Why success destroys the companies we love

ERIC RIES: Are you open to the possibility that you were taught something in business school that was a lie? When the empirical evidence says the theory is wrong, we have to be willing to say that not only is this a better way, but it also should call into doubt our conviction that our modern doctrines about value creation, governance and finance are correct. I think it’s actually very clear that they are incorrect and that we’ve been taught, I would say indoctrinated into, a set of best practices that, as a whole, are value-destroying. And it’s time for us to just say no.

BOB SAFIAN: That’s Eric Ries, author of the iconic bestseller The Lean Startup. Eric is just out with a new book, and it is, if anything, more revolutionary. It’s called Incorruptible. In it, Eric takes direct aim at some of the sacred cows of today’s business and investing paradigm. Eric is a contrarian, but not just for the sake of being different. He relies on verified data and in-depth stories to deliver lessons we all need to hear. This episode is a little longer than usual, but it’s absolutely worth it, challenging core business assumptions around value and trust, courage and impact, with in-the-trenches stories from Anthropic, Cloudflare, Novo Nordisk and Whole Foods. So let’s get to it. I’m Bob Safian, and this is Rapid Response.

[THEME MUSIC]

I’m Bob Safian. I’m here with Eric Ries, founder of the Long-Term Stock Exchange and Answer.AI, terrific podcast host, and of course author of the bestseller The Lean Startup and the new book Incorruptible. Eric, thanks for being here.

RIES: Thanks for having me.

SAFIAN: The Lean Startup is an iconic resource for entrepreneurs and business folks, but the business landscape is very different than it was when the book was first published in 2011.

RIES: Oh, yeah.

SAFIAN: Before we get to the new book, do the main principles of The Lean Startup hold the same way today? Are they more pertinent in an AI era?

RIES: It’s interesting. I talk to a lot of AI founders and people grappling with this new technology and business landscape, and I keep getting the question: Do I feel vindicated? I forecast that we would see a double trend: an increase in the underlying speed at which things can be made, and an increase in the uncertainty of the business landscape. Fundamentally, Lean Startup is a tool for grappling with high-uncertainty environments using the tools of rapid experimentation. The stuff we called fast and uncertain when the book came out now seems very quaint by comparison, but the principles seem like they’ve held up pretty well.

Copy LinkWhy Eric Ries wrote “Incorruptible”

SAFIAN: So the new book, Incorruptible, is a blueprint for companies to endure in this environment of change without losing their soul. What prompted you to take on this topic now?

RIES: I started writing this book quite a few years ago, and I did not realize the issue of corruption would become quite so salient as it has in recent years. So I guess my timing is good. I guess we’ll see. I have been, frankly, helpful to people creating untold wealth. I’ve literally had multiple friends of mine go from no wealth to multibillionaires, and I’ve played a bit part in all these different companies. I’ve probably helped, I don’t know, thousands of people start companies by now. So I’m very proud of that, and I’m very proud of what we as a movement, the startup movement, have achieved. I’ll make no bones about that.

But I’ve also been witness, firsthand, Forrest Gump-style witness, to the dark side of this, too. I’ve been there watching incredible companies be ruined, be taken over. I call it being surgically deboned, making compromise after compromise after compromise, giving in to this temptation to be exploitative, to be extractive, to be selfish.

We’ve all had the experience of a great brand that we love being ruined. The marketing guru Rory Sutherland tells a story about being in a restaurant, taking a bite at his favorite restaurant, taking one bite of the food, and having to go on his phone to ask, “Did this restaurant get taken over by private equity?” He could taste it. And what’s funny is I’ve been telling that story for a while now, and 12 different people have come up to me and said, “I know what restaurant you mean,” and they’ve named 12 different restaurants. We’ve all had this experience. It’s become completely ubiquitous.

And I didn’t know what to call it. I couldn’t even talk about it, because mission drift sounds like a navigation error. Bureaucracy doesn’t capture the gut punch of it.

I realized, what would our grandparents and great-grandparents have called this? And it occurred to me: they would’ve called it corruption. Our modern sense of that word has become catastrophically narrow: embezzlement or fraud. I want to reverse that trend. I think we should go back to the old-fashioned word corruption. We should say that when people find ways to make money without creating any value, they have committed a corrupt act. And as builders, board members, leaders, consumers, employees, whatever our role in society, our aspiration should be to build things that are incorruptible.

Copy LinkHow corruption becomes structural instead of personal

SAFIAN: You argue that this corporate corruption is not primarily ethical. It’s more structural, and leaders are pushed toward outcomes they never wanted. Is this driven by poorly designed systems? What are the structural failures driving this?

RIES: It’s actually wild to me how controversial this point is when, in fact, the science of it is quite settled. Human organizations are a category of thing we call emergent intelligences. Interestingly, so is the transformer architecture that powers LLMs. So we’ll get to that, I’m sure. Organizations have an intelligence, but also a character, that is not present in any of the individual people who make them up, in the same way that the intelligence of an ant colony is not contained in any individual ant.

If you doubt this, I have an incredible video that I borrowed from a bunch of researchers who showed ants solving something called the piano mover’s puzzle, and you can actually watch the video and see that, for ants, the more ants you add to the puzzle, the better it does. For humans, this is not true, by the way, because human beings require very specific coordinating infrastructure to work together effectively.

