stock Exchange and the AI RD lab, Answer AI as well as the host of the Eric Ries Show. His new book, why Good Companies Go Bad and How Great Companies Stay Great is out now, and it asks a question I've been thinking about a lot since reading the book. Why do so many companies eventually betray the very things that made them great, while a rare handful stay true for decades, even a century? This conversation feels especially urgent right now as a massive new wave of tech and AI wealth is reshaping who holds power and what they choose to do with it. I'll be honest, this was one of the most eye opening business books I've read in years, and I was thrilled to have Eric on the show. We dig into the invisible financial gravity that corrupts good organizations, the idea of Mission Lock and his radical redefinition of profit itself. Whether you're a founder, a funder, or you simply want the organizations you work for and buy from to stay true to their mission, you're going to get a lot from this conversation. Enjoy. All right, welcome to the podcast. So I'm here as always, with my co host, Jonathan Jackson. John, good to see you.
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B
Good to see you as always, Amy.
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A
And we are here with Eric Reese, who has just written a new book called Incorruptible that we are excited to dive into. Eric, welcome to the podcast.
- [01:48]
C
Thanks for having me.
- [01:49]
A
Yeah, thank you so much for joining. So I want to say it's been a real ride. Reading Incorruptible through the book starts off pretty bleak, where you're uncovering companies one after another and how they've been corrupted by shareholder primacy, as you call it. What you define as the dominant theory of corporate governance, which holds that the sole purpose of a corporation is to maximize the wealth of its shareholders. But then you guide readers through a whole journey looking at how do you protect an organization from that shareholder primacy? How do you build a constellation of organizations that have what you call mission lock, how an organization can transmit its mission beyond its borders through standards and other things. And you end the book speaking about the individual and the power of the individual. I'd have to say the ending really gives me hope. So thank you for that. And I truly hope that listeners to this podcast get excited to read your book because there's so much in it. And along the way you redefine the most basic word in business, which is profit. And you write, profit is the maximization of human flourishing. Before we go anywhere else, I want to start there. So walk me through. How did you get there? And what does this mean for organizations?
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C
Yeah, thanks for asking. And thanks for starting there. A lot of business books, they're not a lot of. There's not a lot of depth to them. It's an idea, it worked, you should do it too kind of thing. And I really wanted to try something different with this book to make a philosophical point about the nature of business, the nature of organizations, because that has been my experience. Having worked with so many companies, so many leaders, so many founders, so many boards, so many investors, nonprofits, for profits, governments, you name it, I've been there. I've seen how having the wrong idea about what it is that they are doing in the first place leads them into all kinds of concrete difficulties that there are no downstream solutions to because you've made an upstream error in your thinking. And certainly among these, the misunderstanding of profit is one of the most fundamental, especially because we currently divide the world into for profit and nonprofit sectors. And if you ask such a person who's made such a division, yes, but what does it mean to make a profit? They will look at you like you've asked them the dumbest question in the world. And I give an example in the book of Walking an entrepreneur through this question. What does it mean to make a profit? This is the dumbest question I've ever been asked. Everyone knows what it is to make a profit. I know, but humor me. Explain. He said, well, it's the money that's left over after you pay your expenses. Revenue minus expense. He's been having investor meeting after investor meetings. Like, I know we all know what it means to make a profit of it. But the funny part is, of course, the reason he was coming to me is he had embroiled himself in a difficulty in a concrete business, difficulty that he found Unresolvable, Namely, his employees or potential employees that he's trying to hire are asking him, how do I know for sure that this technology that you are building will be used to create long term value and make the world a better place like you claim, and won't be turned into some instrument of terrible things like so many technologies in the past have, or just turned into something extractive or exploitative. Give a lot of examples of places where a organization, its very success makes it a tempting takeover target. The person who takes it over either sucks out the marrow or turns it into an extortionist and starts blackmailing its customers. What's to prevent that from happening here? He's like, well, you got to trust to my good intention. And that's not really getting it done. So he's struggling. How am I going to answer them? But when he talks to his investors, they treated any hint that he was worried about stuff like that as almost in a very condescending way, a sign that he wasn't very serious about running a for profit company. It's right there in the name. So he was stuck. He was actually concretely stuck. He could not figure out how could he satisfy both of these constituencies at the same time, which the way he was thinking about profit made impossible, as I demonstrated to him with the exercise. Of course, this is in the book too. And I've done this exercise with founders all over the world. We start with, okay, you say it's revenue minus expenses, but what about a Ponzi scheme? Is a Ponzi scheme profitable? Everybody wants to say no. Okay, everyone intuitively understands a Ponzi scheme cannot possibly be profitable. But revenue minus expenses, of course it is. And like, but, but, but, but, no, come on. Yes, there's expenses today, but there's also expenses in the future. All they've done to make it seem profitable is to push those expenses into the future. Economists call that deferred liabilities. I say, ah, I see. So what you said, it was simple. It was revenue minus expenses. What you meant was revenue minus expenses minus deferred liabilities. Yeah, yeah, that's what I meant. Okay, but what about a company that pollutes the river and then a community downstream from the river gets sick and somebody has to pay their healthcare costs, but not you. Again, always imagine in these scenarios that you get away with it. No one ever finds out, is that profitable? And again, everybody really wants to say no, because revenue minus expenses, you've just moved the expense onto somebody else's balance sheet and gotten away with it. But you didn't really create a profit. The whole idea of the word profit is supposed to be like the surplus value that was created. So most people will hem and haw about this. Occasionally you'll meet a sociopathic person. They'll be like, yeah, if you get away with it, that's the dream. But most people are not like that. Most people are like, yeah, no, that's not profit. You're right. And of course, economists have a word for this too. They call that negative externalities, as I'm sure many of your listeners already know. Said, great. So when you said it was simple revenue minus expenses, what you meant was revenue minus expenses, minus deferred liabilities, minus negative externalities. Yeah, that's mean what I. But what if I don't create any value at all because I don't account for the cost of the inputs of my production? Right. Like, he had given me the example, like when I was asking him to find profit for me. He's like, yeah, you take a $50 piece of wood, you turn it into a $200 table, you created $150 worth of profit. I said, okay, but imagine I steal a $200 piece of wood and I turn it into a $100 table. Again, imagine I get away with it. Is