Ep. 194 - The Lean Startup’s Eric Ries on How Good Companies Go Bad
SHOW NOTES
If you’ve spent any time in Startupland, you’ve likely read—or at least heard of—The Lean Startup, the mega-bestseller that teaches founders how to build a company from scratch.
Its author, Eric Ries, is now out with a new book. This one isn’t about how to build a good company, but rather how to keep your good company good.
Eric argues that good companies don’t usually go bad because their founders wake up one day and choose corruption. They go bad because they were never structurally protected from it.
In this conversation, Ries explains the central idea behind his new book, Incorruptible: that companies are not merely businesses, but little societies with their own constitutions, power structures, incentives, and failure modes. Build them wrong, and “financial gravity” pulls them toward mediocrity, extraction, and betrayal. Build them right, and they may actually preserve their mission for decades—or even centuries.
In this episode, Eric and I dig into why “mission hopeful” isn’t the same as “mission driven,” whether nonprofits can become as self-protective and fundraising-obsessed as corporations, and why Adopt-a-Pet became a rare example of Lean Startup thinking applied to animal welfare. We also discuss Beyond Meat’s pivot into protein-rich water, whether shareholder voting is absurd, why independent directors may not be the corporate safeguard we imagine, and what companies can learn from ancient democratic ideas like sortition.
This is a conversation about startups, nonprofits, animal advocacy, governance, trust, and power. But underneath it all is a sharper question: if you build something meant to do good, what are you doing now to stop it from being captured later?
DISCUSSED IN THIS EPISODE
All of Eric’s books, and his new book Incorruptible (this site has further resources)
Eric’s new startup, Virgil.
More about David Meyer, founder of Adopt-a-Pet.
Eric on how companies go bad.
How Eric redefines profit.
Beyond Meat’s new protein water.
The case for sortition in America, via Harvard Business Review.
MORE ABOUT ERIC RIES
Eric is the creator of the Lean Startup methodology, practiced by individuals and companies around the world. He is the author of New York Times bestselling book Incorruptible, along with other hits such as The Lean Startup, The Startup Way, and The Leaders Guide (funded by one of the top Kickstarter book campaigns of all time).
He has founded a number of startups, including LTSE, where he is currently Executive Chair and Chairman of the Board, and IMVU, where he served as CTO. He has also advised on business and product strategy for startups, venture capital firms, and large companies across many industries.
TRANSCRIPT
Eric Ries 00:00
The more successful an organization becomes, the more valuable it becomes as a target. It's something worth stealing, or in the book, corrupting.
Paul Shapiro 00:08
Welcome to the Business for Good podcast, where we spotlight people making money by solving some of the world's most pressing problems. I'm your host, Paul Shapiro, author of a nationally best-selling book on food sustainability, and CEO of a company in the same space. On this show, I speak with founders, investors, and thought leaders who prove that doing good and doing well can go hand in hand. The biggest challenges facing humanity are solvable and are often profitable too. My hope is that this podcast informs, inspires, and maybe even helps repel you to build a business that makes the world a better place. I'm glad you're here. Hello, friend, and welcome to episode 194 of the Business for Good podcast. All right, first, here's your random wild fact. Did you know that there are more possible games of chess that can be possibly played than there are atoms in the observable universe? That common estimate, which is called Shannon's number, I don't know who Shannon is, is around 10 to the 120th possible games, while there are quote unquote only about 10 to the 80th atoms in our observable universe. I recently started learning to play with chess in order to play with my father online, which has been fun. I know how the pieces move, and I don't really know much strategy though. So, if you have suggestions for the best way to learn the strategy of chess, please let me know. Okay, so if you've spent any time in startup land, you've likely read, or at least have heard of, and probably tell people that you've read the Ween Startup, the mega bestseller that teaches founders how to build a company from scratch. My friend Christy Middleton raves about this book, so when I learned that its author Eric Ries came out with a new book, I knew we had to get him on the show. This book, though, is not about how to build a good company like the Wean Startup is, but rather how to keep your company good. Eric argues that good companies don't usually go bad because their founders just wake up one day and they decide to choose corruption. They go bad rather because they were never structurally protected from it. In this conversation, Eric explains that the central idea behind his new book Incorruptible that companies are not merely businesses, but they are essentially little societies with their own constitutions, power structures, incentives, and failure modes. Build them wrong, and financial gravity, as he calls it, builds them toward mediocrity, extraction, and betrayal. Build them right, though, and they may actually preserve their mission for decades or even for centuries. In this episode, Eric and I dig into why Mission Hopeful isn't the same as Mission Driven, whether nonprofits can become as self-protective and fundraising obsessed as corporations that are for profit, and why AdoptAPet.com became a rare example of lean startup thinking applied to animal welfare. We talk about our mutual friend David Meyer and his work through the Adopt a Pet charity and what that led to. We also discuss Beyond Meats pivot into protein-rich water. Whether shareholding voter is absurd. Whether independent directors may not be the corporate safeguard that we imagine them to be. And what companies can learn from ancient democratic societies that had practices like sortition. Don't know what sortition is? You will find out in this episode. This is a conversation about startups, nonprofits, animal advocacy, governance, trust, and power. But underneath it all is a sharper question: If you build something meant to do good, what are you doing now to stop it from being captured later? As always, here are your three key takeaways from the episode. First, good intentions don't protect good companies. Eric argues that companies don't usually lose their mission because the founders choose corruption, but rather because the organization wasn't structurally designed to resist it. Number two, mission hopeful is not the same as mission driven.
Paul Shapiro 03:29
Lots of companies and nonprofits hope that they'll stay true to their values, but Eric says real mission driven companies need governance, incentives, and power structures that make betrayal harder. Finally, and number three, nonprofits can lose the plot too. One of the more provocative parts of the conversation is Eric's point that some nonprofits become fundraising machines, where preserving their organization starts to matter more than advancing the cause. I'll stop there and let Eric tell you the rest. Eric, welcome to the Business for Good podcast.
Eric Ries 04:00
Hey, thanks for having me.
Paul Shapiro 04:01
I'm really happy to be talking with you. Not only have I been a reader of yours since I started my own company over eight years ago, your book was highly recommended to me, The Lean Startup, and I read it and benefited from it. But in reading your newest book, I learned a lot more. I feel like about you, and from small to big, you have a lot of interesting, controversial ideas in here, and we're going to talk about them, but first, you seem to have some fixation with chocolate. I realize you're talking a lot about chocolate in this book i s this?
