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- [00:00]
QuickBooks Advertiser
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- [00:04]
Eric Ries
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- [00:07]
QuickBooks Advertiser
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- [00:18]
Adam Grant
this episode is brought to you by ServiceNow. I get to spend my days studying how people think and what it actually takes to change our minds. It's work I find deeply meaningful. But even in meaningful work, there's still busy work. The admin, the repetitive processes, the invisible load that pulls attention away from what really matters. That's where ServiceNow's AI specialists come in. They don't just tell you what you should do about your busy work, they actually do it. Start to finish, cases closed, requests handled, no extra work for you. To learn how to put AI to work for people, visit servicenow.com
- [00:53]
Eric Ries
People think the worst thing that can happen to you is your business fails. Oh no, it could be so much worse than that. We're actually awash in corruption all around us, and I think it's important that we see a pathway out of that trap.
- [01:09]
Adam Grant
Hey everyone, it's Adam Grant. Welcome back to Rethinking my Podcast with Ted on the science of what makes us tick. I'm an organizational psychologist and I'm taking you inside the minds of fascinating people to explore new thoughts and new ways of thinking and. Eric Ries is an entrepreneur and author. He's best known for his bestselling book the Lean Startup, about how founders learn rapidly and innovate continuously. He's dedicated his career to helping businesses succeed and do the right thing. Following that line of thinking, Eric made headlines for creating the Long Term stock exchange in 2015. Just like the New York Stock Exchange, you can trade cash, shares and equities, but the Long Term Stock Exchange was designed to help companies resist short term market pressures and focus on their future growth and impact instead.
- [01:58]
Eric Ries
So one of my questions was why are all the stock exchanges that we're going to compete against, why do they all have the same listing standards? For all intents and purposes, this is America. It's a competitive system. You think one of them would be trying to out compete the other by being more long term or something? Why are they exactly the same? So I like well, let's go find out.
- [02:13]
Adam Grant
His experience on that project and working with many high profile companies over the years led to his new book, Incorruptible, which focuses on how to help organizations avoid straying from their ideals. The Corruption Eric tackles head on is one of the biggest problems of our time. A lot of people believe it may be unsolvable, but Eric has some strong ideas on how to move forward, starting with a little bit of tough love
- [02:35]
Ted (Producer/Interviewer)
and a little bit of hope too. So I think I have to start by saying probably most of our listeners know you for your seminal work on Lean Startup and helping millions of founders come up with minimum viable products and kind of pressure test their ideas and iterate and get half baked possibilities out into the world that then turn into really, really great products, services, companies.
- [03:04]
Adam Grant
And yet lately you are in the
- [03:06]
Ted (Producer/Interviewer)
business of doing something a little different, which is you are making founders and leaders cry. You're making them cry.
- [03:13]
Eric Ries
No one ever cried. Reading the Lean Startup, it's very surreal actually to me. The more I've been talking to people about it and the more often it happens, I feel it's connecting with something that is really like wounding a lot of people that they feel tremendous pain and loss about. And I guess it shouldn't be taking me so much by surprise because of course that's why I wrote the book. I felt that sense that like in our economy there is something like that has gone wrong. And I've just been around too many companies that lost that special spark that made them worth grading in the first place. And I know a lot of people who have wound up incredibly rich and totally miserable. Never mind the people who are affected by this boardroom drama. All the thousands and millions of customers who've had a favorite brand get ruined. Companies that have become malignant or worse, you know, the addictive algorithms and the negative externalities and it's just we're actually awash in this corruption all around us. So much so I think we often don't even know what to call it or even recognize it as a set of choices that we've made as a society about how our economy should be structured. And so yeah, I want to bring both a dark message about something that's gone terrible, but then the hope and the blueprint for how we get out of this mess.
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Ted (Producer/Interviewer)
And that's the part I think that's making them cry. You're telling them something they thought was impossible is actually possible.