that creating a profit? Again, most people are very frustrated by this question because they're like, that can't be right. But of course, what's going on is every one of these questions is showing this chasm between people's formal definitions that they carry in their head that they learned in business school, or being indoctrinated in their managerial job or wherever, or just spending too much time with investors and their intuitive understanding of what it means to build and profit in the world. And this disconnect causes immense problems. Eventually people will say, no, hold on, that can't be right. That's like a kid who like, has $200 worth of their parents organic lemons and create a lemonade stand in which they sold $25 with a lemonade and they think they made $25. It's like, we all understand in real world you have to account for the input factors of production. Ah, I see. So when you said it was simple, what you meant was revenue minus expenses, minus deferred liabilities, minus negative externalities, minus the true cost of the input factors of production. Yeah, that's what I meant when I said it was simple. But what about a business where one of the input factors of production is a human life? Now what? And Most founders, most leaders get very uncomfortable with this. They're like, well, what do you mean? Imagine I do murder for hire. Can murder for hire be profitable? And most people, if they really sit down with it, they'll try to avoid the question for a while. All kind people like, it's profitable, but unethical, it's illegal, it's immoral, it's this. Okay, but I understand it's illegal, but what if I made so much money doing it that I could lobby the government to make it legal? Now is it profitable? Like again, profit is one of the most fundamental words in business. And we care about it. Even though we say we don't. We say it's simple, it's mechanical accounting thing. No, we care. So anyway, if you push hard enough, eventually the definition of profit that most people claim to be simple will collapse in self incoherence. Because yeah, a human being of infinite value cannot ever be legitimately considered an input factor of production. That's absurd. But when you go through this exercise, people will say, wait a minute, but are you saying that most companies today are not profitable? Can that possibly be right? Like that something's gone wrong? No, I haven't said anything in this exercise that you can't learn in an Econ 101 or maybe Econ 201 class. This is all well known. And in fact, if you study like stock market returns, you will notice that although the stock market on average is very profitable, it makes lots of money. Most of that money comes from a very small percentage of the companies. The vast majority of companies are in fact not creating any returns at all. They are in fact not profitable, even if we just care about it in this very conventional way. So my claim in the book, and I do try to give the derivation of this and make the argument in a more robust way than we can do, just is that if we are carrying around a formal definition of profit that is not useful, it's actually not serving us, is not intellectually rigorous and is full of all these holes that are well known. Why are we using it? Why don't we just change it? I'm going to use a different one and I give my attempt to lay this out. I think to make a profit is actually to maximize human flourishing. And as soon as you accept this definition, all these problems go away. It's like, yeah, obviously none of these ways of making money by skirting the rules, tricking people, getting away, like none of that stuff is profitable. And of course actions that destroy human potential, not profitable. They're Just not. And we see that in the evidence. Companies that do that stuff eventually normally set themselves up for their own collapse unless they can find like a regulatory arbitrage or some other way of cheating the system. Anyway, going back to my friend, the founder who's in trouble, this is not a work of abstract philosophy. This is incredibly important because having this understanding allowed him to solve his conundrum. Yes, we are a for profit company, he can say to his employees, but that doesn't mean we'll do anything to make money. We are structured in such a way that we can only profit by maximizing human flourishing. And to the investors who are like, I guess you're not very serious. Oh, I'm quite serious. I'm more serious about this than you are. I intend to build a truly long term value creating engine that no one will be able to stop me from operating. If that doesn't interest you, I might suggest you should get off your high horse and stop telling me what a long term value creator you are. Like, give me a break. We're not going to do this other stuff. If that's an important part of your investment thesis, please don't invest. It worked out very well for him.
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B
That's great. And I loved hearing that. Which you also espouse in the book around this. And one of the things that stuck with me when you were going through this redefinition of profit is also the nature of commercial transactions and the premise on complete information transparency and no coercion as two necessary ingredients where that transaction makes sense. And I loved it. I was talking with Amy when we were discussing your book and one of the things that a lot of salespeople, they're trying to hit their number, they're trying to sell, they're trying to make money for the company. But when the transactions are meaningful, it's not the profit just for you as the company that happens, it's the profit for the purchaser. Right? Like they have surplus, you just got them because they were, as you put in the book, willing to pay more than the price they paid you, theoretically. And therefore you should be proud not just of the fact that you made your company money, but you sold an amazing product at a price somebody wanted to pay. And that switch of the mental model of what to be proud of as a sales agent or when closing a deal is something that really struck me when I was thinking about it. Because we as an organization at DMAGE have been at this for 24 plus years. We've been mission driven, we're B lab certified. We were the first B Corp in PBC in Massachusetts. And so we've been on this journey for a long time and completely agree with everything you're talking about. But even not when I think about selling oh great, DAGI made more profit as opposed to. No, the exciting part about this is not just DAGI made more profit. Like you created human flourishing, you sold a good to somebody who's now going to be better off because we made that sell. And even for a mission driven company like us, it's really fascinating just to. When I read that one sentence, I was like, oh right, that's what should be exciting us, not making more profit for dagi. So I really appreciated that. And on that note, around selling goods and a lot of our listeners are social enterprises and foundations, you talk about this gravity of when you use that traditional definition of profit, you can just see it all the time with these companies that were amazing. You have the Google don't be evil stuff and all this where you just get pulled towards this profit maximization with the kind of silly definition of profit that you start from. I was joking with Amy. I'm like, I feel like a lot of our social enterprises would love to feel that gravity pull. When you're talking with so many entrepreneurs in so many different fields, whether it's nonprofit or for profit, do you see commonalities like when you start to feel that gravity? And I think there's a different version of this gravity in the nonprofit world world where you kind of start with this amazing idea and you chase kind of what I call the dumb money, the very traditional road grant reporting annual stuff, you increase your opex and whatnot. So I feel like there's a potentially different type of gravity when you're going after donors, but it's no different. There's this gravity well of do what everybody else is doing, do the low risk thing. So I'm curious, like are there different moments you consistently see in entrepreneur's journey, whether it's first time, second time, et cetera?