Eric Ries 04:26
You know, I must have been I must have been incredibly hungry while I was writing the book without realizing it, because there, yes, there are a lot of chocolate and confectionary stories. That was not not by intentional design, but it did kind of work out that way. Because we got Cadbury's, we got Hershey, we got Tony's Chocolonely, got the Round Tree Chocolate Factory, a lot of things, a lot of things in there about chocolate.
Paul Shapiro 04:43
Well, we've had Tony's Chocolate Lonely on this show before, actually. Interestingly enough, when I was recently in the Netherlands, and they, I was really impressed to see they had an entire store in the airport. Right, it was really cool to see in the Amsterdam airport they had an entire store of just Tony's. So that was exciting for me, especially after having recently read your book to be reminded of them. Okay, so let's get into this book, Eric. You know, in the Ween startup, which is what you are famous for, to the extent that people know you, they know you for the Wien startup. Not that yet, but in the wean startup, you know, you basically, I would say, you taught people how to build something that is worth protecting, but not necessarily how to protect it. This book seems, if I could wrap it up in one sentence, is like how to actually protect what you built. Is that an accurate?
Eric Ries 05:26
Oh yeah, 100%
Paul Shapiro 05:26
Okay, is that was that your intent? Like when you were writing Lean Startup, did you think, oh yeah, I'll get around to talking about how to protect this, or did this come up later?
Speaker 1 05:33
No. Listen, I wish I wish it had been on my mind for Lean Startup, but I kind of feel like this is an invisible topic that is a blind spot for a lot of founders, a lot of leaders, a lot of us, frankly, as citizens, we we have this kind of childish assumption that if we achieve product market fit, if we create a great product, you know, like what does it mean to make a great company, right? Great companies, like you ask most people to say, a great company is one that serves its customers, that is competing to make the best possible product that profits when its customers are better off, that treats its employees and its communities with respect. Like most of us have a pretty intuitive sense of what that should look like, and I think, frankly, we're just naively assume that if you do that, then the world, the marketplace, the everything will reward you, and that's just not how the world actually works. You could imagine building an economic system like that, but we just don't happen to live in such an economic system. So, what actually happens is the more successful an organization becomes, the more valuable it becomes as a target. It's something worth stealing, or, or in the book, corrupting.
Paul Shapiro 06:39
Yeah, I want to talk about the the corrupting influence, but you know, basically, it feels like you know, it's like the tallest tree gets chopped down, right? Or the spouting whale gets harpered. There's all types of ways to to think about this. But if I'm summing up the central argument of the book, I mean, basically, you you're saying like the gradual corruption of successful companies is not inevitable. Like it's a design problem, and you think that it has a solution that mission-driven organizations can be deliberately engineered to resist the financial and structural and cultural forces, I guess, that corrupt them over time. But what do you think it is like? What when you talk about founders getting corrupted or companies being corrupted? First, let's just outline what do you mean by that, and then let's talk about what you think they can do to inoculate themselves against said corruption. Because of course, no founder starts out thinking, oh yeah, I'm going to be corrupt, right?
Eric Ries 07:22
No, no, of course, of course not. That's that's that's not that's not what anyone thinks they're going to get into. And I, I think so many of the stories we tell about this, we we pretend like it's some villain, some bad person, or some mistake, rather than seeing it as a consequence of the system that we are creating these companies within. So there is this force in the world, and this book is a little bit. I conceived of it kind of like writing about the physics of organizations, the forces that act on them, whether you want them to or not. There is this force I call financial gravity that financial systems transmit to companies. It's like if you've ever worked in a company and you're like, God feels like something is just dragging us down into mediocrity or worse, all the time. Or have you ever been a leader and just feel like you're pushing against this like molasses? Like, what is resisting me exactly? I've even worked with leaders who have like swapped out their whole team. You know, brought out a whole new executive team, or I brought in a whole new team, and within a few months, the same old behaviors are back. The thing that they got rid of people to avoid. Now they're back. How can that be? Of course, the issue is this: it's not about individuals; it's about about systems. So this financial gravity tends to collapse organizations over time, causing them to lose what made them distinctive, lose that special spark that made them worth building in the first place. And as a result of that collapse, we often see them in you know choosing to engage in behaviors that we would call extractive or exploitative, they they realize that to whatever extent customers trust them, they can make money by betraying those customers. Okay, so many of us have experienced this. Like you, you know, if you have a favorite restaurant get taken over by private equity, you know, it's not like you. I've been asking it on my talks. Does anyone have any story of me of like a because of the vast financial resources of the new partner, did the food get better? You know, and everyone laughs like, "Oh, of course it didn't get better. Of course it got worse. But wait a minute, it got worse. So, so the book traces this history going back 200 years of companies that are betrayed by their own investors, by the financial institutions that they work with. And what's interesting about these betrayals is that they are value destroying, and yet they are carried out in the name of profit.
Paul Shapiro 09:25
Yeah. Okay. So it's a it's a lofty way to you know to to think about things, right? And and I don't know that I'm like smart enough to know if my restaurant was that had been taken over if I've noticed differences. But I read this you know in the book, and I I could see how that happens in terms of the timing, let me just ask you: Like my, I don't know when you actually wrote the book, right? So, but it came out recently. So, given where we are politically, Eric, I feel like you know, with the rollback of ESG commitments and proclamations, it's like increased skepticism of stakeholder capitalism, calls to return to like pure. Shareholder primacy, right? All that matters is just creating shareholder value. Does this feel like the wrong time to publish the book right now? Like, is this, or you feel like it's the right time because you're going against what you see as this?
Eric Ries 10:11
Yeah, what's I mean, what's the point of writing a book if it just agrees with what everyone else is saying? You know, we need public intellectuals for if they all disagree with each other. What a waste of time. I frankly, I've been working this book for several years. Took a long time to figure out and and and research and write, and so I could not have possibly fathomed the degree to which public corruption would be an issue in the in the public discourse at the time the book came out. I mean, I really, I truly had no idea how topical it would seem to people, and I've been writing and thinking about these things for a long time, but I I see this as all one one integrated problem, where you know as you create these bad incentives, people start to profit by those incentives. The profits they make, so called, give them power and influence, and they use that influence to accelerate the process by which they're strip mining the things that are valuable in our society. So I don't, you know, I don't mind going against the grain, but yeah, it is a little bit funny that this is the timing.