- [04:33]
Eric Ries
Yeah. It is really interesting to me how many people tell me that the way things are is inevitable. And sometimes they say it out of a sense of despair, like, what can you do? It's inevitable. But even boosters of the status quo often are like at great pains to make sure I know that my attempt to Reform is gonna fail. And at a certain point, I started to realize that the story of inevitability is a tell. Because if it was really inevitable, if they really believed it was inevitable, they would not bother feeling the need to try to convince me that it was inevitable. You just watch it die, you know, it's like, oh, you foolhardy person. I'm gonna sit back and watch you crash and burn. But the fact that they're taking so many active steps to create this aura, this story of inevitability, that is what clued me into the possibility that maybe they're actually a little bit worried that people might attempt things that are verboten according to today's modern best practices. And if they attempt some things, maybe they'll find out some things that would puncture this feeling of inevitability, this feeling that this is the best way for some good reason. In the book I write that your optimism, the optimism that you feel about the possibility of a better future, is a fuel that has to be burned to drive this engine that creates all these catastrophic results. So a huge part of the book is of course, it's about founders and companies and leaders and organizational structure. Of course that's there. But for me, far more important is the way in which the book intersects with all of our lives as customers, as employees, as future potential employees. What I call builders and future builders. All of us are creating, we're actively creating these conditions that we hate. Not through manifestos, not by like, okay, after the revolution, then using all practical techniques that are available absolutely 100% today, do not require anybody's permission to use, have really strong evidence in favor of them being not just better ethically or morally or socially, but better value creating engines. And also of course, with case studies where we can learn from real people who have actually taken that plunge.
- [06:41]
Ted (Producer/Interviewer)
So, Eric, I fully agree with you that corruption is not inevitable in organizations. You make a more provocative claim though, which is that it's possible to build an organization that is incorruptible. And that almost seems indefensible. But I want you to defend it for me.
- [06:58]
Eric Ries
I was actually really surprised that the data shows that most of our modern best practices are pretty bad and judge on their own merits as value creating engines. And also the same people that like, in casual conversation, people will say things to me like, sure, a family run company maybe can maintain a promise over generation, but that's really the only way you can avoid the quarterly pressure, the going public, the constant finance, the private equity attacks, the investor Activists, blah, blah, blah, blah, blah. And they'll rattle off this family run company and that family run company and this one. And then they'll be like, well, and also Costco. For some reason it's like, Costco's not a family run company. How can they be an exception to the rule? And they're like, yeah, I don't really know, but there must be something. But they're just like, there's a one off. What's funny is how many one offs there are. Because people say the same thing about Patagonia. They're of kind of roughly comparable age. But then people say it about Novo Nordisk that's like more than 100 years old. And as I started to piece together the book, I started to encounter more and more and more of these companies that have endured in a very low drama way for decades or even a century, staying committed to a specific ethos, not betraying their principles, and just seemingly immune to, to the corruption we see as inevitable. And of course, how can it be inevitable if there are exceptions? And the thing that really struck me the most is I was expecting that what we would see in this data set of these companies is that they're trading something off to become more durable. So maybe their performance isn't as good or they can't raise money, or there's some liability or trade off that they're giving up by doing this. But the data does not support that. And I also, this is where I decided to just call the book incorruptible rather than like less corruptible. They just don't seem to age the same way that regular companies do. If you talk to them about it, the problems that everyone else is like just getting crushed over, they just are like, what? What are you talking about? So let me give a concrete example. One of the first companies I ever met that had the industrial foundation structure, this is one of these alternate governance structures where you have a nonprofit foundation that is the owner or appoints the directors or has some kind of governance role, oversight over a for profit subsidiary. You know, Hershey Chocolate is structured that way, Ikea is structured that way, Novodor is structured that way. It's not that uncommon, but it's a pretty old fashioned way of developing companies. We don't recommend it as a best practice anymore. In our age of shareholder primacy, it almost seems ridiculous. So the first time I met Grundfos, which is a Danish company that makes the most of the water pumps in the world, if you have a water pump in your town or in your house it's probably a Grundfos water pump. I was meeting them to talk lean startup innovation stuff. This is quite a number of years ago. And while I was there I was meeting with the CEO and all their top leadership and I just said, listen, just so I can become more educated, like tell me a little bit about the history of the company. Tell me about its ownership structure. I just assumed it was like a regular big company, public company, it's like multi billion dollar company. And they explained, oh, the founder didn't want to burden his children and grandchildren with having to have their fates and their economic destinies tied to this company for all time. So towards the end of his life, he transferred ownership to this nonprofit foundation. And the first time they said it to me, I said, oh, I'm so sorry. Boy, that must be really tough. You probably can't be globally competitive. You probably have to deal with like a lot of virtue signaling nonsense. A non profit, you know, you don't have the competitive discipline. I was just going on and on and they started laughing at me like I had said the dumbest thing they had ever heard. And they're like, listen, we wouldn't trade places with our publicly traded brethren who follow these so called best practices for all the money in the world. This is why. And they just rattled off the advantages. You know, they can invest countercyclically. They invest for the long term. The foundation makes philanthropic contributions into the communities that they serve. So every time they win a customer they can say something like, some of the prosperity you help us generate gets reinvested into causes you care about in your community. Like they were like, this is a massive source of competitive advantage. What are you talking about? And it really like it took me aback cause I was like, oh, maybe I've missed something that I need to know more about.
