Building Incorruptible Companies

Introduction to the Brainy Business Podcast

Melina Palmer: Welcome to episode 580 of the Brainy Business, Understanding the Psychology of Why People Buy. In today’s episode, I’m excited to introduce you to Eric Ries, author of Incorruptible and The Lean Startup. Ready? Let’s get started.

Announcer: You are listening to the Brainy Business podcast where we dig into the psychology of why people buy and help you incorporate behavioral economics into your business, making it more brain friendly. Now, here’s your host, Melina Palmer.

Melina Palmer: Hello. Hello everyone. My name is Melina Palmer and I want to welcome you to the Brainy Business podcast. Have you ever found a brand that you absolutely loved? Maybe early on in their creation, one that you were so delighted to be a part of the in crowd for? You knew them when they were small and gritty and cared about you. You felt seen, maybe they were really sustainable or invested in their customer service or the quality of their products and services. They were amazing. And you were so happy for the company as it grew. I mean, after all, you told so many friends and family about it.

But then when it did go mainstream, things started to slip. Everything you loved about it slowly faded away. Eventually you felt like another number and they felt like another soulless conglomerate who cared more about shareholders than customers. I think a lot of us want to believe that if we were the ones building the company, things would be different. If we had the opportunity to create something from the ground up, we would build it with good values and surround ourselves with thoughtful people and stay committed to the mission. Over time, we wouldn’t succumb to the things that others have.

Well, my guest today is Eric Ries and he is the author of a book you’ve probably heard of called The Lean Startup, and today we’re talking a little bit about that, but also and mostly about his new book, Incorruptible. In the book and our conversation, he shares story after story of all the well-intentioned and thoughtful founders who had a vision for their companies who were either pushed out or overruled because the system itself is built to reward short-term extraction over long-term value creation. And it didn’t take long for that to shape the incentives and legal structures, investor expectations and decisions that make or often break these companies who were built by well-intentioned founders who didn’t know the bigger picture.

When you know the rules of the game, you can build an incorruptible company and start to change it. Of course Eric’s going to share about those rules and the real games people are playing in our conversation today and in great depth throughout his book. As you listen today, I want you to think about this: What invisible incentives are shaping behavior inside your organization right now in a way that isn’t aligned with your greater vision?

Really quickly, before we get into the conversation, I want to be sure you know that there are links in the show notes for my top related past episodes and books, ways to get in touch and more. It’s all within the app you’re listening to and at thebrainybusiness.com/580 and now let’s jump right in. Eric Ries, welcome to the Brainy Business podcast.

Eric Ries: Thanks for having me. Excited to be here.

Melina Palmer: Oh yeah, I’m super excited to have you. Can’t wait for our chat today, and see, you know, where it all takes us. But always, you know, just kind of to start out for those who don’t yet know you, can you share a little bit about yourself and the work that you do?

The Pain of Entrepreneurship and The Lean Startup Movement

Eric Ries: Sure, yeah. What is the work that I do? That’s a good question. Most people know me as the author of The Lean Startup, which came out in 2011 and kind of spawned a business movement, if you will, for changing how startups and big companies alike do innovation. As a result, I work with a lot of startups and big companies and that kind of stuff. I’ve been an entrepreneur myself, started the Long-Term Stock Exchange, Answer AI, Virgil (the startup law firm), and a bunch of other things I’m probably forgetting. And in the last, gosh, 10 years or so, I have been really working on reforming not just like the operational practice of startups, but corporate governance and the financial markets and the environment we create around organizations, to help them, you know, stay more mission-driven and not succumb to the financial gravity of our current financial system.

Melina Palmer: Yes, please to that.

Eric Ries: Doesn’t that sound good? Would that be nice if we could do that? Yeah.

Melina Palmer: Amazing. I mean, why would we need that? I don’t know. But so, before we jump into, you know, the new book and Incorruptible, can you share—I know you mentioned Lean Startup, but can you just give a little kind of the elevator blurb synopsis of what that’s kind of about?

Eric Ries: So all of my books come from pain. You know, I don’t—I write about the things that I have personally experienced and I try to find the solution before I write about it. I really, I wish I could—I don’t know how Malcolm Gladwell does it. You know, like it would be cool to be able to write books about stuff that you learned about from other people. I’ve never been able to do that. So, Lean Startup. I had built a bunch of startups early in my career. I was a technologist by training. If you picture a kid like programming computers in their parents’ basement instead of going outside, that was—hi, that was me, my poor parents. And I really thought like the story we tell about entrepreneurship was true. You know, you just make a great product and then something, something, something, and then you’re successful on the cover of magazines.