Paul Shapiro 11:05
Yeah, I thought so too as I was reading it, but you know, I was also drawn, Eric. You talk about you know mission hopeful companies versus mission driven companies, and to the untrained or uninitiated ear, they probably sound pretty much the same. Every founder thinks that they have some higher mission, right? Nobody is is gonna say like, oh yeah, I'm just here because I want to become corrupt and just enrich myself at the expense of my customers or society. But people, you know, have mission hopeful versus mission driven. From the outside, they look identical. But how do you tell them apart? Like, what do you think of when you're talking about those two terms,
Eric Ries 11:41
Yeah. So, mission hopeful. I think a lot of companies that claim to be mission driven, like, are really just mission hopeful. And what I mean by that is they're hoping that somehow in the future they'll still be pursuing their mission. They intend it, they want it, but they don't really have a plan to insure it. And I tell a story in the book about a company who is trying to recruit really top talent to come join their company to work on this really radical AI company, which has a lot of danger attached to it as well as promise. And the employees are potential employees are like, okay, this sounds great, but how do I know that this technology will be used for long term value creation and not to turn us into like gangsters? And the CEO is like, "Don't worry, I have such good intentions, and that's not really getting it done. And they're and they're like, "But but aren't we a for-profit company? What if we get tempted to you know compromise on our values to make money? He's like, "Oh, don't worry, I would never do that.
Paul Shapiro 12:34
Yeah
Eric Ries 12:35
And they're like, "We're still a little worried about it. Well, you know, like, what if what if we have investors? What if the investors pressure you? What if the investors force you or remove you, like what's the plan? And yet, that same CEO, when he would meet with the investors, they would be so condescending. They'd be like, "Oh, I guess you're not very serious about being a for-profit company, then are you? And so I just feel like this this tension is alive for so many companies, and yet they don't really have a plan. And a huge part of the book is to lay out a blueprint if you want to remain mission driven over decades or even centuries. Like, what are the tools that are actually effective at that in the long run?
Paul Shapiro 13:09
All right. So you you raise an interesting question. Like, if you really want to be a for profit company, right? Because you also talk about non profits, and I want to get into one of them. I want to give an example that I was thinking about as I was reading this, and I don't know if this fits necessarily identically to what you were suggesting, but think about a company like Beyond Meat, right? So I work in this industry of animal-free protein, and I follow them because they're you know one of the only you know publicly traded companies in the space, and they've had a tremendous fall from grace. The company IPOed in 2019. They with this great mission to help replace animals in the food system, right to reduce humanity's reliance on animals for food, and they were flying high at a stock price over 240 a share, and they were just rolling out new products: plant-based chicken, plant-based steak, plant-based burgers. They're talking about plant-based seafood, and then hard times befell them. Demand contracted. Their share price fell more than 90-9% They're now trading at under $1 per share. And the latest product, because they don't feel like they can make it work with plant-based meat right now, is sparkling water. Right. So the new Beyond Meat product is a protein-enhanced sparkling water-it's just basically sparkling water that's protein enriched. And the question is: Is this part of their mission, right? Like, does sparkling water advance their mission of replacing animals in the food supply? Now, to the investor, they're going to say, "Hey, listen: If the company goes out of business, there is no mission, right? You have to do anything you can to make revenue. So, anything you can sell-if protein-enhanced drinks are what people want right now-then do this and come back to plant-based meat later when you can when it's a more favorable environment for it. But what do you think? Do you think this is a knowing what you know based on what I just said, presuming you know little else about it? What do you think is that straying from the mission?
Eric Ries 14:53
I mean, I don't know. You know, I I hate to to comment on something I don't know very much about, but. It does sound a little odd, you know. It's like, what what is the purpose of this thing? Now, look, I get there are times when people feel like they have to do something strange in order to make the the long term mission work, and I think one of the challenges in evaluating these things from the outside is that you don't really know what their intentions are. Now, if the company was embodied as a standard, you know, best practice governance public company. Then I'm awfully suspicious because it's so easy for companies like that to be under immense pressure, especially if the stock price collapses. Now, again, you have to know what's going on on the inside to really evaluate. And I give a bunch of stories in the book of companies where the founder was ousted, or there was some kind of major pivot force on the company from the outside because the stock price collapsed. But in a lot of those cases, if you look under the hood, the business has not collapsed. The financial investor perspective has collapsed. Confidence in the company has collapsed. In a lot of cases, this can be rational, but it can also be irrational.
Eric Ries 16:01
So I definitely know the pattern of a company that has is facing an irrationally low stock price, feeling immense pressure to try to drive that stock price back up, and therefore casting about or acting erratically, trying to figure out like we have to do anything it takes to get this stock price back. Like I know that story. That's I don't know is that happening with B. I mean, I don't know the details, so I couldn't. I couldn't say. But boy, it does kind of sound like that. And if that's the case, yeah, it's that. That is a time that is very dangerous to the mission. When if you if you embody the company in a different structure, you can just even if you have hard times, even if you have to lay people off, even if you face antagonistic conditions, you can nonetheless stay true to what you what you intended.
Paul Shapiro 16:41
Yeah, the only you know I have not talked to them about this, and I agree with you. Like you know we're looking at it from the outside. We have no idea what really is motivating the decision. Presumably their revenue is contracting, and they wanted to find some way to increase revenue, and they thought protein drinks are in, so let's try a protein drink. Now, in fairness to them, one thing I was thinking about is if the goal of the company is to try to displace animals in the food system, most of the time protein drinks are enhanced with whey protein, which is dairy, and so maybe you know they're thinking, hey, we're replacing this dairy product, and so it's not meat, but it's still you know replacing cows in some way. So maybe there's that argument. I don't know, but I'd like to talk to them about it. Maybe I'll have them on the show, and we can discuss.