What’s amazing to me is scientists have been able, in many studies, not just one study, to show that human organizations have an emergent character. Since you mentioned ethics, one of my favorite findings is that you can measure how ethical an organization is, and that will help you predict whether that organization will commit crimes or ethical lapses in the future. That is not predicted by how ethical the individual people who work there are.

So what’s going on is that we as human beings are much more susceptible to what I call forces, organizational force, that unconsciously shape our behavior than we realize. That’s why it’s unconscious. And as a result, these failures, yes, they are ethical lapses. I don’t want to take away from the fact that we’re talking about corruption, which also has a moral dimension. But with organizations, we have this interesting middle ground where you can say about an organization that it did the right thing.

And it’s interesting: If you ask people whether seeing an organization do the right thing means they agree with what it did, not necessarily. What I mean is that it was true to its own values. It acted with consistency and predictability. It made a principled stand, and we admire and trust organizations that do that even when we don’t agree with them. In fact, we have incredible data showing that organizations that are structured in a strong way, in a way that can resist outside pressure, that are true to their own principles, reap all these almost unbelievable forms of economic advantage.

SAFIAN: In the book, you say that success itself is a force that can bend companies away from their purpose. So success isn’t the goal? What should companies be strong for?

RIES: Isn’t that wild?

SAFIAN: How could success be bad? Success used to be good.

RIES: How could it be bad? OK, I give example after example, because this is hard for me to accept, and it is one of the most ubiquitous best practices taught to everybody in our society today: that your leverage, your power, comes from success. So when you talk to someone who’s setting out in their career or in their founding journey or whatever, and they’re like, “I’m worried that one day I might become a monster,” everyone’s like, “Don’t worry about it.” They’re not saying you won’t. They’re saying you don’t need to worry about that now. You can worry about it later. First, get product-market fit, go get success, go get rich, and then worry about it, as if the process of becoming wealthy doesn’t have a transformational effect on one’s own character.

Ancient sources are awfully clear about this. Religious sources, medieval sources, you can go to secular ancient sources. This is one of the oldest, most well-established points of ancient philosophy. Every generation has confronted the fact that money doesn’t buy you happiness, but also that absolute power corrupts absolutely, and also that there are better and worse ways of making money. There are lots of ways to make money without creating value. Even Aristotle was super clear that those ways are corrupt and you shouldn’t pursue them.

So somehow, in our modern world, we’ve all been convinced that we have to pretend that all ways of making money are equally good, even though I actually think nobody deep in their hearts really believes that. Part of my goal with this book is just to say: It’s OK. You can say it out loud. People who make things for a living are better. It’s all right. That’s actually something our grandparents were not really confused about. It was super clear to them, and it could be clear to us as well.

SAFIAN: When you’re in a system where people are striving to make money and succeed at something that’s not really adding value, does being in that proximity diminish your own soul, your own ethics? Do you stop even seeing ethics the same way?

RIES: Yeah, it’s actually worse than that. There are two things I would say. First, people say, “Whatever happened to Sears? Whatever happened to Sunbeam? Remember Circuit City? Remember Polaroid?” It’s always like, “Oh yeah, that’s an old-fashioned company. They didn’t change with the times,” or whatever. And I went through and researched all these stories. There were hundreds of them. What you often find is that these companies experienced what I call an unusual failure.

So what’s a usual failure? A typical failure is technological disruption, not keeping up with the times. The product sucked. A new product came in and outcompeted it. The company became bureaucratic and stopped competing, whatever. Companies fail. It happens all the time. But these companies are ones that failed because of their own success, because the more successful a company is, the more tempting a target it becomes.

And we all know the parable of the people who killed the golden goose. So the more golden the goose, the greater the temptation to butcher it. What I see, over and over again, is that people build these incredible organizations, and it’s as if they’re stockpiling an asset. I call it the most underrated asset in business today: trustworthiness. If you study the data, all of these superpowers that mission-driven organizations benefit from are powered, ultimately, by trust.

Trust is not some vague thing. It’s a financial asset of immense value. You stockpile this immense asset, and someone is going to try to steal it from you. Have you met humans? Are you familiar with human nature? Of course they’re going to try to steal it from you. And we’re building these organizations with this weak-ass plan that has no locks on the doors. The asset’s not in a vault. So of course it can be very easily stolen.

SAFIAN: So who’s stealing it, though? I mean, sometimes it’s folks internally who are stealing it from you, right?

RIES: Sure. It’s lying around for anybody to take. Anybody involved can wake up one day and say, “You know what could be good for me? Let me borrow against this incredible asset. Let me do something that makes the organization a little bit less trustworthy but benefits me in a selfish way.” And because we’ve made that so catastrophically easy, in fact, we live under a corporate governance regime in which we’re teaching people, I think catastrophically, that not only can they do that, but it’s their fiduciary duty to shareholders to be as extractive and exploitative as humanly possible. No wonder we are hollowing out organizations left, right and center, and then we sit around saying, “Why are we having this trust crisis? Why is trust in our institutions collapsing?” Well, what do you expect?