And of course, I kept not having that experience and, you know, eventually started to realize that if I thought for myself, maybe things would go better and started to develop these different techniques that today are very, very common in technology. Things like minimum viable product, the need to pivot, build-measure-learn feedback loop, continuous deployment. Like these are now part of the business lexicon. But when I was advocating for them, they were so controversial that people would like yell at me and be like, “That would never work. That’s crazy,” because I didn’t know this at the time, but we were violating the so-called best practices. The things that people had learned that “This is how you build a product, this is how you build a company, this is what it’s all about.”

And here I am, I’ll never forget the first time I was advocating to a bunch of engineers, people who worked for me, that we should do A/B split testing—basically bring the scientific method into product development. And they looked at me like, “Why? That’s like a direct marketing technique. What does it have to do with engineering?” Like we were so far from just the basic rigor of like, let us test our assumptions, let us learn what customers actually want and let’s make sure that our business plan has the capacity to be wrong without that being a catastrophe for the whole organization.

So because when I started talking about that stuff, it was very incendiary, I started writing about it first. Mostly just to work it out for myself so that I could like get my own engineers to understand like why are we doing this? It’s so weird why it works, but why? And then when I started talking about it, it just totally took over my life. It became this total whirlwind, this movement. And so yeah, when the book came out in 2011, I was not at all prepared for what happened next. You know, I thought I would write this book, it’d be a cool like Silicon Valley thing that I would do for a little bit and then I’d go back to my regular life. And now we’re 15 years later and still there’s no regular life that has appeared in those years since.

Melina Palmer: Yeah, yeah. Because, you know, congrats, and it definitely kind of took fire in a good way. Right. And I think for so many of us, we can thank the A/B testing and so many of the things that are being used more commonly in business across, you know, beyond just—my background’s in marketing and so you know, you get some of the like subject line of the email, but it’s more than that, right? Of the things we’re able to look at. And I appreciate as someone whose first book was called What Your Customer Wants and Can’t Tell You, I’m all about testing and experiments a hundred percent.

Eric Ries: It’s the only way to know. And I say this now—I wouldn’t have been able to explain this when I was younger, but now I can say—I really think entrepreneurship is one of those truth-seeking professions like being an artist or a scientist. I really think that because at the end of the day you have to have a very intimate relationship with reality or the thing falls apart. You can do the reality distortion field, you can bluff your way through it for a while and sometimes for a long while, but at the end of the day customers either do or don’t want to behave the way your business plan says. And if the answer is they don’t, there’s nothing you can do about that. You have to eventually face that fact. So yeah, having the tools of the scientific method at your disposal, it’s pretty handy. That’s worked out pretty well over the last couple hundred years.

Melina Palmer: Yeah, we should use that.

Eric Ries: Use it in business too. Why not?

Melina Palmer: Yeah, love it.

The Cost of Speaking Up and Staying True to Principles

Melina Palmer: Well, I think as it’s the, maybe not exactly the smoothest transition as we get into this aspect of the book, because I’m going to talk about—you kind of mentioned how like with working on what became The Lean Startup, you were talking about things and people are like getting upset about like, “No, that’s not how it’s done. That’s not how it’s supposed to be.” There’s a bit of that like it’s upending some status quo bias. But it’s also like as people feel like they have power, they don’t want to give it up. And like in that “don’t rock the boat because you might mess something up for me, so like, just stop,” this very myopic view of things. Like, ah, I guess it’s clear that you have done an amazing job of kind of standing up for what you believe to be true. So one, thank you for all the work you do with that and helping people. Yeah, yeah, absolutely. But like, helping other people to see it too, when it can be hard—like it’s like ostrich problems or like, hoping it’s going to be the optimism bias. There’s like a lot of stuff kind of going on psychologically that fuels the problem that you have been really talking about. It’s very complex, of course.

But I guess a question that kind of leans into it, which maybe we answer at the end, but do you think there’s something like, specific about you that makes it to where you don’t feel like you—like, are willing to like, stand and fight for the thing where a lot of people are just kind of bowing down to the powers that be?

Eric Ries: I mean, look, I’ve lived an immensely privileged life, so that I do think has helped. My parents—you know, my parents were doctors. So actually like, you know, compared to the standards of rigor we expect from medical professionals, like, what we expect from business people and management people is like, pretty low. I joke in the book that like, you know, most directors of companies have far more ability to cause harm in the world, and yet we expect less of them than we do from the average nurse. You know, it’s actually kind of sad. So I think we should—we should have a director’s oath, the equivalent of the Hippocratic oath, for directors.