Speaker 1 17:22
Yeah, yeah. I mean, and and I think it's really important. Like, first of all, pivots are not bad. You know, sometimes you have to pivot. Sometimes the way you achieve your mission is different than what you thought it was going to be. So this is not a like automatic endorsement of stasis or saying that change is always bad. I think the challenge is: Do you trust this company? If they say we're doing this thing for mission reasons, do you trust them? Do you think they're telling you the truth? And I just feel like most companies, as they get larger, they start to take on like deception as a strategy more and more and more easily. It just becomes as natural as breathing. You think about how many press releases you read where you're like, what? Like, just what's like, what? What are they even trying to say? Let alone, do you believe what's going on? Conversely, companies that are truly mission driven that have found a way to protect that ethos over time, they build up the asset of trustworthiness. I think trustworthiness is basically the most underrated financial asset in the world today, and if you can trust what a company says, if they do things for reasons that are legible and comprehensible to you, if they're consistent in that approach over time, then yeah, it's fine to give such companies the benefit of doubt. And customers, the evidence shows customers, employees, partners, investors do. But if you lose that trust, it's it's then so difficult. If you ever are in a situation where you need people to give you the benefit of doubt, it's very hard to earn.
Paul Shapiro 18:44
In defense of the Beyond Meat CEO Ethan Brown, I have full trust in him, and it's hard for me to imagine that he would resort to something like purposeful of deception. You know, this is a guy who I believe to be completely mission driven since long before he ever started this company, and I think that he still is, but I would like to talk to him about it. Maybe we'll see if we can get him on. Speaking of of entities or organizations that are designed to try to help animals, you and I both have a mutual friend, David Meyer, who's the founder of Adoptapet.com. And when a lot of people think about lean startups, they're thinking about for profit companies, like you mentioned earlier. Do you really want to be a for-profit? But you argue that the same principles apply to nonprofit charities also, and the lessons do seem quite similar. So, do you want to just briefly tell the story about Adopt a Pet and why you think these lessons are also helpful for charities? And then I will tell you how easily I have seen charities once they become big become completely corrupted, and I look forward to talking about that. But first, let's hear about one that wasn't corrupted.
Eric Ries 19:45
Oh, oh, totally. I mean, I I met. It's it's funny because you know David is so famous for so many things in in the world, but to me, he he was he's really an animal rights advocate. I knew him because he was very interested in applying lean startup.
Paul Shapiro 19:56
Yeah, to to be clear, so for folks who don't know David, he is. One of the world-renowned Brazilian Jiu-Jitsu champions, also, but he is also well-known for being an animal advocate and the founder of Adopt a pet.com. Please continue.
Speaker 1 20:08
Yeah, yeah. So, so, yeah. So he has this interesting, interesting aspects of his life, and different people know him for different things. I was at a party the day where I was telling this story about Adopt a Pet, and someone was like the same guy we talk about at the dojo. I'm like, yeah, yeah, the same guy, same guy.
Paul Shapiro 20:24
He's a true Renaissance man.
Speaker 1 20:26
True Renaissance man, and his he has a podcast that's actually really exceptional. Also, anyway, so I met him in the context of Adopt a Pet, where he was trying to apply lean startup principles to like increase the impact of that organization. And Adoptapet was, I think, the largest animal adoption nonprofit online, anyway, at that time, and helped so many people, you know, find a way to find animals a new home, and it wasn't. Now, I think people are coming around to the idea that if you're operating a service like that as a nonprofit, lean startup principles apply. But this is a few years ago, where that was not seen as totally obvious, and all credit to David who had the foresight to see how they needed to to act, you know, to get that kind of speed, that customer learning, that feedback loop going, even in a in a nonprofit nonprofit circumstance. And you know, I remember not only working with him and seeing his business acumen up close, but also we got you know we became personal friends, and I had a I myself had a had a dog that we had adopted at that time who was who was ill, and I remember I have the most vivid memory of David like sitting with my sick dog like we're on the floor like just really being being with him at that at that moment and him telling me you what you have to understand here is that this animal, like they're going to be okay. You are suffering. You are upset. You you remember, and and he just like had such a wise way of of understanding this very difficult situation, and I'm always always be grateful to him for that.
Paul Shapiro 21:55
Yeah, I'll tell you, my own dog Eddie, I think prefers the company of David to even myself. So he whenever whenever David comes over, Ed, he goes nuts. I'm not.
Speaker 1 22:04
I'm not surprised.
Paul Shapiro 22:05
Yeah. So you know, there there was an acquisition of Adoptapet.com, and so David did well in that. A lot of the times, people don't think about nonprofits as creating anything that would lead to an acquisition, right? But yeah, this was a website that ran ads, and so it made revenue through that, and so it became a target for acquisition, and was a very successful acquisition.
Speaker 1 22:27
Yeah, yeah, a very unusual situation through and through, and you know, and and true to David's ethos, that money is not being used to to have him live in luxury, but rather to continue to invest in that cause. Yeah, yeah, for sure. That's really great.
Paul Shapiro 22:42
Yeah, so yeah, for sure. He's also started other nonprofit organizations that are also advancing the interests of animals now too. So he definitely is like a like a serial founder of nonprofits here. I have worked like David. I worked in the nonprofit animal advocacy space, and I worked at a group that I founded for many years, and then at a much larger group. And what I noticed with these nonprofits is that oftentimes when they are small, the cause is paramount, right? And as they become bigger and they get more money, they become more interested in protecting themselves and their brand and their fundraising. And I found that they really well apply lean startup principles to their fundraising, right? Yeah, not to their not to their campaigns, not to their fundraising campaigns. Yes, but not to their programmatic campaigns. Alas, what I found is that there is not really a connection between effectiveness of a nonprofit and the amount of money they raise, and they become far more interested in protecting themselves and their brand, and the organization seems to become the cause. And maintaining and perpetuating the organization seems to become the cause rather than the cause for which that was founded in the first place. And that, to me, seemed like the most obvious case. I don't know if I'd call it corruption per se, but maybe a corruption of mission in that a lot of them do seem to care more about their own organization than the broader cause for which they're fighting, and this is not only true in animal welfare, but I think it's true in a lot of different nonprofits. Have you seen this as well?