Copy LinkWhat Cloudflare got right

SAFIAN: You go through some positive case studies in the book, as well as cautionary tales. On the positive side, one of the ones you point to is Cloudflare. I recently chatted with their CEO, Matthew Prince, for this show. What specifically does Cloudflare do? What did they get right that other companies maybe don’t?

RIES: When we start talking about mission-driven companies, a lot of people are reflexively skeptical. Me too. And Matthew was the most skeptical. I knew him when he started the company, and if you had gone to him in those days and said, “Hey, what’s your mission statement?” he’d be like, “Don’t give me your consultant BS. We don’t have a mission statement. We don’t have corporate values. F-off with that stuff. We’re just trying to make a firewall in the cloud, man. It’s real simple.”

What’s so funny about that is sometimes when we talk about these things, people get lofty. They’re like, “Oh, if you’re mission-driven, you must be trying to solve climate change, or inequality, or misinformation, or whatever.” Listen, those are important problems. I’m glad people are working on them. But what I discovered in my career is that if you have even the most humble goal for your company, if it’s anything other than to squeeze every fricking dollar out of this world to take for yourself, whatever it is, you’re already a business revolutionary whether you know it or not, because you’re so at odds with our dominant business culture.

A couple of years in, Cloudflare was having lunch. It was still a small enough company that they could all just sit around the table and have lunch. One of the engineers said, “The reason I like working here is this is the only place I’ve ever worked where I feel like I’m really making a better internet.” And everyone else was like, “Oh yeah, making it better. That sounds good.” It was almost like a phrase they were all excited about.

And someone asked Matthew, “Is that our mission statement?” He was like, “Come on, I already told you, no mission statements.” He was so against that stuff. But over time, he realized that it wasn’t a mission statement. It was a mission. It was actually a description of what they were doing, what the emergent property of this thing was. So they started to embrace it.

SAFIAN: Even though he hadn’t articulated it himself yet.

RIES: He had never said it out loud himself. He was the last one, as far as I could tell in the organization, to realize this is what they were doing. People hear this story and they’re like, “Oh, well, so what? OK, they adopted a mission statement.” But it’s like, no. The statement is not what’s valuable. What’s valuable is that once they had this realization, they were willing to defend it. There are all these great stories of times when the mission required them to do some insanely difficult thing for no benefit. One of the recurring themes of the book is a principle I call “harder is easier,” where people intentionally do the more principled thing, making their lives much more difficult in ways that conventional business practice would always tell you not to do because it doesn’t score well on any ROI analysis. Yet they reap phenomenal financial rewards that they could not have anticipated from doing it.

This is not some high-concept, highfalutin thing. It’s so tangible. One day Matthew was talking to one of his engineers about the fact that the highest-performing feature that converted customers from the free plan of Cloudflare to the premium plan, the thing that actually got people to pay them money, was web encryption, SSL encryption. Today, all websites are encrypted, and this story is actually why. But at the time, it was rare. Most sites were not encrypted. If you walk into a cybercafe, you go to Starbucks, you get on your laptop, not just Chinese hackers but everyone in the cafe could read your email. Everything was completely insecure back then. So it was a premium feature that you had to pay for, and it made sense because encryption costs money. You have to buy the certificates from what are called the CAs, the certificate authorities, and you had to pay money to run the servers to do the encryption.

It actually has hard costs. So it was a logical feature to be a paid feature, and it was effective at getting people to upgrade. He’s explaining this to engineering, and one of the engineers says, “That sounds really interesting, but let me ask you this. Isn’t an encrypted internet a better internet?”

“Yes.”

“Isn’t our mission to make a better internet?”

“Yes.”

“Then why are we charging people for encryption? Shouldn’t it be free for everybody?”

I love this story because every middle manager I’ve ever talked to has had this experience where some dope of an employee walks into your office basically once a week and says, “Hey, boss, wouldn’t it be a good idea to give our product away for free for no reason?” And your job as a middle manager is to be like, “Thank you. Really happy to have your buy-in. Good input, but let me redirect you to our strategic plan. Remember, your job is actually to go make us money.” We’re used to this condescending, patronizing form of management where input is just ignored, but that’s not what happened in this case. Matthew was like, “Oh, that’s a good point.” And he told me later, “Once I saw it, I couldn’t unsee it. This guy was right.”

Now here’s the key part of the story. They didn’t just say, “OK, therefore let’s go bankrupt and give it away for free.” They said the three critical words: “Figure it out.” We have to find a way. Our mission requires that we find a way to give this away for free and still make it economically sustainable. So they went on this months-long rampage of working nights, weekends, and crazy hours to try to figure out how to make this work. They actually figured it out. They created these really complicated special deals with the certificate authorities called contra deals, and they did all this technical work to make the cost of serving the encryption a lot lower. They did all this work to drive their own cost basis down. Now, keep in mind, they could have stopped there and just pocketed the free margin, just tons of free margin.

In business, we teach people margin is good. Get all the margin you can. But then we also teach them Jeff Bezos’ dictum that your margin is my opportunity. So actually, we’re teaching a contradiction. Margin is a form of vulnerability. It’s a liability, not a strength. They could have done that, but they didn’t. They gave it away for free, and they didn’t know what was going to happen. They did it because it was the right thing to do, and they were worried. They even told their board, “We’re worried that our conversion rates might go down a lot if we do this.” And the conversion rates did go down because it was the No. 1 premium feature.