- [11:00]
Sponsor Announcer
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- [11:49]
Adam Grant
This episode is sponsored by Cash App. Your money deserves real protection, and Cash App takes that seriously with Security Lock. Cash App requires face ID or biometric authentication to open your account, so even if your phone is lost or stolen, your money stays safe. When you're sending money, Cash App helps watch out for scams. If a payment doesn't look right, you'll know before it goes through whether you're paying someone back for dinner or splitting the cost of a trip. Those extra layers of protection can help you spend with peace of mind. Turn on security, lock in your Cash App settings today and stay protected from scams. New Cash App Customers can earn $10 if they use code Secure10 in their profile at signup and send $5 to a friend within 14 days. Terms apply. Cash App is a financial services platform, not a bank. Banking services provided by Cash App's bank partners. Visit Cash App Legal Podcasts for full disclosures. This episode is powered by AT&T Business. There's something we often don't question until it the invisible systems that support our work. When you're building something, whether it's a business, a team, or an idea, you're constantly making trade offs about where to invest your time and energy. Imagine being hunched over a laptop in a quiet corner of the office, finally hitting your stride, only to have a spinning loading icon bring everything to a halt. It's that split second where the momentum just breaks and you're forced to stop what you're doing to troubleshoot a connection that should have just worked when you're already navigating uncertainty, complexity and competing priorities. Reliability isn't a luxury, it's a foundation. That's what makes AT and T Business a strong provider for small business owners. It's built to work so you can spend less time troubleshooting and more time focusing on the work that actually matters. Powered by AT and T Business Built to Work get today@business.att.com
- [13:39]
Ted (Producer/Interviewer)
so you know, as I think about, these companies are obviously outliers. And you know you have to rack your brain to come up with a long list of companies that seem to be low corruption or anti corruption compared to the number that are on the other end of that spectrum.
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Eric Ries
Yeah.
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Ted (Producer/Interviewer)
What's your view of why it's so easy for companies to go corrupt? Because I think you you argue that it's more than just bureaucracy or mission drift.
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Eric Ries
Yeah, and I struggled even with the choice to use the word corruption, but I just think our grandparents would have called it this. Like, I think we have a very narrow view of what corruption is like. We'd think it's like embezzlement and bribery, or maybe not even that these days. God only knows, right? It's a very narrow. But our grandparents, our great grandparents, and really going back, like throughout the Western religious and philosophical traditions have been this idea that, like, there are better and worse ways of making money. And certainly by our grandparents time. If you've said, look, I found a way to make some money without creating any value at all, they would be ashamed of you. They would say, those are corrupt practices. What are you talking about? You say, but it's been legalized so I can get away with it. They wouldn't be impressed. You say, but look, you gotta hand it to me, because at least it works. They're like, of course it works. That's why it's dangerous. It's like a cancer. A cancer works defined in its own terms. Sure. No, we have to recognize that we have built an economy where it creates more and more pathways for people to create wealth for themselves, to make money without actually creating value. So why is this going on? I think there are two things that are true at the same time. First of all, the core error in thinking has been going on for hundreds of years. This is not a new thing. And there's a very simple pattern to it. You know, Robert Owen, famously, at New Lanark Mills, this is in 1800, an entrepreneur figures out a new way to make more money, like by treating workers well. He had created social insurance for his workers. He had housing and healthcare for workers. He educated their kids. He had limits on how many hours you could work in the mill. And by doing this, what James o' Toole calls enlightened capitalism, he was able to turn Up Hill into one of the most prosperous in the country. That's step one. Step two. They assume that because capitalism is fundamentally about competition and selecting for value creation, people will be thrilled by this discovery. And not only will the market defend and protect what they've created, but that it will spread through competitive pressure all through the economy. And then, third step, they are shocked and betrayed when the investors themselves are the ones who are the agents of its destruction. Robert Owen had different sets of investors try to oust him. He kept having to get new investors to buy out the old investors. If you know the story of fedmart, saw prices. That's the father of modern retail from the 1950s. What happened to him with Investors following that exact same script. So this has been going on a long time. It's like an error in our business thinking. But it is also getting a lot worse because through the rise of financialization and the rise of the modern best practices around what's called shareholder primacy, at the same time we've made this financial gravity stronger, this gravity that pulls companies down into mediocrity or worse. We have preached a company structuring and operating practice that cherishes and celebrates making weak companies that are extra vulnerable to this force. That's what's considered to be a best practice. And that's why these exceptions are so interesting. It's not so much that there's this one outlier, that outlier, but if you add up all the different kinds of outliers that I document in the book, we're talking about industrial foundations, cooperatives, worker owned companies, employee owned companies, ESOPs, EOTs, purpose trusts, B corps, like there's a lot of these outlier companies together. Depending on how you measure, we're probably talking about like between 3 and 5% of global GDP. So it's not the majority by any.