Eric Ries 24:11
Oh, of course, yeah, yeah. There's there's quite a few nonprofits that don't exist to do anything other than to fundraise for themselves, and so like they're like a you know a little bit of a Ponzi scheme, you know, like they don't really exist to do the thing that they they're raising money to do, or some just the ratio. There's a lot of organizations where I think they they start out with very sincere intentions, but the the cost of the fundraising consumes all the fundraising. Yes, so they're raising a lot of money, but they're spending all that money to raise money and listen, this is not a distinct issue from the kind of corruption we're talking about of for profits. I actually think it's the same issue. I saw the other day a news story about an academic nonprofit that was like a some academic discipline. You know, the nonprofit that does the conferences and the events and stuff, and they were having a big controversy. It was a membership organization in academia. And they're having a big fight. I can't remember what it was. The the members are up in arms about some issue, and the leadership is having to fend off this like criticism.
Eric Ries 25:07
And one of the the leaders, I think the executive director of the nonprofit, is like, listen, we have a fiduciary duty to raise this money and to do what the donors want. And da da da da. I was like, that you have a fiduciary duty above what your own members want, and your membership-driven nonprofit. Like this thinking, that this kind of financialized thinking about leadership has just become absolutely endemic to almost every domain of human life. And in the book, I try to argue that the way we currently define profit is wrong, and therefore we get ourselves confused. To me, to make a profit means to maximize human flourishing. That's literally what it is. So we today say that okay, if a company has investors and is controlled by the investors, that's for profit. And if a company is kind of autonomous in itself and accountable only to its board of directors, that's nonprofit. But that doesn't really make sense. That's really like an arcane aspect of the tax code. How these two entities are taxed.
Eric Ries 26:05
That's not what's fundamental to me. What's fundamental is is the mission at the center. I think it is possible. In the book, I lay out the the blueprint for how to create these hybrid organizations that are not investor controlled, they are not founder controlled, they are mission, and they can blend elements of what we today call for profit and not profit decision making, and the evidence shows this is not just my personal opinion. The data shows such organizations have far greater longevity and far greater financial performance than conventional companies.
Paul Shapiro 26:30
I'm so eager to get into that and get into examples of that, along with some of your other more controversial claims, like that it's crazy for people to be able to buy shares in companies. But I want to get into all of that. But I do just want to comment on this nonprofit issue that you're raising. First of all, one of my own more controversial views is I do wonder, like, should these be tax exempt? Like, I mean, these are essentially companies; they're paying often, you know, gigantic salaries to their executives. Not that that is necessarily bad. If the executives are good and doing a good job, they deserve to make the money. I'm not begrudging them. I'm just saying, is it that different from a for-profit corporation? Should they be deductible? And but then you know you're talking about the mission driving things, and I've wondered about this myself about what is more effective to advance a mission, whether it is nonprofits or for profits. I'll give you an example. Like, would it be better to donate to an environmental organization or to seed an electric vehicle company with startup investment, right?
Paul Shapiro 27:30
Which would do more. Or if you go back to the the animal welfare example, you know, the animal welfare movement in the United States was founded really in the 1860s and 70s because people were really concerned about the treatment of carriage horses in urban areas. The horses were being savaged; they were being overworked, and these animal welfare groups all got started. The ASPCA and all these other groups got founded in that period, right after the Civil War, and they campaigned for all types of reforms for horses. They wanted resting days for horses where they couldn't be worked. They wanted resting hours so they could only be worked a certain number of hours a day. They wanted watering stations for them, and then this entrepreneur named Henry Ford comes along and renders the exploitation of these horses totally obsolete. Right. So, what would have been better for horses to invest in Ford or to donate to the ASPCA? Right.
Paul Shapiro 28:14
Like, it's just not so clear to me which is more effective. Whether using the market is going to do more for these causes, and I wonder the same with numerous other things, not just for horses, but think about you know one of what what David Meyer is seeking to do now with his food systems innovation is trying to replace animals in the food supply, like Beyond Meat. Would it be better to invest in the companies trying to do that, or to donate to a charity that is, let's say, advancing the you know the the message that you know farm animals shouldn't suffer something like that right and I'm not arguing I know the answer to this it just feels like the distinction between the two it's not so clear to me which is morphic
Eric Ries 28:52
yeah yeah no and I appreciate you raising it in a in a non ideological way because I think people are very quick we live in a time when there's a culture war going on, and there's a lot of people who are very much opposed now to the idea of making a for-profit company as an act, a good act in any way. You know, I can't really say that I blame them, especially the younger people who have grown up under this system of shareholder primacy, where companies, you know, Corey Doctorow calls it inshittification, like they literally companies are making money by making their products worse on a consistent basis. Now he's talking about technology companies in particular, but we've all seen that this can happen. So I get that there's some people who have kind of given up on the whole enterprise, but I think that's a mistake. And similarly, you have people who are very reflexively suspicious of nonprofits, a bunch of virtue signaling do-gooders, and I don't know, like I think it's complicated. I think the truth is that we have examples of for-profit and nonprofit companies doing bad stuff and doing good stuff. And when you have a theory of change, this has been one of the big problems in the ESG movement.
Eric Ries 29:54
If you have a theory of change, like okay, I want to. I think sustainability is very important. Well. A lot of the companies that are driving the sustainability improvements get bad governance scores. So, like the E, the S, and the G are at war with each other because in order to have the strength to be able to preserve a mission for the long term, often requires a governance structure that these same advocates think is bad, so part of this is also exposing the absolute contradictions that our our governance class, who've been kind of the people in charge of this these questions for the last few decades, they have kind of gotten themselves into this cul-de-sac where they're not able to achieve the outcomes that they claim that they that they want to achieve. I'll give you one funny example from the book. There's a study that showed that since 2008, so not an insubstantial data set now, since 2008, companies which have been rated to have bad governance have outperformed companies rated to have good governance. And yet, if you look at these governance standards, they claim to be serving the interests of shareholders in the era of shareholder primacy. They're supposed to be shareholder value maximizing, but in fact, they are not, because the things that drive shareholder value over the long run are the kinds of things we're talking about. Are things like like mission and trustworthiness, and those are not part of the evaluation criteria of the governance rating agency.
Paul Shapiro 31:12
This is like Lincoln suspending habeas corpus during the Civil War. Like you think, you know, I don't like it. I don't like that governance structure. But you know, maybe maybe it's worth it to keep the union going, or in in in more modern times, I think not just about companies, but you know, you look at a look at a country like China, which is an autocracy that has no political opposition, and yet they are installing more non fossil fuel energy production than everyone else combined. Basically, right? It's like you know, you wonder like, well, I don't. You know, you may not like the governance, but in terms of their own, you might not like the G, but the E is actually, you know, outpacing a lot of other folks whose governance you may prefer.
