How to prevent corporate corruption with Eric Ries | ReThinking

1. 0:00 – 1:54

   Why business failure isn’t the worst outcome: the wider corruption problem

   1. EREric Ries0:00

      People think the worst thing that can happen to you is your business fails. Oh, no. It can be so much worse than that. We're actually awash in this corruption all around us, and I think it's important that we see a pathway out of that trap. [upbeat music]

   2. AGAdam Grant0:16

      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, and get half-baked possibilities out into the world that then turn into really, really great products, services, companies. And yet lately you are in the business of doing something a little different, which is you are making founders and leaders cry.

   3. EREric Ries0:44

      Gosh, 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 like 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 creating 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-- 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 choice, a, a set of choices that we've made as a society about how our economy should be structured. And so yeah, I want, I wanna bring both a dark message about something that's gone terribly wrong, but then, um, the hope and the blueprint for how we get out of this mess.

2. 1:54 – 4:05

   The myth of inevitability—and why challenging it scares defenders of the status quo

   1. AGAdam Grant1:54

      And that's the part I think that's, that's making them cry is you're telling them something they thought was impossible is actually possible.

   2. EREric Ries2:03

      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, 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, 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, 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, you know, future potential employees, what I call builders and future builders. All of us are, um, 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.

3. 4:05 – 5:56

   Can an organization be truly incorruptible? The case for “exceptions” that aren’t trade-offs

   1. AGAdam Grant4:05

      So Eric, I, 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 de-- I want you to defend it for me.

   2. EREric Ries4:21

      I was actually really surprised that the data shows that most of our modern best practices are pretty bad [chuckles] and judge, 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, "Yeah, you know, sure, a family-run company maybe can maintain a promise over generation. That-- But that, that's really the only way you can avoid the quarterly pressure, the going public, the, you know, the, the constant finance, the private equity attacks, the gov-- investor activists," blah, blah, blah, blah, blah. And they'll, 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.

   3. AGAdam Grant4:55

      [laughs]

   4. EREric Ries4:55

      You know, but, um, Costco's not a family-run company. Uh, how can they be an exception to the rule? And they're like, "Yeah, I don't really know, but there must be some." But they're just like, "They're just a one-off." What's funny is how many one-offs there are, 'cause people say the same thing about Patagonia. They're a kind of roughly comparable age. Um, 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, like staying committed to a specific ethos, not betraying their, their principles, and just seemingly immune 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 i-in this, you know, data set of these companies is that they're trading something off to become, uh, more durable. You know, 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. Also,

4. 5:56 – 8:11

   Industrial foundations as a competitive advantage (Grundfos, Hershey, Ikea, Novo Nordisk)

   1. EREric Ries5:56

      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 pro- 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. Hershey Chocolate is structured that way, Ikea is structured that way, Novo Nordisk is structured that way. It's not that uncommon, but it's a pretty old-fashioned way of, uh, 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 most of the water pumps in the world. You-- if you have a water pump in your town or in your house, it's probably a Grundfos water pump. Uh, 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 a multi-billion dollar company. And they explained, oh, the, the founder didn't wanna burden his children and grandchildren with the-- 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. 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 nonprofit. You know, you don't have the, 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, 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, you know, that I need to know more about.

5. 8:11 – 9:36

   Redefining “corruption”: making money without creating value

   1. AGAdam Grant8:11

      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. What's your view of why it's so easy for companies to go corrupt? 'Cause you-- I think you, you argue that it's more than just bureaucracy or mission drift.

   2. EREric Ries8:35

      Yeah. And I struggled even with the choice to use the word corruption, but I just think our grandparents would've 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 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 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, "That's-- those are corrupt practices. What are you, what are you talking about?" You say, "But it's, 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 'cause 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 by, uh, defined in its own terms, sure." We have to recognize that we have built an economy where it creates more and more pathways for people to create, to, 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.

6. 9:36 – 10:36

   The long-running pattern: enlightened capitalism discovered, then crushed by investors

   1. EREric Ries9:36

      First of all, the, the core error in thinking has been going on for hundreds of years. Okay, this is not a new thing and there's a very simple pattern to it. You know, famous Robert Owen famously at New Lanark Mills, 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, how many hours you could work in the mill. And by doing this, what, uh, James O'Toole calls enlightened capitalism, he was able to turn up to 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

7. 10:36 – 13:24

   Financialization and shareholder primacy: building “temporary organizations”

   1. EREric Ries10:36

      investors. If you know the story of FedMart, Sol Price's-- it's like 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, uh, 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 or 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, uh, you know, 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.

   2. AGAdam Grant11:38

      It's not trivial.