SAFIAN: Yeah. I mean, it’s like you said. It’s like killing the golden goose, right? Here’s your best tool.

RIES: Your best thing, and you’re giving it away for free.

SAFIAN: And you’re giving it away.

RIES: Most companies would have panicked when the conversion rates went down and reversed course, but they didn’t. They were like, “No, this is what we’re about. This is what we stand for. We’re going to do it.” And of course, I wouldn’t be telling the story if it didn’t have a happy ending. Yes, the conversion rates went down, but they had 10 times the top-of-funnel signups because all of a sudden they were the heroes of the whole internet. It’s like when Volvo gave the seat belt patent away for free. When Malcolm McLean gave away the patents on container dimensions, there are these acts of corporate generosity that we study every once in a while as like, “Oh, isn’t that funny that they did that thing that one time? Anyway, back to our normal exploitative playbook.” But Cloudflare is worth $70 billion today because they did this.

So was it an act of corporate generosity, or is this actually the most effective business strategy on the planet? Business opportunities are powered fundamentally by positive externalities, which I think a lot of us have been trained to systematically overlook.

SAFIAN: Let’s just pause here for a moment. Eric is throwing a lot at us, but the story about Cloudflare is so resonant. By doing what didn’t make sense in a near-term financial sense, they ended up with a competitive advantage in both product and reputation. A true win-win, born from playing a completely different game. So what are the trade-offs for playing a game like this, and can we learn anything from failures as well as successes? We’ll talk about that and more after the break, so stay with us.

[AD BREAK]

Before the break, we heard Eric Ries, author of The Lean Startup, describe the foundation of his new book, Incorruptible. Now he shares how being incorruptible helped Novo Nordisk thrive over decades, and how straying from that path crippled Whole Foods. Let’s jump back in.

Copy LinkHow Novo Nordisk avoided corruption

What did you learn that might surprise us about Novo Nordisk?

RIES: I love the Novo Nordisk story. This all started in the 1920s. Marie and August Krogh are a husband-and-wife team of physicians in Denmark. Marie Krogh is actually an awesome person in her own right. She’s one of the first women to become a doctor and researcher in Denmark. Her husband is a Nobel Prize winner, and she gets diagnosed with a fatal illness called diabetes. At the time, there’s no cure for diabetes. It is an absolutely 100 percent fatal disease. Her husband says, “Will you still come with me on a tour of North America where I’m giving lectures for my Nobel Prize?” She goes with him, and they’re having dinner one day, I think it was in Boston, and the person at the table is telling them about this new research that’s being done in Canada. Someone has figured out how to synthesize insulin, and that could be a cure for diabetes.

They go and meet the Canadians, they’re blown away that this fatal disease is going to have a cure, and they ask the Canadians if they can license the technology and bring it back to Denmark and start producing insulin there. They had this fear that if you were making medicine and charging people money for it, you might be in a situation where you’d be tempted to exploit them. Because if I have your lifesaving medicine, you’ll do anything for it. I can make a fair profit if I sell it to you in a fair way, but if I wanted to, I could charge you 10 times more, anticipating Martin Shkreli by a lot of years. What could you do?

SAFIAN: Yeah, I was going to say, that never happens, right?

RIES: So they agreed that what they would do is create the Nordisk Insulinlaboratorium as a nonprofit foundation that would own a for-profit subsidiary. What’s really interesting about it is that Novo Nordisk is still going 100 years later. The foundation they set up is now the largest foundation in the world, and Novo Nordisk is a publicly traded company. I hear people tell me all the time, “Once you get large, once there’s investors involved, once you go public, you’re doomed. Corruption is inevitable.” But if that’s inevitable, how come it hasn’t come for Novo Nordisk? I’ve been pitched founders who are like, “I want to do drug discovery. Do the Novo Nordisk thing.” And I’m like, “Great. Tell me about the corporate structure.”

“It’s going to be a regular old Delaware C corp, shareholder primacy to the max.”
And I’m like, “Well, who told you that?”

“I talked to this investor, and I talked to this MBA, and I talked to this lawyer,” and blah, blah.
And I’m like, “Look, I’m sure those people all seem really smart, but before you go listening to them, I just want you to answer me this one question. Are you sure you’re smarter than a Nobel laureate? Because Marie and August Krogh worked this out 100 years ago, and it totally worked.” And this is not just one company, by the way. There are enough of these companies in the world that the great researcher Steen Thomsen at Copenhagen Business School has actually built a data set of these companies to see if they perform economically better or worse than conventional companies. Everyone I talk to about this is always like, “Well, they’re nonprofit-owned. They probably are inefficient, they’re not disciplined by the market. They can’t raise capital at attractive rates. They can’t this, they can’t that.”