Speaker 1 31:49
Yeah, and this is why this is such a tricky thing, because if you want to make it into a culture war issue, you certainly can. You know, and and and that will often blind us to the reality of things. And I basically say to people like, if if your if your means and your ends are at odds with each other, people are like, well, then you have to choose one or the other. But one of the most important ideas in the book is is comes from a famous Jim Senegal quote, founder of Costco. You need to figure it out. If you find yourself in this tension, you don't just pick the one of the easy alternatives. You figure it out, and a lot of times, what's going on is you've just you've made a mistake. Like I think the governance class has made a mistake. They made a mistake about what constitutes good governance. And so as long as we keep flailing around in this false dichotomy, we're going to be swinging wildly between like you know I like to joke that imagine I'm thinking about starting a new a new government, like a new city state. You know, ancient Greek polis kind of thing, right? And I go to my I go find a professor in the political science department and said, "Listen, I need your help. I need you to help me write the Constitution. Think of a new system of governance for this new republic that I'm going to build. They're like, "Great. What are you? What are you considering? Like, I've only got two choices. Choice A is a system where whoever can borrow the most money can buy the most passports, come as a tourist on election day, and they get to vote all the passports they've borrowed money to buy. They only have to have them for that one day, but their vote counts the same as the citizens who live there. And then they can leave the next day, and their vote counts. Professor will be like, "Okay, what else you got? Like option two is despotic emperor for life, and their heirs and assigns. And they'll just be like, "That's that's all you can think of. Those are the only two choices. Like, "Yep, that's all I can think of. And they'd be like, "My friend, you know, we here in the political philosophy department, we have been working on this problem for a couple 100 years. We have a few other things you could consider. In fact, some of our ideas go back 1000s of years. Would you like to hear these other ways? And and hilariously, corporate governance is basically boiled down to these two ridiculous extremes. So, in the book, I make the case for what I call constitutional governance. Actually, borrowing some of the things we know actually work in political contexts, bringing them into corporate governance so that we can build companies that are just that are built in a more principled way.
Paul Shapiro 33:59
And so, just to explain this analogy because Anthony's such a riveting one. Like, so despotic obviously means you have one founder who's got all the super super voting power and everything versus the investors who are the equivalent of the foreigners who bought a bunch of share who bought a bunch of passports in this case and show up for one day but aren't involved in it. That that that's what you mean by that, right?
Speaker 1 34:19
Yeah, yeah, yeah, yeah. Exactly. So if you if you conceive of a company as a republic, the the question of governance is really a question of how power should be shared. You know, human beings have been experimenting with our our political forms like for 1000s of years, for for maybe 10s of 1000s of years. You know, probably probably all the way back into prehistory. What is the right way for a tribe, for a family, for a group, for a city, for a state, for a nation, like what is the right way that for us to share power? How what what makes power legitimate, and who do we give it to? And lots of different you know societies have thought differently about this over many years, and so too every organization is like a little mini polis. It is a. An attempt to say how in this little utopia, this I think of it like a little spaceship. You know, you bring your atmosphere with you, or a little like a submarine. In in our enclosed environment, here's how we think things should be. Now, different organizations are some are hierarchical, some are egalitarian, some are ruthless, some are kind. You know, some are bureaucratic, some are high performance, some are strong, some are weak. We have many different kinds of organizations out there, and what I'm saying is not that everyone should agree with my values and do it my way, but rather we should build structures where every organization can declare and defend its own values, whatever those values are. And when you do that, I think it just opens up the scope of what kinds of governance really make sense in these situations. And yeah, right now we kind of have stuck with like you know Mark Zuckerberg is the emperor of Facebook forever; he can never leave. Yes, or or we have a situation where any random activist can oust the CEO at any time.
Paul Shapiro 36:00
Yeah, you mention the ancient Athenian polis, and I think people are often shocked because they know that our governance is supposed to be descended from Greek tradition. But I think that very few people recognize, or they're surprised to learn about sortition that this was like really common in Athens, and most people don't know the word sortition, which is basically a random selection, like a lottery type selection, and that's who got to serve in on city council, for example. It was just randomly selected citizens, kind of the way that we pick jurors today, right? Jurors are picked at random; they're not picked because they have expertise in law or any particular field. They are just picked at random. And I've wondered, like, how would this work if you, let's say, were to have a board of directors at a company that were picked at random, and you know, as opposed to just you know, people who buy enough shares that they get onto the board, right? Or in the case of independent directors, who I was surprised to say, who I was surprised to see in your book that you take a pretty low view of, you think that these independent directors are actually causing more problems, and they're supposed to be the antidote to the corruption that you're talking about. But first, you know, would certition work? And second, what's wrong with independent directors? That people think of them as so important, right? They think of them like an inoculum, not as a as a corrupting agent.
Eric Ries 37:17
Yeah. Again, this is not my opinion. You know, this is what the data shows, yeah, the number one recommendation for directors, you know, if you look at kind of governing good governance standards over the course of the last few decades, every scandal, the solution is to have more independent directors on the board. And just for those that don't know, what is an independent director? A director is is nominally independent if they have no economic incentive that is aligned with the investors or the shareholder or the management of the company, so they're like an outside influence, not that different from sortition, which we'll come back to because like their very randomness is supposed to be what gives them this this authority, and the data shows first of all that that independent directors just are not an inoculum against corruption. Like just statistically speaking, it doesn't work. And I think the reason is pretty clear. It's just that how do you become an independent director? You have to be recommended for the job by investors. You know, basically, investors ultimately are the ones who decide how many independent directors are going to be. They like so if you're kind of seen as a good guy by the kind of people that sit on boards, then you can kind of get this really nice sinecure. A lot of independent directors, especially of larger companies, are compensated very handsomely for a very low amount of work. It's a pretty sweet gig, and the way you get that gig is by showing your fealty to these ideas, ideas like shareholder privacy. And so, in practice, independent directors are just not mission aligned to the company because their incentives are elsewhere, and if they were too mission aligned, you know that would break their their vaunted independence. And so, in the book, I give a bunch of examples of companies with with a lot of independent directors that nonetheless just betray the company for no particular reason. You know, of course, it's important people to know that Enron's board was named one of the five best boards in America. Its audit committee was completely independent directors, all people with great credentials. Obviously, there's examples like Theranos and places where, like, the independent directors provided a smokescreen or a shield to the corruption, rather than investigating it or getting to the bottom of it. And and in general, when you look at founder controlled companies, you'll often see that the a common criticism of those companies is that the the board is too closely aligned to the founder, but but a lot of activists, a lot of the like people complain about activist investors, but not all activists are bad. There are activists that really come in and turn around a failing company, and a very common technique in that kind of activism is to make sure that all of the directors, including the independent directors, have their net worth tied up in the value of the company, so that they're incentivized to do a good job and to think long term. And so, you know, having the executives and the directors have long term economic compensation tied to the success and health of the company, you know, is a proven tip.