   3. EREric Ries11:39

      But it's not trivial either and 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, um, you know, as you're well aware, if you look at a graph of trust in America, it's like bloop. If you look at a graph that is like average longevity of, of public companies, it looks exactly the same. If you look at average stock holding period, like stock- these average stock holdings used to be like six years, eight years, now it's like six months. It's the same. If you look at a graph of average executive tenure at companies, it's [laughs] everything's in the same decline slope. So in the book I say we ha- 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 gotta say, "Something's not right here. These companies shouldn't exist if our best practices, if our modern... 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, like I've been able to use the techniques that I've learned from these alternative companies to like help companies actually do good stuff. And 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, is a real shame.

8. 13:24 – 16:04

   Evidence that better governance and people-first practices outperform

   1. AGAdam Grant13:24

      I think so too, and, uh, you can see it even in really crude measures. Like I'm thinking of the Alex Edmans research on, uh, companies that make the great places to work list outperforming the market over decades.

   2. EREric Ries13:35

      Yeah.

   3. AGAdam Grant13:35

      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, [laughs] you know, a fairly limited set of practices." 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. And I think-

   4. EREric Ries13:51

      Yeah, financial dividends.

   5. AGAdam Grant13:53

      Yeah.

   6. EREric Ries13:53

      That's what's so crazy about it. That's really wild to me.

   7. AGAdam Grant13:56

      It is crazy. And of, of course, then you start wondering, is it the practices or is it the kinds of people who choose the practices or both? And at the end of the day, it doesn't matter.

   8. EREric Ries14:05

      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 really strange how, how 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 sc- just putting on my like, you know, scholarly research methods hat for a second just so we can geek out about that. 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 is not that hard of a list to make. It's du- it's not especially difficult like set of practice. We're not making 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&D spending will be lower that quarter. We're talking about an average of all the CEOs [laughs] and CFOs in the whole public market. Think how, how strong the effect must be to show up in the, 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, uh, uh, and customers, outperform companies that are structured in these unusual ways, outperform companies that have, that feature employee ownership in all or in part have not just outperformance in 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 [laughs] growth, the more of the benefit you get. So like, a- 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 w- we could just say like, "Let's let shareholder primacy go and let's move to what's next."

   9. AGAdam Grant15:58

      I thought we were already moving there a decade ago, but [laughs] it's been a, it's been a slower crawl than I expected.

9. 16:04 – 18:29

   Why ESG and stakeholder capitalism often disappoint—and the shift to “mission primacy”

   1. EREric Ries16:04

      I think a huge part of the problem with the kind of 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 stakeholder 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 shareholder primacy, we have to articulate a new paradigm, a new philosophy of what organizations are for to replace shareholder primacy. I, I call it mission primacy, that, or that we should restore the ancient idea, the idea from, you know, before 1985. [laughs] Like so not like so ancient wisdom, but like certainly before Depeche Mode, we should g- get back to the idea that, that organizations exist to do a specific thing, and that that mission is the reason why they are, 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, uh, 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.

   2. AGAdam Grant17:32

      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. It's like, okay, well, you know, we're now gonna allocate a tiny portion of our profit to the community or to the climate, or we're gonna invest in like a little bit of a discount 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. It's like, no, no, no, no. 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. What I love about your vision here, your blueprint is we're, we're not gonna say you should have socially responsible business practices. We're gonna say you should have a socially responsible mission.

10. 18:29 – 20:09

    Restoring “purpose” as a real commitment, not branding: mission vs. charter

    1. EREric Ries18:29

       It's a really important distinction, and it's interesting, m- um, maybe you'll appreciate this too. So I had a lot of test readers of this book. I think I had 600 test readers, generated, like, more than 10,000 comments-

    2. AGAdam Grant18:39

       Wow

    3. EREric Ries18:39

       ... while I was going through the manuscript production process. 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? I, I... The 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? 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, um, uh, you know, in a new way. We 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?"

    4. AGAdam Grant19:52

       [laughs]

    5. EREric Ries19:52

       They're like, "Like our, our... The way we're training leaders, we train them to have this real sense of incapacity." I was like, "What are you ta- what do you mean we can't? This is 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 in the [laughs] real pain. So if we're gonna do it anyway, my point is just let's do it well.

11. 20:09 – 23:52

    The Long-Term Stock Exchange (LTSE): reform meets the ‘very visible hand’

    1. AGAdam Grant20:09

       I, 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, 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. 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, you know, I can manage for the long term, but then I might be out of a job because [laughs] I'm not meeting my targets. And you come in and say, "Actually, no. I'm gonna 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?