Our modern finance theory, it’s really important to understand this, makes very concrete and specific predictions about what should happen to these companies, and they’re all wrong. Actually, these companies outperform. Actually, they have better financial performance. Actually, they don’t need the market discipline. They create a lot of shareholder value that for-profit companies, normal for-profit companies, can’t touch. They have better return on invested assets. They have better Tobin’s q, if you know what Tobin’s q is. They’re better in all these different dimensions.

SAFIAN: But it sounds like heresy, right? It’s so different.

RIES: It is. It’s 100 percent heresy. It shouldn’t work, but it does.

SAFIAN: Except it does.

RIES: Except it does. Are you open to the possibility that you were taught something in business school that was a lie? It’s actually very challenging for people. And again, the effect is not marginal. For example, one of the best stats about these companies is they’re six times more likely to live to year 50. We’re talking about 10 percent versus 60 percent. It’s a huge difference. So it’s not just that there’s this acute exception, how interesting. When the empirical evidence says that the theory is wrong, we have to be willing to say that not only is this a better way, but it also should call into doubt our conviction that our modern doctrines about value creation, governance, and finance are correct. I think it’s actually very clear that they are incorrect and that we’ve been taught, I would say indoctrinated, into a set of best practices that as a whole are value-destroying. And it’s time for us to just say, “No, we’re going to have our own better new best practices.”

Copy LinkWhat went wrong with Whole Foods

SAFIAN: Among the cautionary tales in the book, you cite Whole Foods. And Whole Foods, at least at first to me, seemed like a real mission-driven…

RIES: It was.

SAFIAN: … company. So what went wrong?

RIES: Whole Foods is a very important story to study, not least because John Mackey is awesome. I know him, and he’s a really great entrepreneur, and he had, I think, a tragic experience. If you talk to him about it, he blames himself, but I think it’s important to move the story away from the personal drama and focus on the structural aspects. People today know Whole Foods mostly as a gourmet grocery store, but it was originally not even really about gourmet food at all. It was really about health and environmental consciousness. The original store in Austin was a community center. People loved that store, so much so that in the early days of Whole Foods, there was flooding in Austin and the store was completely saturated with mud. The company would have absolutely gone bankrupt except that the whole community showed up with buckets to bail them out.

Their banker personally guaranteed them a loan to go buy new inventory. This was at a time when John and his then-girlfriend had to live in the store. They were bathing with the dishwasher hose. This was an act of tremendous love, and that was his goal. He said, “My goal was to make the best workplace in America. I want to be a place that people love to work, they love to shop.” So it was a very mission-driven company. It expanded, raised money, and had a bunch of success. Mackey kept talking about how, at each stage, if you look at what he wrote about it, he said, “When I got VCs involved, I felt like I’d taken on hitchhikers with credit cards. As long as we were going where they wanted to go, they were willing to pay for gas, but they really weren’t fundamentally aligned with us in the same way.”

So he was eager to take the company public to get those people off his board. And he talked about how going public was the greatest day of his life, not only because they had made a lot of people rich, but because now he was moving on from those investors. But Whole Foods was a bad fit for the public markets from the beginning. They had high margins because it was a premium product. If their margins went down even a little bit, their stock would collapse as the market punished them. So they really got this strong message from the market that you have to defend these margins at all costs, and they did. Here’s what’s really interesting about it: the whole time they’re a public company, they are just obsessed with keeping the stock price up. But why? Normally we say, “Why is it important to have a high stock price?”

Well, you’re greedy if you have stock options and you’re greedy, but Mackey donated all his stock options to charity. He said he didn’t want to work for money anymore. He wanted to work for the love of the thing itself. So that wasn’t it. He said, “Well, it’s important to have a high stock price because what if you need to raise money?” Today, you think about all the tech companies that go public, they’re money-losing machines. Whole Foods, during this whole period, never had an unprofitable year or an unprofitable quarter. So they never needed to raise money or really needed anything from the markets, and yet the psychological, compulsive need to keep the stock price high drove all their decisions. In particular, it drove the decision not to lower prices. They couldn’t bear the trauma of the stock price going down.

But this wasn’t just like, oh, they’re being weird. They understood that the cheaper the company would be, the cheaper it would be to buy up the shares and take control of the company, take it away from them.

SAFIAN: Which would make them vulnerable, right?

RIES: Which would make them vulnerable. So they felt like a high stock price was the kind of success you needed to be successful. This is that same fallacy we talked about before. We have success, success will give you power, use that power to do what you want. But unfortunately, because they couldn’t lower prices, eventually their foot traffic started to decline, and now their stock price is going down anyway, which in fact allowed activists to come in, buy up a small percentage of the company, and force them to sell it. Mackey, to thwart the activists, made an absolute Hail Mary of a phone call to Jeff Bezos and said, “Look, could I sell the company to you instead because you’re more long-term?” And that’s ultimately how the deal went down. The activists who did this, by the way, made $500 million for six months of work applying the pressure campaign to force this sale to happen.

I quote an article that’s like, “The greedy bastards won,” and they were like, “Look, Mackey wants to have it both ways. He wants to be this avatar of being mission-driven and conscious capitalism and doing right, but he also wants to run a standard-issue publicly traded company.”

SAFIAN: And when you say he blames himself, is that what he blames himself for?

RIES: Yeah. He feels like he should have been able to figure this out. I’m more sympathetic to his situation even than he is. I think he was caught in a trap that had no solution because it needed to have been solved years earlier.