- [14:22]
C
That's exactly right. So first of all, financial gravity is the unconscious psychological transmission of values from those who have resources to those who want resources. Is an old psychological reflex built in to humanity. Now it's very important to understand as we cover in the later chapters of the book, that which values are transmitted by gravity are not a law of nature, but rather an artifact of the financial system that people find themselves embedded in. So we happen to live in the era of shareholder primacy. We happen to live in an era where extraction and this kind of like conformity to a certain set of financial is like is ubiquitous. But that has not always been the case, nor is there any necessary about that. And yes, it is fascinating to watch it metastasize out of the domain of traditional business and into every other of life. To the point that I saw a big nonprofit, a member driven nonprofit was watching from afar as they were having a meltdown, as they were having a massive conflict between the sponsors of their flagship event and their donors. And the members. The members wanted one thing, the people providing the money wanted the other. And the executive director was trying to do damage control. And they were like, look, I hear that you have this very principled stand members that you want us to do this thing, but we have a fiduciary duty to the. And I was like, you have a what? You have a what? You're a mission driven nonprofit and now you're going to justify this bullshit on the basis of your fiduciary duty like to who? To what for what? It's just like this is so internalized. As a best practice, organizations must continue to get money. So whatever you have to do to get the money, you do. This of course leads many organizations into value destroying acts of self destruction. That's what the first part of the book to the for profit sector at all. You'll have the case. And again, what is going on is a misunderstanding of what it means to make a profit in the first place. Which is why we divide the world into nonprofit and for profit. That makes no sense. Nonprofit means like Philip Morris. The Smithsonian Institute is super for profit. They're making a ton of profit. They buy into this whole thing. But once you reorient the world world away from wrong dichotomy, you can say, well okay, well people say for profit. What they really mean is investor controlled companies. And when they say nonprofit, they're trying to say is self controlled or autonomous organization. But in practice often just mean donor controlled organizations. And how many nonprofits do we all know who spend all the money they raise on fundraising? What is that fund put a Ponzi scheme. But once we break that dichotomy open, it creates the possibility of creating mission controlled companies. And that's my preoccupation in the book. What does it look like to build an entity or eventually a constellation of entities where the mission itself has the sovereignty and that can help decide what happens so that when you have a silly executive director like being like I have this fiduciary duty, they would be like I have a fiduciary duty to the mission. So let's talk about what is the mission of this organization. Is it to raise as much money as possible? No, of course not. Financial resources to an organization are like oxygen is to a human body. You need it. It's important. People who. I remember. I know who you're talking about. You talking about people who are like, wish I could have a little bit of that, right? Like people who are starving, people who are struggling to breathe, of course are not interested in particular in these fine grained distinction. But just because that's true doesn't mean that our goal as an organization is to breathe as much oxygen as possible. As the old Tennyson poem, as though to breathe were life, right? Like no, there is something else that we aspire to do. Now I think the reason why most leaders, this is true in, in startups and nonprofits alike are so vulnerable to gravity's pull is that when something works, I joke. I did a podcast where I was interviewing mission driven leaders one after the other, almost all of whom were like overnight successes, 10 years in the making. The world celebrates the 3,000th night of the success as the first night, because that's when the world noticed all of a sudden. But there's this massive long flat part of the hockey stick during which the thing was being grinded out. During the grind, we are beggars. We beg people for money. And we start to subtly internalize that. Investors and donors and the people that have money are our superiors. We don't say it out loud, but we've internalize it. And you start to be like, I just have to do whatever the market might want. And it's the might that's really gross. I think you go interview a bunch of investors they actually want and you figure out how to. That's all perfectly fine. But you start to avoid doing that. You're like, gosh, everyone just says we need to need to be more extract. I'm getting the sense that if we were stabbing a few more people in the back, people more excited about what we're doing, you know, and it starts to shape you. You start to feel this compulsion to do what these people want. And when you finally have success, many leaders wrongly attribute the success to the compromises they made to get there. It's generally not true. I've been in these situations a lot of times where it's like, look, you've been doing your thing, the same thing this whole time, and finally it's working. Finally you've made the key pivot that was necessary. And now investors are throwing themselves at you. Donors are dying to be associated with you, and you still act like you're begging them for money. And you see it in the way that allocations get made. It goes from like, who can I get to invest? To who gets to invest. And I wind up giving away this most precious thing, the ones with the slick marketing and the ones with the biggest stat. Like, I'm compensating for my years of neglect. And like, finally I will bask in the sun of these people's approval and attention like we were medieval courtiers being like, the court has finally acknowledged the nobility is ready to welcome me into its ranks. And if you've ever read a historical novel about what happens to people when they finally are basking that get stabbed in the back later, these stories don't have a happy endings. So I just think we have to really examine this and recognize our own complicity in it. We create the incentive structure that we see because we reward the worst people when the time comes. And one of my goals in writing the book is to help leaders across all sectors see these forces clearly and learn to navigate them.
- [20:09]
B
That's great. It's timely. From some of the conversations I've been having in this unprecedented new wealth that's about to come online from some of the SpaceX IPOs and AI IPOs. Is there a better way to think about capital and helping those most in need and philanthropy? Because it doesn't have to be done the way it currently is. There's no law of nature, to your point of this is the way grantmaking has to happen. This is the way supporting nonprofits or for profits for social missions needs to happen. And so I'm really excited by a lot of the. I loved a lot of the examples and love you just to go through a few of them of mission lock from like famous companies you've heard of, particularly like the wegovi story was awesome. That set this up before B Lab was a thing, before public benefit corporations was a thing to create this mission lock. And these are massive companies. They're wildly successful. Their mission lock made them way more, quote, unquote, profitable downstream because of their mission lock. Can you just kind of take us through maybe like Costco and Novo Nordisk? Those two examples really resonate.