    2. EREric Ries20:56

       Well, I will say-

    3. AGAdam Grant20:57

       It was a brilliant idea, Eric. Where, where did it fail?

    4. EREric Ries20:59

       Well, it hasn't failed yet. You know, give us, give us some time. Uh, you know, it's really funny you say that because in the book, I wanted to, to tell the story of how it almost died, but 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.

    5. AGAdam Grant21:11

       [laughs]

    6. EREric Ries21:12

       So the thing you gotta understand, 'cause when I would go around saying, "I wanna start a new stock exchange," people were 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."

    7. AGAdam Grant21:20

       [laughs]

    8. EREric Ries21:21

       Most people told me it was impossible, can't be done. You know, it's illegal. It's this, it's that, and I eventually met a lawyer who was like, "Oh, you just, you fill out the right form." And I was like, "The, the what?" He's like, "Yeah, there's a form. SEC form number 001 is the application to establish a national securities exchange." It's 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 gonna be awesome. We raise the money, we'll get the team together, build this company." So it took, took me close to 10 years, but we did eventually fill out the form. We got very close to getting version one of the exchange approved. We had companies ready to list on it. It would've 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, uh, we don't like this reform that you're proposing, and we think it's gonna fail. It's inevitably gonna 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?" [laughs] Like, "What's it to you, you know? I'm gonna try. It's a bad idea. It'll fail in the marketplace. You can call me up 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 gonna call all your vendors and make it clear to them that if they work with you, they're never gonna work in this town again, and we're gonna make their life difficult." So I was naive. I said, "Well, bring it on. Let's, let's go. Let's fight." Anyway, got my, 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." And anyway, so I thought we were gonna be in big trouble, 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. It'd 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 listing standard. 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 quo, are not shy at all about making things happen. So this happened to us, and I'll 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... You can't be mad at someone who ambushes you, 'cause 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

12. 23:52 – 25:05

    Surviving by practicing the book’s principles—and why engineered systems can be re-engineered

    1. EREric Ries23:52

       and I said, "Listen, uh, 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 wanna take half a loaf, discretion being the better part of valor, I would understand. But it has to be a unanimous decision, so we gotta, we gotta do this together, 'cause it's gonna, we're gonna 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 it. Rather, death first, you know? That's really how it felt, like, like in all those movies. And I, 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 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, um, indivisibility as a company, that we at all survived. Now as, in retrospect, turns out we didn't go out of business. We were able to then get a new version two of the idea approved, and that's a whole, a whole other story. But yeah, I, I tell a, I tell the story because it's, 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.

13. 25:05 – 30:38

    The blueprint: ‘Ethos + Integrity = Incorruptible’ (top recommendations)

    1. AGAdam Grant25:05

       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?

    2. EREric Ries25:13

       There's a lot of details here that really matter. I will give you the, 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, 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 that 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. Sol Price, the founder of FedMart, the, the pre- 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 first... 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 three cents on the bill of materials by making this product a little bit more carcinogenic in such a way that no one will notice." You, you psyched to do it?

    3. AGAdam Grant26:37

       Nope. [laughs]

    4. EREric Ries26:37

       Like, 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, 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, that so-called independent directors are not a very good check on, on outside pressure. They tend to amplify pressure rather than to, uh, be a bulwark against it, so, um, we gotta 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 can 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 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.

    5. AGAdam Grant28:13

       [laughs]

    6. EREric Ries28:13

       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."

    7. AGAdam Grant28:34

       [laughs]

    8. EREric Ries28:34

       You'd be like, "The tourists are the voters? That doesn't make sense."

    9. AGAdam Grant28:36

       Oh, no.

    10. EREric Ries28:37

        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, it-- that is a recipe for carnage, like instability, civil... Like, 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. Uh, I mentioned already the Novo Nordisk, The Industrial Foundation. Uh, 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 are-- have a dual loyalty in the same way that investors have a, already have a dual loyalty. Investors, 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.

    11. AGAdam Grant29:55

        Wow, this is music to my ears. I think that this is exactly the rethinking of capitalism that the world sorely needs. Eric, I really, I really think you've done it again. I think 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 [laughs] that existed, and I think before-

    12. EREric Ries30:14

        Highest praise. Thank you

    13. AGAdam Grant30:14

        ... 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.

    14. EREric Ries30:23

        I don't even know what to say to that, man. Thank you. That's very kind of you to say.

    15. AGAdam Grant30:26

        I love the vision. I wanna see it implemented. Let's make it happen.

    16. EREric Ries30:29

        Amen to that. [upbeat music]

Episode duration: 30:50