So yes, like, I think, you know, of course that that is helpful. But end of the day, like, I really feel like living in integrity, that’s just the most important thing. And so I’ve never really been able to give myself over to orthodoxies. You know, consciously—I’m sure I get suckered into stuff all the time, but, like, consciously, I’ve always felt like the truth is the most important thing. I love—I’ve always loved ideas since I was a kid. And, you know, and I could be really annoying about it because I would argue—like when I was younger, I would argue with anybody about anything. You know, I was like, “I want to know the truth, I need to know, let’s fight about it.” And you know, I hope I’ve been able to channel that into more productive ways as I’ve gotten older.

But I remember, I’ll tell you a story. I remember the first, first time that I really understood the stakes of speaking up in a work context for what you believe. Up until that point, I had just always been an employee. So at the end of the day, like I could kind of spout off on whatever, but as long as I was good at my job, nothing bad would happen to me. Although what happened is people would like argue with me and maybe I’d get my way, maybe I wouldn’t, but it didn’t really matter. So when I was a founder, like first venture-backed company I did in Silicon Valley, I was the youngest person on the team by far. You know, I was a co-founder, I was in charge of the technology, and I was doing things in these weird ways. And God bless my co-founders for putting up with this, which in retrospect is kind of unbelievable to me. But they did, they believed in me and they believed in the approach, and it worked.

So anyway, we get to this point, we’re growing a bit, we have VCs on our board, it’s starting to get more serious, and basically there’s this meeting coming up, a board meeting coming up, and I’m just like, “Oh no, I’m going to be fired.” Because everyone’s just like, “Look, you have to—you have to start being more flexible about this. Everyone expects us just to mature and do things the professional, the accepted way. You need to like, just tell them that you’re willing to like go along with that. You understand? This is, you know, just like, then we’ll like live to fight another day. Don’t be so stubborn.”

And you know, I remember just pondering what to do in this meeting. Like, I just was like, it just really grates on me, you know? It’s like nails on a chalkboard, the idea of doing something you don’t believe because it’s what people want. And anyway, I had this epiphany basically where I was—maybe it was just the like gigantic venti, you know, Starbucks latte, but God only knows what was in it back what we used to consume in those days, whatever. It was like, I was like, I was high as a kite, you know? I’m like, okay, I’m like ready to go. I was like fueled on adrenaline, caffeine, and sugar. And I’m going to this meeting and I’m going to—and I just had this moment of realization where I was like, “Oh, I see. Let’s just really look at this rationally. If I do what they want, how’s it going to go?”

First of all, I know it’s not going to work. So I’m putting my name on something that I know is not going to work. And secondly, if it goes bad—because when you’re doing things different, every time something goes wrong, people blame the thing you’re doing that’s different as the reason it went wrong. Even if that’s completely irrational, that’s just—that’s human nature. So now that we put ourselves into compliance with the standard thing, let’s say it doesn’t work, are they going to say, “Well, at least Eric did it the standard way. He’s not to blame”? I just had this realization: no, it’s still going to be my fault. I’m going to have compromised for nothing.

On the flip side, let say I speak out at this meeting, I say what I believe, and they fire me. That will be sad, but I’ll get another job. And more importantly, everybody in that room will know what I stand for. And I was like—I just realized that. I was like, one day they’re going to be in a meeting someday in the future and they’re going to be like, “Man, this company’s going too slow. You know what we really need? We need to find someone who’s like, irrationally committed to the idea that we should go fast and do these experiments and whatever.” And they’re going to be like, “Remember that guy we fired? You know, he was really annoying in that situation, but that’s what we need. And we know what he stands for.” So if you hire him, this is what you’ll get.

And it was like—now, I didn’t know the phrase “employment brand” or anything. I didn’t know anything about anything back then. But I had this understanding that by staying standing for something, not only could it cause bad things to happen to me, but it would create the possibility of good things to happen too. Now, in the end, I didn’t get fired. My entire narrative, what I thought was going on, was totally wrong, as it often is when we’re younger. But for me, that was a really formative experience because I realized that I was willing to risk some amount of personal loss for the principles that I believed in. And I think until you ever—until you’re faced with that situation, you never really know what you stand for. Everyone thinks they’d be bold, but sometimes we’re not, right?

Melina Palmer: And if you hadn’t like gone through the process of thinking through the what-ifs, you know, doing them—those counterfactuals and pre-factual thinking on that—like, you in the moment would be so quick to succumb and think you’re going to deal with it later. And that’s what so many people do, right? Like they say, “Well, I guess I’ll just say I’m going to do this thing or, I’ll try to work it out.” And it’s just the one time, right? It’s like, we’ll just go ahead and deal with that now. But, as there are far too many examples that you share in the book of like that one just like opening the door, like the little crack ruins everything essentially. And so, as we kind of go through here, I think I’m going to follow a bit of the path of, as we go on the book, of like really doom and gloom us up here. Like, let’s set the stage of how bad things are slash can be so we can build it back up.