Paul Shapiro 39:55
Before we get there, would it be better if independent directors, instead of being compensated in cash, were only compensated? In stock options or shares in the company, so that you're tying their compensation to the company's performance, or would that not solve the problem?
Eric Ries 40:07
Yeah if it was a long-term problem with stock options, is they tend to invest over short periods of time, and that that defeats the purpose. So, for example,
Paul Shapiro 40:14
five or 10 years.
Eric Ries 40:15
Yeah, five or 10 years would be great, and and I think even like five or 10 years after you leave the board, you know, right? Like, like that's that's really what what we want to be focused on incentivizing. For example, there's a study that showed that for that for a company for public companies, this is so crazy to me. If the CEO or the CFO have stock options that vest in a given quarter, on average, R and D spending will be lower in that quarter.
Paul Shapiro 40:40
Oh, I can't. How could? How could it be otherwise? I mean, that's so obvious, right?
Eric Ries 40:44
Isn't that sad? But like, think how powerful that effect must be to show up in a random sample. Like, right? It's not like this is just like on average this is happening, so it must be an incredibly powerful. So just like, how sad is that? So we're we're effectively compensating people to hollow these companies out. So I don't. So far as I know, no one has ever tried sortition, and I don't know. I don't know that there's any evidence to to draw in here. But I think there's there's one related question which which I found very striking. So I mentioned before that that certain of these governance alternatives are better than than our current best practices, and one of the one of the practices that there's a lot of data for is what's called the industrial foundation structure. So this is the this is a structure like Novo Nordisk has, where you have an outside nonprofit foundation which plays the role of the mission guardian over the for-profit subsidiary. Patagonia is structured this way. Hershey Chocolate is structured this way. Tony Chacolony is structured this way. Very common. Now it's not always a nonprofit foundation. Sometimes the outside trustees are in a purpose or a mission trust. Anyway, there's a bunch of varieties with this idea, but the structure is there are two entities: one that oversees the other, and the for-profit entity has the responsibility for business operational efficiency and has a board structured like that. And the mission guardians are outside trustees that really have the responsibility to look after the long-term integrity of the mission-that's their-that's their power and their responsibility. So that structure, for those you know that don't know this structure or encountering it for the first time, there's enough companies in the world that have this structure. We're talking about you know IKEA and novodore disc and John Lewis Partnership and Grundfos, the water pump company, and just so many. There's so many that there's a data set we can look at how they perform compared to peer match comparable for profit companies, and companies that have the structure are something like five times more likely to live to year 50 compared to companies with a conventional structure. And there's a lot of data on this. There's a lot of research on it. But one of the like really tough questions that comes up is like, okay, if the directors of the for-profit company are accountable to the trustees, who are the trustees accountable? Now, in some structures, like in the in the perpetual purpose trust at Patagonia and others, there's actually a third layer where there's somebody whose job is what's called the mission protector, and they have the power to sue the trustees and force them to do a good job if they ever deviate from the mission. But in the older structures, if you look at these foundations, especially there isn't any way. There's no mechanism for that. It's just they're they're accountable to themselves only, and when people hear that, sometimes they're like, "Well, that can't possibly work, because over the long run, the people that get chosen to serve as trustees are effectively random. You have no control over that, and I think it's really interesting to this. To me, would be like the clue that maybe sortition would work. As far as I can tell, of the research that's been done, it doesn't seem to matter that much who the trustees are. It matters a little bit. Like there are examples of nonprofits that have become malign and and bad owners. Like it's not like it can't happen, but statistically speaking, it seems like most people, like on a jury, like try to do a good job, and so yeah, and it's not a highly technical job because mission integrity is actually something that most people find relatively intuitive.
Speaker 1 43:55
So I wonder, I wonder if, like you know, I of course I always advise companies to to be very, very, very careful in selecting the trustees and really pick the right people and all that stuff, but I actually wonder if if someone will do this research eventually that will show that actually, like it's not it's the the structure is so powerful. I wonder how much does it really matter, you know, if you've picked the quote unquote right people or not. I don't I don't know that there's any evidence one way or the other on this question yet.
Paul Shapiro 44:19
Yeah, I'm a fan for these sortition experiments. I don't think I'll gain popularity for this, or that the idea will gain popularity. But it does seem like take politics for example. Should the people who want to rule us be the kind of people who we select to rule us? Maybe it'd be better to have the people who didn't seek it. Like if you had, you know, a group. Maybe you know you could opt out of it if you're not willing to participate, or maybe it should be. You know, everybody takes a test if they want to participate and they get entered into the lottery system. But there are some places in the U.S. that have tried this, like in Oregon, they've had like citizens' initiative reviews where randomly chosen panels assess ballot measures and they write pros and cons for the official voter guide always. There's also been like in Colorado, they've had sortition style selection for state level policy evaluations. These people aren't creating policy, but they're you know they're doing things. And I've wondered for companies like what would happen if you had some whether the board or otherwise you know selecting. Obviously, you're not going to pick employees based on this, right? But for governance structure, maybe it'd be better. So you you talk about the idea, Eric. Like it's fine for people to buy shares in companies, but should they be able to vote? Right? Should there be shareholder votes? If you own part of the company, why shouldn't you be able to vote?
Eric Ries 45:35
Yeah. So this is a question of again, who should have the power? And we today we take it for granted that the principle is called one share one vote. So every every shareholder is equally valuable, and if you have if you look at the arguments in favor of shareholder primacy, they'll often have these arguments. Well, with you know without the without the money provided by the shareholders, the company couldn't exist. Or you know investors are the residual claimants after everyone else gets paid. Only the shareholders get paid then, so therefore they deserve this special power, special treatment. Yeah, there's a bunch of these arguments, and what's interesting to me about those arguments is they would apply to other stakeholders too. You know, yes, a company could not exist without the money provided by investors.