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C
Okay. So yeah, I like giving people the kind of like deep cut Costco story because Costco is a company that like people are such fans of and yet most people don't really understand what makes it Special. And that's because they don't know the preheat history of Costco. Before there was Costco, there was a company called fedmart started by one of the greatest entrepreneurs of all time named Saul Price. He's widely seen as the father of modern retail. For those that don't know, just to get a sense of how influential he was, Walmart is named into fedmart. How influential he was. Anyway, Saul was a lawyer before he became an entrepreneur, and he had a very particular philosophy of business as a result. I wish all lawyers who went into business brought this with them. But Saul understood being a lawyer as a profession in which you are a fiduciary to the client. So client comes in, you're supposed to put the client's interest before your own. You're of service to them. So when he became a retailer, he asked himself a very simple question. Who's my client? He's like, oh, the customer is my client. It was so obvious to him, I'm a fiduciary to the customer. That was his philosophy. He had a fiduciary hierarchy. He said, the order of priority is customers first, employees second, shareholders last. The great Peter Drucker, by the way, said, no, that's backwards. It's supposed to be employees first, customer second, shareholders last. The famous Johnson and Johnson aue credo is patients and nurses first, employees second, communities third, shareholders last. Are you noticing a pattern? Anyway, that was Saul's belief about business, and he would go out of his way just to ridiculous lengths to insist on his philosophy. He paid higher than market wages. There's a famous story about a time when he opened a store in San Antonio during segregation. And they were like, if you have a food court out front, you have to segregate it. And he wouldn't do it. And so he was like, if it doesn't have tables or chairs, it's not a food court. So he ripped all the tables and chairs out, and then he could have an integrated food service counter. I mean, just like tons of things like this. There's one of my favorite stories is a time he went to a vendor, one of his suppliers, and said, listen, we want to sell this product for a dollar or less. If you take 50 cents off, we'll take 50 cents off and we'll sell more volume. They did it. The vendor agrees they do it. They put on the shelves. They basically sell the same number as they did before. Saul calls his category buyer up and he says, go back to the supplier and give them their fifth cents back. Because I saw we don't have to do that. We had a contract. We entered into it in good faith. Like it didn't work, like you don't have to give them the 50 cents. Yeah, but we told them it would and it didn't. So give them their 50 cents. You know, it was just like, there's a universe of stories like this about Saul. So as a result, everybody trusted Fed employees, loved working there. Customers would drive miles out of the way to shop there. Investors made a lot of money. Saul took the company public. He made more money for his investors than they could possibly spend. So obviously they were fully satisfied and gave him the freedom to run the company the way he thought was best, right? Yeah. No, obviously not. Who are we kidding? No matter how much money Saul made for them, they always wanted more. They were voraciously hungry for more profit. And so for 20 years, Saul battled his investors for control of FedMark. Even though it was working, his philosophy produced the competitive advantage that investors were happy about. Yet they were like, look, why do you pay more than you have to? Saul believed in low prices and high wages, but they so many investors wanted high prices and low wages. Anyway, all this came to a head one day in 1975 when Saul came into his office but could not enter the door because they had changed locks on his door because he didn't work there anymore. Just summarily fired him. And what's so interesting about this story is what happened next. On the one hand, the investors got their way. Fedmart was turned into a profit seeking company above all, as a result of which, it was bankrupt within seven years. It took them only seven years to destroy what had taken Saul more than 20 to build. On the other hand, Saul understood something that I think the investors didn't. Investors were like, look, this guy is an impediment. And he would say, no, I'm not getting in the way. But the reason why fedmart was successful was not because of my charismatic leadership. It was because this whole thing is an integrated engine, a set of interlocking principles that develop this commercial outcome so I can do it again. So after taking two weeks off to lick his wounds, Saul was back. He leased the office upstairs from fedmar in the same building. And he started a new company called the Price Club. When I was a kid, that's where we shopped. But today, Price Club if not really remembered because he was not the only one who learned this lesson. Also a guy named Jim Sinegal who had worked his way up from stock boy to executive at fedmart. He quit in protest when Saul was fired and eventually went out to start his own company. His company and Saul's were to then merge some years later, forming a company that they called Price Costco. See, but we just call it Costco. So that's the deep cut origin of Costco. Today, Costco is a $400 billion public company that still maintains Saul's ethos all these years later. And yet the reason why Fed Mart was destroyed and Costco endures is because Costco was protected by this mission lock mechanism. Spell out in the book how it was done because Jim Senegal was there the day that Saul was betrayed. And he's like, well, I don't want that to happen to me. So the structure is necessary to give Costco sovereignty.
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B
Well, just because it was so timely with how GLP1s are exploding and worth like a jillion dollars.
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C
Oh yeah. I mean, again, it's just such a wild, such a wild story. And I was just in LA doing the LA version of the book tour and people were real interested in GLP1 in LA far more than I didn't really have an understanding of how mainstream this thing has become until I was in LA and it was all anyone could talk about. And again, like not to lionize GLP1, so. Which I have very mixed feelings about. But from a profit perspective, they are undeniably powerful, maybe the most profitable pharmaceutical history of humanity. So Dwarkish had a podcast episode the other day where he mentions in passing that GLP1 is only possible because of a quirk in the Danish tax code, which is kind of sort of true if you look at it from one perspective. It has a truth in it, but I think really undersells the farsightedness of a woman named Marie Crow who helped set Novo Nordisk up more than a hundred years ago. Here's the story of Novo Nordisk. Marie was one of the first women official credentialed doctors in Denmark. She was a remarkable woman in her own right. But today she's mostly famous because of her husband August, who won the Nobel prize right around 1920. And around the same time he won the Nobel Prize, she had diagnosed with a fatal illness called diabetes at a time when diabetes was an incurable disease, so it was a death sentence. And despite getting this diagnosis, August asks her would she be willing to travel with him to do a lecture tour of North America to talk about his Nobel Prize winning research and dutiful wife that she was, she says yes. So August and Marie, scientists both Travel to North America. And on this lecture tour, someone takes them aside at dinner and says, there's these people in Canada who have isolated first time synthesizing a potential cure for diabetes. So Marie convinces August that they should go extend their trip to North America, go to Canada, see this technology for themselves, which they do. They realize its potential because they have the scientific caliber to understand what the technology is. And they ask the scientists in Canada if they can bring this technology back with them to Denmark, commercialize it for use in Scandinavia. And they make an agreement there. All the scientists get together and say, okay, we're going to do this project. But they had a concern in the 