The Mystery of the Golden Goose and Short-Term Extraction

Eric Ries: I felt so bad writing the book because I was like, you know, part one, for those that don’t know, spoiler alert. Part one of the book is called “The Shape of the Abyss.” So I wasn’t—I was like, I’m not going to pull my punches. And I was like, we put the word corruption, like, right in the title. So, you know, we gotta—we gotta—we gotta call it what it is. We’re not gonna shy away from saying that.

Melina Palmer: Yeah, yeah.

Eric Ries: For hundreds of years, like, I call this the mystery of the golden goose. Okay? For hundreds of years we have this pattern that happens. I tell the story of Robert Owen, the great Robert Owen, very famous entrepreneur who took over a failing textile mill in Scotland in 1800. Okay. But his story is like crazy contemporary and like—private equity hadn’t been invented yet, but the story is very familiar to anyone who’s been around our modern economy. This mill was bankrupt when he took it over. Working conditions were atrocious, quality was bad. And he had this idea, he thought, you know, if—if we’re willing to invest so much money in machinery, in machines, to improve a factory, how much more return could we get if we invested in what he called the vital machines, AKA the human beings. What if we treated them well?

So he was very far ahead of his time. He imposed like a 10-hour workday when 12 hours, 14 hours was absolutely the norm. He banned child labor. He built corporate housing for his workers, he brought in free healthcare. He had an old-age pension scheme. He built schools on site. Like, he was very paternalistic by modern standards, but by the standards of 1800 where there was no welfare state, this was a very enlightened view of what business could be. As a result, the mill thrived. It was called New Lanark Mill. It became one of the most profitable in the country. It had the highest quality. He did all the things you’d want. Like there’d be a recession—everyone else would lay off their craftspeople. He wouldn’t lay people off. So whenever the recession would end, he would be in position to boom.

So he assumed—he made this like 3-part plan that is so common. Like, it’s the same. You see it with mission-driven founders to this day. And one of the three parts is not true. It’s not like the others. So part one, he thought that, okay, if I do these reforms, it will make the company way more profitable. He was an industrialist. He was not some do-gooder. Like he was trying to make money and he made a lot of it. Check. Part one, check. He thought that, if he can show people that these ideas have a return on investment, he could make the financial case that this was like a breakthrough, like a technology that could make companies more profitable. Check. Therefore, since capitalism is about the market rewarding productivity, efficiency as a competitive system that rewards value creation, therefore, his fellow industrialists would embrace him as a hero. His ideas would spread to other factories. And more importantly, anybody who refused to adopt these techniques would actually be adding to the data that the old ways are outdated and can be replaced.

And here he was, oh so wrong. He was shocked, like utterly stunned that over and over again his own investors were mad. He’s making them all this money, and they’re like, “But why are you wasting so much money on the employees? Couldn’t we make more money if we screwed them over?” And he wants—he’d have to be like, “You don’t seem to get it. That’s the engine by which we create the money.” And so his investors tried to fire him. He had to buy out his first set of investors. The second set of investors that he like specifically chose because they understood this idea started to be like, “Why are we doing all this education stuff for employees?” Just like—they couldn’t tolerate it and they tried to fire him a second time. He brought in the third set of investors to buy out the second set of investors.

And each time, this is the pattern we see over and over again. I tell you stories like this. In every decade for the last 200 years, we invent this enlightened capitalism. We assume the market will reward it and then we’re fighting this constant battle for permission to do what is making a lot of money. And eventually, the third set of investors finally got him out, ended his reforms, reverted back to normal practices, and the mill lost the thing that made it special. You see that over and over and over and over again. So call it the mystery of the golden goose. Because this is like the old parable: we have the goose that lays the golden egg, why do we butcher it? If we’re going to build organizations that can last, if we’re going to build organizations that can stay true to the things we care about, we have to figure out why this happens. And not to be all doom and gloom—since this has been going on for such a long time, people sometimes say to me, “Well, I guess it’s inevitable. Nothing you can do about it.” But if it’s inevitable—this is kind of the second mystery of the book—if it’s inevitable, why are there exceptions?

Melina Palmer: And some amazing ones that are surviving to this day. Let’s talk a little bit about the forces at play and some of the, I guess what’s driving that feeling of inevitability and how, you know, you can leverage it. I love how you talk about that, you know, financial gravity and being able to, you know, relate that in. So like, why—I mean, I know we don’t, we can’t fully get everything that’s going on of like, why are people so greedy and awful? I guess it’s like the big piece of—

Eric Ries: Oh yeah, welcome to human nature. Have you met it? Like, for sure.