- [17:18]
Ted (Producer/Interviewer)
It's not trivial.
- [17:19]
Eric Ries
But it's not trivial either. Which means like we have a data set to look at it. And what's interesting to me is these companies as a set just really, really defy the best practices. They're just constantly doing things that I was taught would lead to their destruction, it would lead to them being uncompetitive or unprofitable. And yet the data shows that they are more profitable and are much more stable than our so called best practice companies. So like, as you're well aware, if you look at a graph of trust in America, it's like, if you look at a graph that is like average longevity of public companies, it looks exactly the same. If you look at average stockholding, period, average stock holdings used to be like six years, eight years, now it's like six. It's the same. If you look at a graph of average executive tenure at companies, everything's in the same decline slope. So in the book I say we have, we've entered an era of temporary organizations being led by temporary leaders, owned by temporary investors. And then we're like, why is the trust in decline? What's going on? Meanwhile you have these companies that are just quietly stably doing their thing year after year, decade after decade. And of course correlation does not equal causation. But at a certain point you got to say, something's not right here. These companies shouldn't exist. If our best practices, if modern finance theory was true, these companies would be dinosaurs. They would not exist anymore. And separately from my point of view, of course, as a company builder myself, I've been able to use the techniques that I've learned from these alternative companies to help companies actually do good stuff. That's how I started to get confidence that this is not just some academic curiosity, but there might actually be a set of techniques that have been lost. It's like almost like our birthright has been stolen from us. This knowledge that we have that we don't apply in our modern business culture, I think is a real shame.
- [19:05]
Ted (Producer/Interviewer)
I think so too. And you can see it even in really crude measures. I'm thinking of the Alex Edmonds research on companies that make the great places
- [19:13]
Adam Grant
to work list outperforming the market over decades. Yeah.
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Ted (Producer/Interviewer)
And you look at that and you think there is so much more to being a good company than just making a list based on a, you know, a fairly limited set of practices.
- [19:25]
Adam Grant
But even just looking at those is enough to know that there's a set of companies that are trying to do right by their people and that actually pays dividends over time.
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Eric Ries
Yeah, financial dividends. That's what's so crazy about it. That's really wild to me.
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Ted (Producer/Interviewer)
It is crazy. And of course then you start wondering, is it the practices or is it the kinds of people who choose the practices?
- [19:44]
Adam Grant
Or both.
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Ted (Producer/Interviewer)
And at the end of the day it doesn't matter.
- [19:47]
Eric Ries
It could be that when companies are doing well, people are happier so the causation is in reverse. Or of course it could be that the techniques actually work. And that's true for any of these individual studies. But when you start to look at the totality of the evidence, it starts to be really like strange. The lengths people will go to be like, well that can't be right. And I think what I like about it from a, like just putting on my like you know, scholarly research methods hat for a second just so we can geek out about that. And we're looking at like broad scale aggregates or averages. Think about how strong the underlying signal must be that it can show up in these averages. Yeah, like the best places to work list in the grand scheme of things. Not that hard of a list to make. It's. It's not especially difficult set of practice running. I mean anything especially difficult and yet it shows up. One of my favorite studies is in the quarter where the CEO or the CFO of a public company has stock options vesting in that quarter. R and D spending will be lower that quarter. We're talking about an average of all the CEOs and CFOs in the whole public market. Think how strong the effect must be to show up in the. Just in the average. It's unbelievable to me. So, so we actually have like surprisingly good evidence. You know, just purpose driven companies outperform. Mission driven companies outperform companies that are trusted by their shareholders, employees and customers outperform companies that are structured in these unusual ways, outperform companies that have feature employee ownership in all or in part have not just outperformance and like employee morale, they have faster revenue growth. And there was a big meta study that was done, I think a data set of like 55,000 companies with varying degrees of employee ownership. Employee ownership exhibits dose response. The more of it you do, the faster the revenue, the more of the benefit you get. So like, again, a certain point, yes, you could be skeptical of any individual study, but when you start to add them up, I think we actually are seeing the shape of a whole new paradigm. And we could just say, like, let's let shareholder primacy go and let's move to what's next.