1920s. They had this concern. Years ago, they had this concern. Imagine, Jonathan, that you have a life saving medication that I depend on to live. In that case, I would want you to charge me a fair price for this medicine. In fact, I want you to profit by doing this so that you have every incentive to stay in business and keep providing me the medication. But as much as I want you to do this, I would live every day in fear. What if you woke up one morning and said, wait a second, I don't have to charge Eric a fair price. I can charge him whatever I want. He needs this medication. This is that fear that those employees were talking with that founder about at the beginning of our conversation. This fear that someone could wield the technology in an exploitative way to become a gangster that is ever present with a powerful technology. So anyway, they, for all the scientists involved, foresaw this possibility and decided to force it. So they incorporated the company using a structure called the industrial foundation structure in which to this day still how it is. Novo Nordisk is a for profit company that is governed by a Mission Guardian nonprofit foundation. So yes, this is more common in Denmark than in other places because starting in the early 20th century, Denmark had a tax code that was especially favorable to this structure being formed. But that's not why they did it. They did it for these mission preservation reasons. And it was an aspect of it that has long since been vindicated. The tax issues have long been solved. You can now build the structure basically in every country. Anyway, what's interesting about this feature is that in most things in business, we can only hypothesize that they were important to the success. Anthropic is governed by the long term benefit trust. Seems like that's been really helpful to their integrity. Other companies have different structures where it seems like the structure is related. But in this case we have the most perfect natural experiment you will ever find in business that shows you exactly how valuable this structure was. Because 80 years after the Krogs set it up, this structure was tested in a really profound way. Now the key to this structure is there are two entities. It's not like OpenAI, which was only ever one board, one entity. You have a board of trustees who have the mission guardianship responsibility and you have a for profit subsidiary, or I'm talking about multiple subsidiaries, each with its own independent board that has the business operations response. And this is like a system of checks and balances. Most decisions made by the for profit board. And every once in a while something really urgent comes the attention of the trustees who have to intervene. So this is one of those cases. There are just a zillion stories in this book of boards who decide to betray the mission for no reason. They see an opportunity and they do it. So this is one of those stories. The for profit subsidiary gets caught up in the wave of a pharma consolidation and they get all excited. Sell the company to a Swiss biotech company that was like, I think at that time the third largest in the world. So they ink this merger agreement. Now again you have to understand Novo Nordisk is a publicly traded company, a big multi billion dollar. I can't remember the exact value it was at the time of this merger. But they're going to get a big premium. They're going to get $20 billion for a company that's only worth 15. They're real excited about this merger. They assigned definitive agreement to do it and they treated it a checklist, due diligence item. Got to go to the board of trustees of the foundation and they are the ones who have to approve any sale. And the first time they have this meeting the trustees ask them this question, what is the purpose of this transaction? And the for profit board must have just been like, what are you talking about? We're about to make a ton of money. Was a purpose of it. We're a for profit company. There's a bleep ton of profit to be had here. And the board's like, well that's interesting because our mission is a little different than yours. Our charter says we can only approve a transaction if it is necessary for the survival of Novo Nordisk. Is this transaction necessary for our survival? My favorite detail in the story is they have to come back for a second meeting. First meeting went so badly you could just see them being like time out, time out. We're going to resync with our bankers and we're back. And give you a much more compelling presentation. They just clearly had not taken this seriously. Did not realize that this was even remotely a possibility. Come back second time, they're like, look, the new best practice in pharma is consolidation. If we don't consolidate, we're going to be eaten. It's eat or be eaten. And again, the board's like, okay, but we've been profitable and growing like 15% a year for 10 years in a row. So once again, what business problem is this transaction supposed to solve? And again the board's like, but we're just going to make so much money. The transaction is to make money. Isn't that our purpose here? No, that is not the purpose. That's like a confusion about corporate purpose. And say, no, the transaction is blown up. You can imagine how pissed off everybody is if they say no. They have the absolute power and they used it. Now, what's interesting about this story is we know exactly what would have happened to Novo Nordisk if they had said yes. Because the company that they were going to merge with itself merged with Merck two years later and as a consequence had all of its R and D operations shut down. So we know that any R and D program that would have been running at Novo Nordisk that had not yet borne fruit would have been canceled. There's a lot of academic research, by the way, that something like 5% Alpharma acquisitions are so called killer acquisitions where the intention of the acquirer is to shut down the R and D again, a massive way to make money without creating value. In fact, by destroying a lot of value. In this case, the timing of this happens to be amazing. That the research program to create Wegovy and ozempic and the GLP1 class of drugs took 13 or 15 years. It took a really long time to come to fruition. Most of the experiments did not work. And for years this was like buried on the depth chart as the least favorite research project in the Novo Nordisk research pantheon. And it happens to be that this merger is just about two years before the end of this program. So we know for sure if this company had been merged, then this research would have been canceled. And now, okay, we're going to freeze frame. Take the moment the transaction was declined by the board and freeze frame a few years later when, because of GLP1, the market cap of Novo Nordisk exceeded the GDP of Denmark. And ask how much value for shareholders was created by this refusal by the trustees. The answer is more than $500 billion. Of shareholder value. So this is the paradox of mission protection. Conventional finance theory would say, because the trustees have no skin in the game, they are themselves not shareholders, they don't have efficiency and the desperation and the agent. They would say that they would be bad stewards of shareholder value. Yet the paradox is they are exceptional stewards of shareholder value. Because human nature being what it is, we have a tendency to kill the golden goose, even though we know we're not supposed to. So by giving up control, investors actually make more money. And that's not unique to Novo Nordisk. There are a whole data set of companies that have these unusual structures and the data shows that they are like five times more likely to live to year 50. They have better R and D investments, they are more efficient, they do all kinds of stuff that modern shareholder primacy and finance theory would predict to be impossible. And I just think we very much owe it to ourselves, as board members, as leaders, as executives, as customers, as employees, as citizens to reckon with this data. First of all, most importantly, why are you having to learn this data from me? So many of us employ an army of advisors and consultants and lawyers and bankers and investors and donors and all these super smart people. How come they didn't mention it to you? And I think trying to really ask yourself that question, why? Who profits from this suppression of this knowledge is very valuable to reflect on going into that.