Eric Ries 46:13
True, but that's also true of the labor provided by employees, or the idea provided by the founder, or in a lot of cases by the support by the local community, so they don't deserve any representation in the in the corporate structure, really. And then separately, you have this question of who are the residual claimants. Well, if I'm a tourist, you know the average stock holding period of of stocks in public companies has collapsed from like multiple years to less than six months, and we have and that and that average obscures the fact that a lot of traders are so-called quantitative traders, their average holding period is more like 10 minutes. Someone who's bought the shares for 10 minutes really should have the same say in the company's future as someone who's like lived or worked there for decades. Like, I just don't think that makes sense. So, just like in in governments, we don't let the tourists vote, but we let them be tourists. Tourism is not bad. We want tourists. Tourists are good, so I have nothing, no problem with people being short-term economic only actors with relationship to a company. But the idea that they should have the same power as the citizens of the republic is absurd. So there's a lot of mechanisms by which you can do this filtering. You know, I've been an advocate for what's called long-term or tenured voting, where the amount of time you've held a stock gives you more power or representation in the company's voting power. I think that makes a lot of sense, but it also raises the question of like, well, who else do we want to have a seat at the table? Is it really just shareholders, or like, should employees be represented? Should customers be represented? Should other partners be represented? And I think the the preliminary evidence, obviously, this is not super common yet. But for example, in Germany, you know, employees elect board members. That's called co-determination. That seems to be the evidence shows is pretty effective. And there's a bunch of other experiments in this area that are that are ongoing, trying to figure out how do we bring more voices into the governance table.
Eric Ries 47:56
Frankly, I just think having the decisions be made by this like very narrow set of insiders, investors, and independent directors. It's just it's a formula for it's like it's it's designed to create groupthink and kind of a lack of creativity. And it and also like these people tend to get very they are alienated from the impacts of their own decisions. So they often are taken by surprise that customers would be upset that they're doing something, or that they'd be an employee revolt. I think how many boards are just like they're like ancient aristocrats, like utterly out of touch with the reality on the ground, and therefore making bad decisions. So I think their decision making would be greatly improved if we had more voices present.
Paul Shapiro 48:35
Interesting. Well, you know, hopefully these companies are making all their employees shareholders through some type of incentive program for them, but yes, it would not be enough to to select the directors of the company. That's for sure. Okay, there's so much more I want to talk with you about, Eric, and I hope we get another chance to do so because there's so many other topics. But for now, let me ask you: Are there resources aside from your books? Obviously, the Wing Startup, and again, this book is called Incorruptible: Why Good Companies go bad, and how great companies stay great. But are there resources aside from your books that you would recommend for anybody who's thinking about starting their own company? Maybe they have started their company, or just interested in entrepreneurship in general.
Speaker 1 49:11
Sure, yeah. There's a lot of resources. It's actually a resource guide that I've been maintaining that you can access via QR code in the book. Because a lot of people who've read the book so far, who are founders in particular have asked me for for implementation help? Like, okay, give me the templates. Like, what should a term sheet look like? What should the incorporation docs working? So, working on a bunch of things in that area. My friends at Unshackled Ventures are preparing to to launch an incorruptible term sheet and show what that should look like. There's also a company that I helped start called Virgil, which is an early stage startup law firm. I just got so frustrated with law firms that make this so expensive and difficult to do at the early stage that we have an AI AI enhanced legal team that does this kind of stuff, and not just not just incorporations and mission protective provisions, but also back office stuff using AI for a flat fee subscription. Way way more cost effective than most. Other current options, so you can check that out at tryvirgil.com. And if you go to incorruptible.co and sign up for the mailing list, we have a whole bunch of additional resources. There's a community that you could join. There's a lot of ways you can interact with other founders who are grappling with these same issues. And like I said, you can get via QR code in the book all of the implementation and the advanced implementation guides that kind of walk through exactly how to do this.
Paul Shapiro 50:20
Cool. Well, we'll certainly link all of those resources in the show notes for this episode@businessforgoodpodcast.com And finally, Eric, are there companies you want to see? Obviously, a law firm that helps companies get incorporated is one of them that you already have implemented. But are there other ideas that you think, hey, somebody should start this company because this is an area where we need more work?
Eric Ries 50:40
Oh man, I I have such a long list. I'm like, how much how much time do you have? Okay.
Paul Shapiro 50:45
should you put that list on your website?
Eric Ries 50:46
I know I really should. I I should I should start writing these things down. We like we obviously need pro social social media. Like having just launched this book and seen the effects that algorithmic social media has on people's brains is so so toxic and bad. I think trying to figure out how to how to create new social media companies that are that are pro social. There's I know a bunch bunch of people working on in this space, but I think we could use we could use more. That's that's very obvious. Another very obvious one is I think we need more financial products. Okay, financial instruments. We we are just so so many financial products are just the same things repackaged over and over again, and so yeah, I've been thinking about you know does somebody want to create an incorruptible ETF? Want to allow the public to put their money behind their own values? I think the kind of the ESG products are just not there's just not that good. We could do we could do way better.
Paul Shapiro 51:39
It can be an ETF where the companies have great E and great S, but really bad G, and then you know they're going to take off, right?
Speaker 1 51:45
We, I think the data shows that touch that that we would perform really well with that, and obviously there's there's things you can do in the private markets, those things you can do in venture. Yeah, so I think think there's quite a few quite a few things that that need to be done there.
Paul Shapiro 51:58
Okay, very good, very good. Well, I appreciate all the work that you've done to help startup founders like myself and so many other people I know, Eric. So thank you. And I'm going to finish just by reading this great line that I really appreciate of yours. You said that we birth organizations; we do not own them. Like children, they develop their own character, inevitably absorbing ideas and values from the environment around them. I can guarantee you, I know this to be very true, and it's a very good lesson and reminder for all of us in the world of entrepreneurship. So, Eric, congratulations on your new book. I hope it is a big hit. Again, it's incorruptible: why good companies go bad and how great companies stay great. Good luck with the rest of the book rollout.
Speaker 1 52:34
Really appreciate it. Thanks for the conversation.
Paul Shapiro 52:35
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