- [21:41]
Ted (Producer/Interviewer)
I thought we were already moving there a decade ago, but it's been a slower crawl than I expected.
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Eric Ries
I think a huge part of the problem with the couple attempts we've had to move away from shareholder primacy towards what called stakeholder capitalism. Obviously they have the ESG movement. I don't think that stuff has been that effective in part because it has been a fundamentally negative framing about what is wrong with shareholder primacy, which it is terrible. So that's easy to critique. But like, I tried really hard to write this whole book without using the word stakeholder, and it was not easy. Not because it's not a good word, but just because I think takeover capitalism has really become associated with this kind of like zero sum thinking. That's like a compromise. So, okay, employees want higher wages, but customers want lower prices. So now what do we do? And I think in order to move past Charlotte of primacy, we have to articulate a new paradigm, a new philosophy of what organizations are for to replace shareholder primacy. I call it mission primacy. That we should restore the ancient idea, the idea from, you know, before 1985, like so ancient wisdom. But like certainly before Depeche Mode, we should get back to the idea that organizations exist to do a specific thing and that that mission is the reason why they are valuable. Then from that core idea, we can then rebuild what I call the new governance. Basically, a new theory of corporate governance to include new dimensions of care about organizations and like. And we do that, I think we can give people, instead of saying the old thing is bad, let's compromise. We can say, no, we actually have a new destination in mind, and we can start to reorient our economy towards that destination, one organization at a time.
- [23:18]
Ted (Producer/Interviewer)
I think that's exactly what we need. And the way you're framing your alternative actually speaks to the other problem with stakeholder capitalism, which is so many of the. Whether it's corporate social responsibility or environmentalism, so many of these movements have essentially just tried to transplant one organ onto a body that's failing systemically.
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Eric Ries
Mm.
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Ted (Producer/Interviewer)
It's like, okay, well, you know, we're
- [23:42]
Adam Grant
now gonna allocate a tiny portion of
- [23:44]
Ted (Producer/Interviewer)
our profit to the community or to the climate, or we're gonna invest in,
- [23:50]
Adam Grant
like, a little bit of a discount
- [23:51]
Ted (Producer/Interviewer)
for our customers, or we're gonna do this one little thing to try to give our employees a little bit more of a say.
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Eric Ries
And it's like, no, no, no, no.
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Ted (Producer/Interviewer)
Like, this cannot be an appendage. In order to change a broken system, you actually have to go back to the purpose of the system to begin with. And so what I love about your vision here, your blueprint, is we're not going to say you should have socially responsible business practices.
- [24:17]
Adam Grant
We're going to say you should have
- [24:18]
Ted (Producer/Interviewer)
a socially responsible mission.
- [24:21]
Eric Ries
It's a really important distinction, and it's interesting. Maybe you'll appreciate this too. So I had a lot of test readers of this book. I think I had 600 test readers while I was going through the manuscript production process.
- [24:32]
Ted (Producer/Interviewer)
Wow.
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Eric Ries
And something that came up a lot, which I thought was super interesting, is part of the book here. My goal is to redefine certain key terms. What is the purpose of a corporation? People think the word purpose is some, like, vague ESG nonsense, but. No, Purpose is a very specific concept. It is. What is the legally mandated thing an organization must optimize for? Like, a lot of companies have a mission statement. So you say, oh, we care about product quality. Oh, yeah, that's your mission statement. Let me see what's in your corporate charter. Oh, look, shareholder primacy. Then you're lying. You don't care about product quality. You see product quality only as an instrumental end to support making money for your shareholders. So it's like a very degraded view of what an organization actually is. So we restore purpose, you know, in a new way. But then from that we can also, like, start to redefine other key terms. Like we can ask ourselves, what does it really mean to make a profit? If you're destroying human potential as a side effect of making money, are you really profitable? I would say no. And obviously to make a profit, to me it's very clear, is about maximizing human flourishing. Okay, so people, a common test reader reaction from a certain kind of person who's like, steeped in the reform movements, not from civilians, but people who are in the biz, you know, they say, well, you can't do that. You can't redefine terms. And I was like, says who? The way we're training leaders, we train them to have this real sense of incapacity. I was like, what do you mean we can't. This our company. We can define our terms any way they want. By the way, our modern accounting systems require every company to define profit for itself. Anyway. It's a real pain. So we're going to do it anyway. My point is just, let's do it.