- [35:49]
B
Why One thing, just to build on that story, I believe the CEO who proposed that merger you said in the book, then became a huge advocate for the trustee model and is now on the trustee side making sure that Novo Nordisk lives up to its mission as it continues. Is that, Do I remember that correctly from the book? Yeah, yeah.
- [36:08]
C
He eventually became chairman of the foundation and in fact, because recent years Novo Nordisk has been having all kinds of problems because they've been having this kind of complicated squabble with the Trump administration and therefore sales of GLP1 US. Anyway, it's a big mess. Their stock price has been all over the map and there's been this massive disagreement between the trustees and the for profit board again about what to do. And now with him leading the charge, decided, I saw the news recently that the trustees had fired all the for profit board members, basically started over to assert their view. Now, look, I can't say I'm not following it closely enough to know exactly who's right, who's wrong, what's going on. It's very complicated. Obviously, this is a highly regulated business. And again, my point is not to Claim that Novo Nordisk is perfect. Like I said, I even have mixed feelings about GLP1 myself. We run into this with any company you want to hold up. I talk about the famous $50 hot dog at Costco and I have a friend who's a vegetarian environmental activist. He's like, why are you holding up a hot dog as virtuous? I talk about anthropic. I have to tell a sounding story of anthropi in the book. Or I played a bit part. And I've had plenty of people like, you're an author and they stole your works. Like I'm in the class action settlement with Anthraba. Yes. I'm not saying that, you know, and people say that about Patagonia or whatever company you want to put on a pedestal. I could find something they did that was a mistake or that was wrong. Sure. Of course, when we say that a company is praiseworthy for being strong, for doing the right thing, it cannot mean absolutely right according to my values. If that's the only way to say someone did the right thing, then none of us could ever agree that anyone ever did the right thing except ourselves, which would drive us into solipsism and eventually into insanity we see happening because that's the value system that we're increasingly embracing in this highly polarized time. Instead, we have to get back to an older conception of the right in which we can recognize the integrity of a person or an organization who stays true to their own values, whose values are aligned to human flourishing, and who is doing the best they can to consistently and with high integrity make good choices. And so we may not always agree, but we see that they are trying to do something that makes sense to us and to them. And therefore we can trust them even if we don't agree.
- [38:01]
B
Yeah, that's, yeah, that's, that's great. And one of the stakeholders that you mentioned was employees. And I think there's one way to view this book and the mission lock and incorruptibleness as a founder who's trying to protect this multibillion dollar vision they have. But most people are not necessarily founders of multi billion dollar companies, but their employees. And they want to get a good paycheck but have their work mean something and contribute to something. And one of the things that I was struck with is you talk about the longevity of these mission locked approaches and structures in the time horizons of decades and hundreds of years in some cases. But for employees who are only looking five or 10 years out, who I hope Read this book and are thinking through do I work in this sector, that sector, this company, that company. How do you want them to internalize what you wrote and apply it in a meaningful, practical way when you're not the founder coming up with the B Corp structure or the investor choice?
- [38:54]
C
Yeah, in some ways they're the most important audience for the book, even more so than founders and leaders and board members, for two reasons. First of all, you said that, well, they're not the founder of a multibillion dollar company. How do you know? How do they know? A lot of people who found multibillion dollar companies didn't think they would do that one day. It's a myth that people are like born knowing they're going to be a world beating emperor or whatever Napoleon figure. All those people are not that great, a lot of people, because they had a pre existing ethos of integrity that put them in the position to do something great again, not to necessarily make money and billions of dollars, but to become a leader. So future leaders, future builders are a very important audience for the book. But even for people who say that's definitively not for me, I think they can still get a lot of use out of this book. And in fact the later chapters are preoccupied with this question we've been talking about this gravitational pressure that companies feel, feel, that organizations feel. And you have to ask like, where does it come from? Who generates it? People are like, well, the money generates it. But is that right? Can money generate a psychological force? By itself, no. People have to generate the force. And all of us are the transmission mechanism by which these values are transmitted. Who we choose to give our money our time and attention to, and where we choose to work, where we choose to invest, these decisions are surprisingly consequential. And yet we are living in a very cynical age in which the media message very much is that none of these things matter. Virtue signaling is a waste of time. Through whatever you're going to solve climate change through recycling, you must be a chump. And in particular, the idea that you should be selective about where you give your attention is an idea that's under tremendous attack. Now what's interesting to me is that the same people telling people that their decisions don't matter and that they have no agency are spending billions of dollars to make that message known. Why is it so valuable to them to be worth spending all this money to make you feel helpless and weak? Maybe because they fear your strength. So the goal of the book is that when somebody claims to be mission driven to you. You will now have the tools to find out if they're sincere or not. I think it's a big mistake to assume that anyone who's talking mission, virtue, signaling, whatever, anyone talking values, must be trying to trick you or is bad, even though most people are. How can you tell the difference? How can you find out if it's for real? Let me give an example. So the book is basically like a checklist, all the steps that we teach leaders in the book. Here's how to build a mission driven company so that you're not merely mission hopeful, but truly mission driven. Every one of us can use that as a checklist. I use it as a checklist. Now someone says, I'm mission driven. I say, oh, really? Which of these 12 things have you done? Oh, none of them. Please come back later when you've actually done a couple things take you more seriously. People are constantly asking us to trust them. Hey, just trust me with your data, with your life, with your children, with your welfare, with your mental health. Why are you worthy of that trust? A young person who was an early reader of the book came to me and asked me for advice. And they said, I want your help. I want to apply the ideas in the book. You know, I want to be an activist for these ideas. I want to spread them. But I just want you to know, like, I'm not very courageous. I need a job. So I can't really afford to piss anybody off. Can you give me some advice on what I can do? Like give me a no courage activism formula. It was like giving us for a no bake cookie recipe. I said, sure. That's actually very easy to answer you. Here's what you're going to do. Here's your plan. You're going to go have your job interview. At the end of the interview, they're going to ask you if you have any questions for them. Everyone knows you're always supposed to say, yes, I do. Here's your question. Is this a mission driven organization? Nothing offensive about that. Just ask. Oh, great. Oh, cool. How do you know? Tell me about what's mission driven about it. We're going to save the environment, we're going to save the children. We have free beer on Fridays. I don't know what they're going to say. Whatever they say, be like, oh, that's so great. Just be open, be curious, and at the end just be like, that's so cool. Is that also our legal mission? Is that in the corporate charter or is that just rhetoric? You're Just asking. You're not saying anything. I'm pretty sure the person you ask will not know the answer to this question. But it's a legitimate question. If the company has taken no steps to preserve the mission, it won't be preserved. And so they will eventually betray you. So it's a perfectly legit question for an employee to ask. No judgment. You just want to know if they don't know, just, oh, could you get me an answer to that? I would love to know. Now, whether you get an answer or not, you've just