SAFIAN: Whenever he took those hitchhikers on with their credit cards, he was busted from that point on.

RIES: Absolutely. He definitely had no idea what he was really signing up for then. And I wouldn’t say it was too late, because actually I’ve worked with companies that have adopted these structures at many different ages and stages. But yes, one of the ideas in the book is that it’s generally always too early until it’s too late. You talk to people about this, and then you get this pat on the head. You go to your lawyers like, “I think I want to do this thing. I heard Eric was on this awesome podcast with Bob, and he says I should do this thing like Novo Nordisk.” Go try it. You will get the most condescending pat on the head you’ve ever had in your life where you’re just like, “Oh, that’s sweet that you think that. Good for you. Don’t worry about it. You don’t have to do that now. You can always do it later.”

It’s absurd. What are we doing when the evidence that these companies outperform is staring us all in the face? It’s not just Novo Nordisk. Anyone have a Vanguard mutual fund? Anyone ever bought furniture at Ikea? Patagonia? Hershey Chocolate, for God’s sake, has this structure. It’s a very simple idea. Yet it is very difficult to adopt because there’s all this gravitational pressure to conform, conform, conform to the so-called best practices, and many board members, many investors, many founders, for that matter, have become convinced to become more loyal to the best practices than to do what actually would serve the organization’s health.

Copy LinkThe trade-offs to being a mission-driven company

SAFIAN: If you’re a business and you say, “OK, I’m going to put my mission first,” what are the frictions or the trade-offs that I should expect if I do that?

RIES: I’m going to push back on your question a little bit, because the most common piece of reader feedback I got while working on this book, bar none, was people saying, “You’re not being honest enough about the trade-offs.” So I went and reinterviewed a whole bunch of the mission-driven CEOs and I said, “Look, I need to know more about the trade-offs.” And they all looked at me like I was a total lunatic. They were like, “The what?” I’m like, “The trade-offs.” They’re like, “The trade-offs of what?” And it was as if I had asked them, “What are the trade-offs between eating food and eating poison?” They’re like, “It’s not a trade.” You are foregoing the right to eat poison in the future, so you’re taking options off the table, that’s true, but that’s not really a trade-off. It’s just the thing that we do. We can’t imagine doing it any other way.

I’ll give you another example. I met a company called Grundfos. They’re a Danish water pump company, another Danish company. And they were the first company I’d ever actually gone to do a workshop with, with their executive team, that had this structure. I didn’t know they had this structure at the time. But I got there, and it was very weird. I was like, “Everything is different at this company. Why?” They’re like, “Look, you need to understand, we have this unusual structure. We’re owned by a nonprofit company.” And I was like, “Oh, I’m so sorry. You must be at such a competitive disadvantage. Nonprofit? Oh yeah, you must not be able to raise money.” I was basically giving them my condolences, and they were really offended. Like, “What are you talking about?” I was like, “Wouldn’t you rather trade places with someone who follows all the best practices?” And the room erupted in laughter, like I had just said the dumbest thing they’d ever heard.

Nobody who works at one of these companies would ever trade. Really, the only trade-off is that if you do this stuff, or try to, people will incessantly try to talk you out of it. But those people do not have your interest at heart. They are talking their book, as we say in finance. They have their interests in mind. I tell the story in the book of a founder I worked with. I tried really hard to get him to adopt these things. He came to me like 12 months, 18 months before his IPO, and he was worried about this kind of stuff. And I was like, “Yeah, you should be worried. You have a structure that is weak and rickety, and you are going to get absolutely screwed.” So I was just giving him the history, giving him the data, and he was alarmed. He’s like, “Oh man, this is terrible. I need to go do something about it.”

He calls me back and he’s like, “I talked to my board, I talked to my investors, I talked to our investment bankers, I talked to our lawyers about it, and they were all just like, ‘Eric is such a downer. If that guy really believed in your vision, he would understand you’re the exception.'”

SAFIAN: He wouldn’t be such a downer, huh?

RIES: Yeah, exactly.

SAFIAN: You’re such a killjoy.

RIES: Yeah. He was just like, “You know, man, I hear you, but our company is special. We’re unique.” And I was like, “Listen, I hope you’re right.” He was fired from his company five months after the IPO. He didn’t even make it six months.

SAFIAN: Those other players — the investors and the board members and whatever — are so invested in the idea of success. It’s defined them, so they see that as the framework of, “Well, this is good because it’s been good for me.”

RIES: It’s been good for me, so it must be good. Absolutely. That’s right.

SAFIAN: Hang on, everyone. Eric isn’t done ripping into our assumptions. Coming up, he shares an insider’s view on what happened between Anthropic and the U.S. government, and he explains what he thinks is necessary to reframe business and capitalism toward better outcomes. We’ll be right back.

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So far, we’ve heard Eric Ries talk about how the pursuit of every dollar can lead to unsavory outcomes. Now he applies that lens to the realm of AI, where he has an insider’s view of Anthropic versus OpenAI, and he offers his prescriptions for how to correct misplaced priorities in the investment world and for each of us personally. Let’s get back to it.