- [26:05]
Ted (Producer/Interviewer)
Well, I think part of what's appealing about your vision is you're not just asking companies to change, you're also reimagining the very structures and incentives that surround companies and asking us to imagine a better system. And one of the key elements of that that you've been working on for years is the long term stock exchange. I was tremendously excited when I first heard that you were doing this because every single CEO I know makes excuses about quarterly returns and earnings and, you know, having to be subject to these short term pressures and like, well, I,
- [26:40]
Adam Grant
you know, I can manage for the
- [26:41]
Ted (Producer/Interviewer)
long term, but then I might be out of a job because I'm not meeting my targets. And you come in and say, actually no, I'm going to build a stock exchange that measures your long term value. And so you might not have to worry about the quarterly earnings anymore. What happened?
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Eric Ries
Well, we'll see.
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Ted (Producer/Interviewer)
You'll see. It was a brilliant idea, Eric. Where did it fail?
- [27:02]
Eric Ries
Well, it hasn't failed yet. You know, give us some time. You know, it's really funny you say that because in the book I wanted to tell the story of how it almost died. Then I, I think I do create the confusion for some people about like, wait, but did the company actually die? No, it didn't die. It didn't die. But anyway, so, so the thing you got to understand, because I'm not going on saying I want to start a new stock exchange, people are like, that's. What are you Talking about, like, that's not something you do. You know, that's something our grandparents did, but we don't do that anymore. Most people told me it was impossible, can't be done. You know, it's illegal. It's this, it's that. And eventually met a lawyer who was like, oh, you just. You fill out the right form. I was like, the what? He's like, yeah, There's a form. SEC form number 001. Is the application to establish a national securities exchange. A hard form to fill out, but it's not some mystical process. You just fill it out. So I was like, great. Oh, man, this is going to be awesome. We raise the money, we'll get the team together, build this company. So it took me close to 10 years, but we did eventually fill out the form. So we got very close to getting version one of the exchange approved. We had companies ready to list on it. It would have been a big coup, big breakthrough for us. And I get this phone call from, like, a loose consortium of hedge funds and governance experts and policy people, like, they call me and they say, listen, we don't like this reform that you're proposing, and we think it's going to fail. It's inevitably going to fail, so we'd like you to stop doing it. And I was so naive. I said, well, this is America, so why don't you just let me fail? Like, what's it to you? You know, I'm going to try. It's a bad idea. It'll fail in the marketplace. You can and say, we told you so. They said, no, we'd really rather not. We have commercial interests at stake here. If you don't do what we want, we're going to call all your vendors and make clear to them that if they work with you, they're never going to work in this town again, and we're going to make their life difficult. So I was naive. I said, we'll bring it on. Let's fight. Anyway, got my butt absolutely kicked. All my vendors start calling me, being like, sorry, we can't work with you anymore. We need these guys more than we need you. So I thought we were going to be in big trouble.
- [28:50]
Sponsor Announcer
And.