created a gravitational ripple. Because every company today that runs a hiring process, I guarantee this, okay? There is somebody in the process whose job it is to make sure that every question a candidate might ask has an answer. There's a document, someone's writing a document with all the frequently asked questions and their answers and even the infrequently asked questions, which means whoever's job it is, she is going to have to ask her manager, hey, what is the answer to this question? What does it say in our. I've never even thought of this before. And she's going to have to ask her manager, who will ask his manager. I have actually been in board meetings where this kind of thing comes up. Someone will be like, we're getting this weird question from candidates. We're trying to hire the best people. What is our answer? Does anyone know what is the answer here? Right. Look, maybe no one will care. Maybe nothing will happen. But every once in a while, you'll have a CEO who's been like, c, wanting to do this whole time. They want to become a public benefit court, which means writing this purpose into the legal charter. And all of a sudden, just by asking a question, you have given them the excuse they need. Hey, guys, I know before you were resistant doing the right thing for the right reasons, but can I interest you in doing the right thing for the wrong reason? Can we do it just to get this commercial benefit of the best talent? You never know. And I was just talking to a CEO of a big public company who this happened to. It really bothered him. He had started the company not thinking it was going to work. And so when his lawyers had presented him with the incorporation documents, it said, like all. Almost every company today, by default, it just says, maximize shareholder value as the legal purpose. And he's like, that doesn't seem right to me. But they were like, don't worry about it. You can always change it later. He was like, well, it's probably not going to work out. Okay. Well, I'll just do that. I don't want, I want to keep it simple, keep it simple, keep it simple. He didn't bother. And then for years this would bother him. Every round he'd be like, is this the time to change it? Oh, don't bother, don't rock the boat. Next thing you know, they became a public company and they still haven't changed it because it was always too early, too early, too early. And so he needed to change it as a, he actually changed it as a public company, which was really difficult to do. But he did do it. And part of what gave him the courage to do it was he had people asking these kinds of questions. He's like, no, we commercially, as part of our strategy, we need to stand for something specific. And so he did it. So just by learning to ask the right questions, you wield immense power. Now that's the no courage version. If you have a little more courage, you could try something a little spicier. Either way, know where your power lies. That way you can make a conscious decision about whether to use it.
- [45:09]
A
I love that example. I think that's, that's really good advice. I want to ask, coming back to the founder's role and that any of us could be potential founders, but I felt like you had a really interesting take on founder mode, which I know is a very popular buzzword in Silicon Valley these days, but you wrote about emergent intelligence and you said an organization's emergent intelligence is powerful enough to defeat the efforts of smart, well intentioned leaders again and again. And you suggest that the founder mode is really a short term thing. So I am curious, like how should founders be thinking about their roles in ensuring an organization's mission lasts?
- [45:45]
B
Yeah.
- [45:46]
C
So for those who don't know the term founder mode, it was coined by Paul Graham after describing a phenomenon that he observed by, in Brian Chesky. Brian Chesky gave a talk at Y Combinator about having kind of, he described as losing control of his company to his employees. He had hired all these managers and professionals and he was trained in this best practice to do delegate decisions to them and to not micromanage. And next thing you know the company doesn't stand for anything. And in the classic and like he told this story of having to basically fire all those people and blow up all those procedures and reassert his own ownership of the company, have it reflect his own views and integrity. Now I know Brian, I was there, I, I'm familiar with this story from the inside. But since then it spawned A whole genre of these stories of people going founder mode on some problem, meaning that the founder asserts their moral authority to make dramatic changes in the company, which is true. There are times when this is necessary. And I do think the charge that this is micromanaging is a bunch of bs like, so I'm sympathetic to this story, absolutely. But the question you never see asked in these founder mode drama stories is who hired all these people in the first place? The founder mode story is the founder as a victim of choices and decisions they themselves made. Our grandparents didn't tell stories like they'd be like, wait, just take responsibility for this. Founder mode isn't accept is admitting error without while painting yourself as a victim. I think that's kind of gross. So don't do that. Admit that you made a mistake and try to undo it. Now the question is, why did you make the mistake in the first place? Think about this. These founders are the strongest, most bold people you ever meet. They forget to be bold for a minute. Did they forget? No. What happened was they got sucked into this gravitational well. Which means that companies that go founder mode often have to do it more than once because you do the intervention and then you start to drift back and you have to do it again. And of course, God help you if you have an organization that doesn't have a founder running it anymore. Now what? So I think ultimately founder mode is not a long term solution to what is underlying systems problem. And the reason I, I use the term emergent intelligence is we have really good evidence that's what organizations are like, metaphysically speaking, that's literally what they are. They have this living character to them that is both measurable and to some degree controllable. But it's like human health. The analogy I give in the book is many people, when they reach a certain age, some people this is like college age, sometimes a little earlier, some people, it's quite a bit later. But anyway, some people generally have to face question of what am I? Mind, body duality and all that stuff. What am I? Am I in a body? I am a body, I'm a brain. That what am I? And a lot of people at some point will conclude, oh, I am in control of my body. How do I know? I tell my arm to lift and it does. My mind controls the body. And of course, if you've been in a Socratic questioning situation with friends or with a mentor or in a philosophy class, you'll have someone be like, oh really, why don't you command your body to heal? That wound. And they're like, huh? No, that happens automatically. It's like, I see. So you can command yourself to be healthy? It's like, no, not exactly. And in fact, a lot of college students, a lot of us fall into nihilism. Oh, if I'm not in control, I guess nothing I do matters. Therefore I can eat all the Doritos I want. That's not right either. No, that's not right. If you want to be healthy, your conscious choices, your voluntary actions do have a very important. In fact, this is actually why I use the word ethos in the book, is a very old fashioned idea going back to Aristotle. And before that, your conscious choices crete like layers of sediment forming your character over time. If you build a character, a healthy character, healthy habit like, then eventually you will have exerted conscious control over the emergent properties of your own body. Organizations are the same. There is no difference at all. They're just made of different things. But the process is the same. And many managers have the same misconception. I control my organization. How do you know? I give a command and it is obeyed. Congratulations. That means you have a functioning nervous system. But can you command the culture of your company to be a certain way? No. Founder mode is a story of command and control, and that is powerful in the same way that if you eat right, you can be healthy, but you can't do it just once. It has to be a lifetime discipline, a lifetime process. And so a lot of the book is about grappling with what does it mean to lead an emergent intelligence? What does it mean to lead an organization and attempt to bind it to certain principles, certain values, when we don't exactly directly command it. In the book, I say we don't own organizations, we birth them. So being a leader, being an entrepreneur, being a founder, this is a lot closer to motherhood than it is to like being a slave owner. And I think once we recognize this shift in our own thinking, it opens up again new practical possibilities to solve problems that we otherwise view as intractable.