Copy LinkWhat comes after shareholder primacy

There’s this declaration in the book where you say shareholder supremacy is over. It doesn’t feel that way to me, so what makes you feel like shareholder supremacy is over? Maybe it should be over, but —

RIES: Look, my personal view is that this fight has already been lost. First of all, shareholder primacy was supposed to be for investors, but like I said, it’s actually turned out to be really bad for investors. And I think we’re actually in a world of extraction primacy now.

SAFIAN: I always think of rich investors, the investors today.

RIES: Yeah, we’re running for the benefit of the shortest-term, most extractive investors.

SAFIAN: Yes.

RIES: Secondly, there’s a generational thing. The new generations coming into the workforce now have lived only under this idea. This idea is very recent. I always tell people if you can see a park with a tree in it, you’re probably looking at something older than shareholder primacy. The key date for the adoption of shareholder primacy in Delaware is 1986. That’s not that long ago. We’re talking about Depeche Mode, not monks in some monastery. A very recent occurrence.

But we now have people entering the workforce who have lived under this idea their whole lives. So when I teach them about the collapse of trust, for example, if you look at the data on trust — trust in governments, trust in big business, trust in doctors, trust in hospitals, trust in journalism — the graph is just straight down.

They don’t really understand how trust could have collapsed because they can’t imagine living in a world where anybody trusted any institution for any reason. They’re like, “You would trust your doctor? You would trust your government? You would trust big business?” And I’m like, “Look at the data. Seventy percent of Americans used to trust big business. Now it’s like 20 percent.” They can’t imagine it because all they’ve ever known is extraction, exploitation, and weakness. For all their power and all the money they’re making, these are the most inconstant, pathetic organizations ever. Think about the people who’ve succumbed to public pressure in just the last couple of years.

So when you talk to younger people about shareholder primacy, they’re just so over it, it’s unbelievable. I think the argument is already lost, so we better get busy thinking about what comes after shareholder primacy. What is the new thing that we’re going to do? The number one protection investors want most is limited liability. Ultimately, our entire economic system is powered by the fact that investors are not liable for the actions of the companies they invest in.

We are putting that protection at risk. Our modern ideas of fiduciary duties rest on both trust law — the idea that a director is a trustee of the corporation — and what’s called agency law. When you’re my agent, your job is to maximize outcomes for me. Whereas if you’re a trustee, your job is to protect the thing that is held in trust. So shareholder primacy is basically taking out the trustee aspect of fiduciary duty and being all agency all the time. The idea is that every corporation is obligated to maximize returns for its investors. But the most ancient legal traditions — the entire common law going back to the Roman era — say that if you are my agent, then I am liable for your actions. Because if you walk into the marketplace and, to maximize returns for me, you stab somebody, that’s my responsibility, because I sent you as my agent to do that.

It is intellectually incompatible to have both shareholder primacy and limited liability. We can’t have completely unaccountable corporate behemoths, accountable to no government, no process, no nothing, doing whatever they want, and investors saying, “I wash my hands of this, but also I insist everything be done for my benefit.” Sorry, it doesn’t work that way.

Copy LinkReflecting on the Anthroping and Department of War conflict

SAFIAN: In the context of all this, I have to ask you about AI. OpenAI and Anthropic have clashed over how they engage with the U.S. government, the Department of Defense. Where do they fall in this incorruptible lexicon, between positive model and cautionary tale?

RIES: I happen to know the Anthropic story better because I was involved. I’m not an investor or anything, but I helped them set it up. The conflict between Anthropic and the DOD, I think, is really instructive. Anthropic was put into an absolutely untenable situation by an unprecedented act of government overreach. Given that the government did this thing — and you can debate whether they did the right thing or the wrong thing; it’s actually irrelevant for our analysis — it’s unequivocal to me that Anthropic did the right thing in resisting.

And we have to ask ourselves, in order to make a statement like that, what does it mean for an organization to do the right thing? We can say three things. One, they acted in a principled way in defense of their own values. Two, their values align with a notion of human flourishing.

I think companies that have purely extractive values and wear them proudly on their sleeves can never be said to do the right thing. And the third thing is they had the courage, the institutional strength, to resist outside pressure. That’s what makes them trustworthy. When I talk to normal people — not the excessively online hyper-posters who are trying to win a culture war every five seconds — they are perfectly capable of saying that they trust a company that did the right thing, even if they disagree with the decision. I know people who are like, “I don’t agree with what Anthropic did. I personally think it would have been fine for them to sign that contract, but I respect that they had the courage, the strength, and the principled consistency to stand up for their own values.” And I loathe the companies that rushed in to grab that contract.

Again, even though I think it was a perfectly fine thing to do, the opportunism of it makes me suspicious of their motives. If they’ll betray their principles for $200 million, what if I’m the principal one day?

SAFIAN: Anthropic was consistent in its decision, in the way it approached this, and in some ways OpenAI was consistent with its history and culture in jumping in.

RIES: Consistent with its behavior, yes, but not with its stated principles. I think that’s really the issue.

SAFIAN: Behavior really is what states your principles. It’s what you do that matters, right?