- [28:50]
Eric Ries
And then one day, right when we're at the absolute wit's end, can't figure out how to do it, gonna completely collapse. I get a phone call and they say, listen, you know, just so you know, you don't really need to endure all this suffering, you know, nice exchange here. Be a real shame if something happened to It Why don't you just make your listing standards the same as everybody else's, and all this can be made to go away. And I was like, oh, now I understand why everyone has the same listings. Yeah. Oh, I see. And what was really interesting is in the process of doing that, one of the things I learned, there's so many things in our economy where everybody does it the same way. It's a best practice, or there's just some level of conformity. If you ask most people, why is it that way, they say, well, it must be the invisible hand of the market. The market has spoken. This must be the best way. And, man, if you think this is the invisible hand of the market, like, you really do not understand how our economy works. Okay? This is a very, very visible hand of people who profit from the status. Qu are not shy at all about making things happen. So this happened to us. And I never forget. It was the middle of the night. I was in the wrong time zone. They had attacked while I was away. Like, they were very. They can't be mad at someone who ambushes you when they're good at their job. Like, they did it well. They had clearly done this before. I was not their first victim. And I get my team together, and I said, listen, here's the situation. I finally understand what's going on. Unless we capitulate, we will die. I really thought we would go out of business if we couldn't solve this problem. And so I said, look, if you guys, you've followed me on this crazy journey, if you want to take half a loaf, discretion being the better part of valor, I would understand. But it has to be a unanimous decision. We got to do this together. We're going to sink or swim as a team. That's been our ethos the whole time. And every person on the call that night said, no deal. Like, we're not doing this. Death first. You know, that's really how it felt like in all those movies. And I joke in the book that I wish I could say it was my visionary leadership that got us through that terrible night, but the truth is, I was the one curled up on. On the floor in the bathroom, like, I thought we were done. And it was only because we had implemented many of the ideas from this book. Like, we had actually tried to be a model of this ethos, this character, this indivisibility as a company that we had all survived. Now, in retrospect, turns out we didn't go out of business. We were able to then get a new version 2 of the idea approved. And that's a whole other story. But yeah, I tell the story because it's very important to understand how many features of our modern economy have been engineered. They're not natural, and this may feel like bad news, but I think it's good news. If they could be engineered once, they could be re engineered.
- [31:28]
Adam Grant
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- [33:20]
Eric Ries
Close your eyes, exhale, feel your body relax and let go
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Eric Ries
And breathe.
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- [33:48]
Ted (Producer/Interviewer)
1-800-contacts. So I imagine you have a lot of founders and leaders who are drawn to this idea, but also not sure about how to make it happen. What are your top three recommendations?
- [34:04]
Eric Ries
There's a lot of details here that really matter. I will give you the summary, but it's only the overview. The formula is simple. It is ethos plus integrity equals incorruptible. There's kind of two dimensions of work we gotta do. The inner dimension of character, purpose, mission, alignment, coherence. And then the outer dimension I call the dimension of integrity, meaning more like structural integrity. How do we be strong enough to resist temptation and also outer pressure? So in the inner dimension, the techniques are operational. What is the purpose of a corporation? I go through all the history of how we wound up in this very bizarre place where we don't see organizations as these living, beautiful, vital things that make quality products, but as mere financial instruments. That's a relatively new idea that we need to reverse the tools we need to make what I call fiduciary commitments. This is an idea that shows up again and again and again. Saul Price, founder of fedmart, the predecessor company to Costco, he called it being a fiduciary to the customer. And he had a clear fiduciary hierarchy. Customers first, employees second, shareholders last. The exact opposite of what we teach today as shareholder primacy. So when people, when we start talking about fiduciary commitments, people assume we're talking about some kind of legal thing. But no, before we get to legal commitments first, we have an operational commitment. It's very simple. If someone comes to you and says, hey Adam, I got a great idea, we could save $0.03 on the bill of materials by making this product a little bit more carcinogenic in such a way that no one will notice you psych to do it?
- [35:32]
Ted (Producer/Interviewer)
Nope.
- [35:33]
Eric Ries