- [50:33]
B
I love that, and I know we're taking up a ton of your time, but I want to ask one last question related to both founder mode and all of this ingenuity that you've seen and researched in the book. How do we get that same level of ingenuity and uniqueness and human flourishing into the philanthropic space? Because what I see as somebody who's been on both the for profit and social enterprise side, also for profit, but as a mission driven business, a lot of Amazingly smart, caring people stop at, okay, I made a bunch of money, I took my company public and I'm like, okay, but now is the most important part of your job of causing human flourishing is how do you make the most impact you can with this money you want to drive impact into? And a lot of people give it staffs or things and they just kind of all this stuff that made their company amazing, all the stuff that made tens of thousands of jobs one of the most amazing places to work, they don't bring that insight and ingenuity and caring into their giving, which I'd argue is potentially going to be more impactful than the company they built if they do it right. And so I'm curious your take on that and what we can do.
- [51:37]
C
Oh, it's very dispiriting. I think. So much of philanthropy is frankly vapid and completely content free. And most people that do philanthropy don't realize it because just they're surrounded by yes men who only tell them how geniuses they are because that's gravity's most pernicious effect. If you sit in a giant pool of resources, everyone conforms their behavior to want to please you. It's so gross. I once sat with a group of incredibly successful businessmen who were all meeting Oprah for the first time and they turned into like a bunch of little boys, just, oh, please. Oh, is there anything I can say to please or impress Oprah? I was like so sad in a certain way. Like they were so obsequious. And if you ask them afterwards, like, why did you behave this way? They don't know. It's an involuntary reflex. If you understand that joke, if you find that funny, if you're in philanthropy, if you have a large pool of resources you're giving out, you have to understand that everyone you interact with is doing that to you, including the people that give you negative feedback to prove their authenticity and honesty to you. They're just trying to calibrate what do they have to do to make you believe that they really see you or whatever. In the book, I call the phenomenon mission transmission, which is the having the awareness that every kind of transaction you do when you're the holder of resources transmits your values whether you intend it or not. So like, I know so many family offices, so many foundations who have money, for example, invested in so called neutral index funds while they're waiting to invest in, but there's no neutral in this world. As the old song says, you gotta serve somebody, right? So the money winds up serving groups like ISS who have values and beliefs about governance that are generally antithetical to the people whose money is being invested. So you have to be willing to see the way in which you make grants is an act of value transmission is active mission transmission. The way that you choose how money is invested is in active mission transmission. Who you choose to bless and endorse, who you give your time and attention to, whose podcast you go on because you're so famous. All of these things are ways in which you are causing gravitational force to align with somebody's values.
- [53:42]
B
I love that it's a great place to close. We really appreciate your time Eric, and love that you've been able to spend this with us. I know our readers and listeners will get a ton from this.
- [53:50]
C
Thank you so much. Appreciate all that you do. And yeah, thanks for the chance to talk about these ideas.
- [53:54]
A
Huge thank you to Eric Reiss for such a generous, genuinely mind opening conversation. And thank you dear listener, as always, for being here. A few ideas I'm walking away with first, profit isn't revenue minus expenses, Eric argues. It's the maximization of human flourishing. And once you accept that, a lot of what looks profitable actually isn't. Second, he defines financial gravity, or the unconscious pull to take on the values of whoever controls the resources you need. It shows up differently depending on the organization. In a for profit, gravity pulls you toward investors and the market. In a non profit, it pulls you toward donors chasing the grant, doing what everyone else does until eventually you're drifting from your mission. Either way, the antidote is the same. Get clear on your mission and let it hold the authority. Third, to do this structure is critical. Costco still honors its founder's ethos decades later, while its predecessor, Fedmart was gutted within seven years of his ouster. And the difference is Mission lock, building the mission into the legal bones of the company so it can't be stripped away. One of the most striking cases is Novo Nordisk, where a Mission Guardian foundation blocked a hugely lucrative merger by asking one question, is this necessary for our survival? And in doing so saved the research that became Ozempic, ultimately creating more than $500 billion in shareholder value. And finally, you have more power than you think. As Eric puts it in the book, you're not stuck in traffic, you are traffic. Every transaction you take part in transmits your values, whether you intend to do so or not. So whether you're hiring someone interviewing for a role, buying something, giving or investing, you can do so thoughtfully to transmit your values. That's our show. Please rate review, subscribe, subscribe and share this episode if you found it useful. It really helps us grow our impact and write to us@podcastemangi.com with any ideas, comments or feedback. This show is executive produced by myself. Prathana Balachander and Michelle Avalencia are our editors, Natalia Glowacki is our producer and cover art is by Sudan Shukant. A final note, in the spirit of transparency, we use AI to assist with guest research, copywriting and post production so a small team can produce a high quality show. All AI assisted content is reviewed and edited by humans and we retain full responsibility for what you hear.