RIES: Just think about law firms, universities. I can’t remember how many big companies in the last two years you would have thought were big enough and strong enough to resist outside pressure have basically proven they’ll do anything for a dollar. It’s pathetic, it’s sad, and there are very few companies on the other side of that ledger.

Now, here’s what really blew my mind. Anthropic did this, and I wasn’t involved. They didn’t consult me about it. I was not an insider to the decision, but I know for sure, because I know the people they go to for advice, that a lot of people they went to for advice were probably like, “Don’t make a stink. This is the U.S. government. Who are you?” You can just imagine the advice they got. So I don’t think there was any way they could have anticipated that as soon as they did this, Claude would go to No. 1 on the App Store.

That night, at their headquarters in San Francisco, the sidewalk was chalked up with thank-you messages all around the office. They got very unanticipated benefits, so much so that a couple of people have argued that they cynically did this as virtue signaling, knowing that somehow it would benefit them. Nobody could have predicted that this would go as well as it did. You stand for what you stand for, you think it through, you try to make the best decision you can, and you live with the consequences. People respect that because they can trust that if you’ll do it in this situation, you’ll probably do it in the situation that affects them, too.

Copy LinkWhat Eric Ries hopes business leaders do differently

SAFIAN: Incorruptible is a rallying cry of sorts, and I’m curious what you hope listeners hear, what business leaders do differently? You’ve spent your career, in some ways, arguing that the system matters more than the individual, but individual actions are required to change the system.

RIES: I mentioned very briefly this academic idea called structuration. Organizations shape your behavior, but you also shape their behavior at the same time. And I had this realization studying not just the good companies we’ve talked about, but also the bad companies — the Philip Morrises, the Facebooks, the companies creating addictive products. To me, that’s one of the darkest parts of modern capitalism. But what I realized in studying these organizations is that they’re addicts, too. In the modern world, because of surveillance capitalism, every decision you make — I don’t care if you’re an important person or just a regular old consumer, citizen, board member, or middle manager — is somebody’s personal metrics target. Every decision. There’s someone in the world whose job is to watch you very carefully to see if you’ll do the thing they want you to do. 

And, of course, it’s probably multiple people on multiple sides of that issue.

So every choice you make ripples out in gravitational waves through these organizations. And when you realize that, you realize you may feel so powerless with these huge, massive organizations, but they’re obsessed with you. They’re addicted to you. Their algorithms, their analysis — I’ve literally been in the room where this happens — where people are debating some arcane product management decision like, “Should we make it with a slightly healthier ingredient, or should we go for the cheaper ingredient?” It’s like, well, it’s going to add 3 cents to the unit cost. The BOM, the bill of materials, will increase by 3 cents. Someone else is like, “But what about the willingness to pay?” The most important phrase in business is actually willingness to pay. Will the customer pay the 3 cents or not? You can’t imagine the amount of energy and time that is spent analyzing whether you will pay the 3 cents or you won’t.

So every time you cynically say, “Well, I guess it doesn’t matter,” you are actually lending your gravitational force to a system you hate. You are helping make it more powerful. And every time you resist and do, in your own small private way, the right thing, you are strengthening untold, unknowable allies who think the way you do. I don’t mean to say, oh good, we can solve climate change with recycling. I’m not saying that individual power is everything, because of course systemic forces are important, too. But we have to remember that systems are made up of people. We are the people who make them up. We consent, or not, to their hegemony. And one of the biggest things I learned writing this book is that we all have far more power than we realize.

SAFIAN: I got into business journalism because I believed that business can be a catalyst for positive societal change, but listening to you, sometimes I think, am I just being naive? How optimistic are you that business can truly be incorruptible?

RIES: If human civilization is going to endure on this planet, then it needs to be. The technologies that we are learning to harness are now in the catastrophic range. I meet startups every day. There are two guys in a garage with something that could change the world. The Anthropic co-founders are wielding a force that could be civilization-ending. I’m really optimistic about it because I think it’s an existential necessity, and I think anybody who actually has a stake in the future survival of the species ought to take it seriously. Anyone who’s giving you a message that it’s naive — you’ve got to ask whether they are, in fact, committed to the future of our civilization. Now, it turns out that many of those people own a bunker in a remote desert. So I think they’re telling on themselves quite explicitly that they don’t view that as their problem. And why you would listen to, buy from, or give your attention, energy, or support in any way to such a person, I think, is deeply anti-human. So maybe don’t do that.

SAFIAN: Well, Eric, as always, talking to you is thought-provoking. This was great. Thanks so much for doing it.

RIES: It’s such a pleasure. This was really fun.

SAFIAN: It’s hard to pick just one takeaway from Eric’s stories. We could emphasize everything that’s screwed up about the system, and there’s plenty to point to, but Eric is ultimately upbeat because there’s clear data that what’s good for society, fairness, and trust is actually good for business, too — that the shortcuts people are drawn to actually leave us shortchanged. Remember his early observation that the ultimate asset for any business or brand is trustworthiness. I totally agree. And the more we safeguard that trustworthiness, the more we lean into it without exploiting it, the more value we actually create. I don’t agree with everything Eric says, but this vision of business — this is what motivates me. And if I’m being naive sometimes, so be it. I’m Bob Safian. Thanks for listening.