Like there's. If you run your company by the so called best practices of shareholder primacy and ROI based thinking, you will not be able to resist doing stuff like this. Because doing the right thing is ROI negative by definition because the returns are intangible, but the costs are tangible. So we commit ourselves to these fiduciary commitments and then there's a bunch of techniques in the book for how do we align the business model with that mission and then how do we align the culture with that Mission. That's the path of ethos on the integrity side. First thing we gotta do is write the company mission into the corporate charter. This is by far the easiest thing in the whole book. And it stuns me that this is not a universal practice among companies. I'm just utterly shocked. And all it does is restore the historical norm that companies should exist to do some specific thing. Then we have to solve problems at the director's level. A lot of companies are destroyed by betrayal in the boardroom. The research shows that so called independent directors are not a very good check on outside pressure. They tend to amplify pressure rather than to be a bulwark against it. So we got to replace independent directors with a better system. I also recommend something we call the Director's Oath, like the equivalent of the Hippocratic oath, but for corporate directors who can do far more damage to people's health than your average nurse and yet are held to lower standards than nurses. Come on like, surely we could do better than that. And then of course, we have the governance structure. We have to reimagine the relationship between the company itself and its shareholders. We, we very often in our modern world say that shareholders own the company, but that's wrong. People say like, we're spending the shareholders money. That's not true. That's like just in the same way that taxpayers don't own the government, shareholders own shares in a company that give them certain rights. This is starting to sound like a political philosophy term paper. That's right. The way we currently do the politics, the power distribution of corporate governance, politically speaking, is an idea so stupid you couldn't even get a Political Science PhD student to write a paper about it. Imagine if I'm like, adam, here's my new idea. Anyone who flies into France the day before election day gets to vote in the election and then they can leave the next day. You'd be like, the tourists are the voters. That doesn't make sense. No. And I'm like, actually it's worse than that. Anyone who borrows money can just rent as many passports as they can afford and then they get extra votes for every passport they hold and they can still leave the day after. You'd be like, that is just. That is a recipe for carnage. Instability. Civil. Yes. Everything we're seeing with corporations is caused by this like, bizarre political principle that goes by the name of shareholder democracy. So there's a bunch of different ways we can fix that. I mentioned already the Novo Nordisk, the industrial foundation Patagonia is ruled by what's called a perpetual purpose trust. And there's many other examples. What all these structures have in common is that the directors have a dual loyalty in the same way that investors already have a dual loyalty. Investor directors are fiduciaries to the company, but they also are responsible to their limited partners. Well, so too should every director, including independent directors, be accountable to trustees who oversee the mission. And I tell a story in the book about a time when these outside directors had to hold the for profit directors of the board of Novo Nordisk accountable for doing a certain thing. It prevented the directors from doing what they wanted to do. That intervention created for the shareholders more than $500 billion of shareholder value. So, like, this is not a trivial or ancillary concern. There are moments in history when it has proved to be decisive in favor of long term value creation.
- [39:02]
Ted (Producer/Interviewer)
Well, this is music to my ears. I, I think that this is exactly the rethinking of, of capitalism that the world sorely needs. And Eric, I really think you've done it again. I think.
- [39:14]
Eric Ries
Oh, thank you.
- [39:15]
Ted (Producer/Interviewer)
Every time you sit down to create a new vision for how groups of people should operate and be effective together, it's better than the alternatives that existed.
- [39:24]
Eric Ries
And highest praise.
- [39:25]
Ted (Producer/Interviewer)
I think before it's, it's usually been better from a creativity or innovation standpoint. I think now it's also better from a moral or societal perspective, which is tremendously exciting.
- [39:36]
Eric Ries
I don't even know what to say to that man. Thank you. That's very kind of you to say.
- [39:39]
Ted (Producer/Interviewer)
No, I love the vision. I want to see it implemented.
- [39:42]
Eric Ries
Amen to that.
- [39:43]
Ted (Producer/Interviewer)
Well, I think we should do a follow up and super interesting to ask our listeners to send in some examples and like maybe react in real time to. Okay, how would you fix this? You know, I can imagine asking our listeners to say you want your company to be more incorruptible. Like, give us your questions and we're gonna start giving some ideas.
- [40:06]
Eric Ries
I would be so thrilled.
- [40:08]
Ted (Producer/Interviewer)
You have no idea.
- [40:08]
Eric Ries
This is so fun for me.
- [40:09]
Ted (Producer/Interviewer)
Let's make it happen.
- [40:11]
Adam Grant
So this is for you, listener. If your organization is facing some of these challenges, we want you to call in with your problem or question and we'll weigh in during a future episode. You can call the rethinking hotline and leave a short 1 minute voicemail with your name. Could just be your first name and your question. Call 510-858-4465, which is 510 85. Think that's 5108584465 or 51085 think I'm
- [40:40]
Ted (Producer/Interviewer)
excited to hear from you and rethink these issues together.
- [40:46]
Adam Grant
Rethinking is hosted by me, Adam Grant. The show is produced by Ted with Cosmic Standard. Our producer is Jessica Glaser, our editor is Alejandra Salazar, our engineer is Asia Pilar Simpson, our technical director is Jacob Winick and our fact checker is Paul Durbin. Our team includes Eliza Smith, Roxanne Hylash, Banban Chang, Julia Dickerson, Tansika Sung Manivong and Whitney Pennington Rogers. Original music by Hans Dale sue and Allison Layton Brown.
- [41:17]
Eric Ries
You know, I'm obviously well known as someone who loves a lot of feedback, so I had a lot of test readers to this book. I think I had 600 test readers.
- [41:23]
Ted (Producer/Interviewer)
Wow.
- [41:24]
Eric Ries
I apologize to the first round of test readers. It was really bad, but it got better. Thanks to their diligent effort,
- [41:36]
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Eric Ries
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Eric Ries
We're gonna need a bigger tray. Get more value with your meal deal with McValue.
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