Melina Palmer: I know, so, but it’s like mind-boggling as you read them. And I guess if we can quickly also give the one of the examples that has to do with like, I guess even just showing in like current rules and some of the stuff that’s so shocking that people have in their agreements of like, do you sell to the worst possible person for the dollar? Like if we can use that example, sure, as we talk a bit about that gravity.

Financial Gravity and the Trap of Shareholder Primacy

Eric Ries: Yeah, yeah, yeah, yeah. You’re probably talking about—thinking of Vectura Corporation. Yeah, yeah, yeah, that—so, okay, so financial gravity, first of all, what is it? Financial gravity is this force. I really think it’s more useful you think of it as a physical force that grabs organizations and pulls them down into mediocrity. The book explains the rules of how it works, the psychology, the research we have that demonstrate that this is a real phenomenon, not just some random theory. And so we’ve had this kind of hundreds of years history of this happening, where this force is getting stronger because we financialized everything. We are in the age of financialization; the financial sector is stronger and bigger relative to the real economy than it’s ever been.

And at the same time, though, we have been indoctrinating a whole generation of leaders, board members, managers, investors into this idea that is called shareholder primacy—a set of “best practices” that is actually intentionally designed to create weak companies. So we’re like—we’re living in an age of institutional collapse. We’re looking left, we look right. We’re like, “Gosh, all the bridges and buildings and everything have all collapsed over here and over there. Like, why did that happen?” People will be like, “Well, gravity, I guess.” It’s like, well, but that—that bridge didn’t collapse and—there’s still gravity over there, right? So I think we have to, like, start to think. If I was an engineer and we were investigating a real bridge collapse, and you said, “Why did the bridge collapse?” I’m like, “Well, gravity.” You’re like, “That sucks, man. That’s not an answer. Like, yeah, but can’t you say something more than that? I mean, it’s not wrong. That is true. That is why it fell down. But can you—can you say more?” We go and we look over and we’re like, “Oh, look at the metal bolts. They’re all corroded.” Maybe that’s why people say, “Oh, corroded bolts. I guess there’s nothing we can do.” What are you talking about? Why don’t we build the next bridge with stainless steel?

And so the book is really about, like, what is the equivalent of stainless steel for organizations. So we have to really grapple with the legal framework that we live in—this idea that’s called shareholder primacy. And the idea of shareholder primacy is that an organization is not—naive founder that you are—an organization is not a vital, beautiful, living thing. Oh, no. It is just a financial instrument for the enrichment of its shareholder, of its shareholders. That’s the only thing it’s meant to do, and that is its legal purpose. Most founders are so naive, they don’t even know that this is their legal purpose. Or if they do, they’ve been taught that this is like a pillar of capitalism. This is just what it means to live in a market economy. It’s so wrong. These best practices, most of them are younger than the trees in your local park, and they lead to really absurd outcomes.

Like, I always ask founders this exercise. I say, “I want you to imagine for me the most evil company in the world. Who do you think that is?” And they’ll be like, “Ah, you know, I think it’s this company or that company.” It’s funny to see what companies get named. But I just for the sake of the hypothetical, I’ll be like, “Let’s—let’s assume it’s Philip Morris.” Because my dad’s a pulmonologist, so I was raised with cigarettes are the ultimate evil. I was like, cigarettes are bad. We sell cigarettes to children. That’s super evil. I would never want to work for a company like that. So imagine that Philip Morris comes to you and they say, “Hey, I would like to buy your company from you for $1 more per share than it’s currently worth. Would you like to sell? Sound good to you? Any interest?”

Melina Palmer: No, no.

Eric Ries: Every—every normal person is like, “Absolutely not. Of course not.” And it’s like, oh—I’m like, oh. Did you know that according to the legal documents, the charter that you yourself legally signed, you have a fiduciary duty to say yes? “No, that can’t be right.” I’m like, “Call your lawyer and then call me back.” And they call me back and they’re like, “I feel so betrayed. He said that’s a best practice. He’s doing me a favor.” Yeah, this is the disconnect that we have to grapple with.

So sometimes though, occasionally, I’ll get a more recalcitrant founder who will say to me, “Eric, you’re exaggerating. That might be true, but that’s an exaggeration.” So this is my favorite story for curing people of the exaggeration claim. There’s this company in the UK called Vectura. They were a university spin-out from the University of Bath and they made inhaler therapeutics like for asthma and COPD. Healthcare company, a very successful technology, worked really well. Company went public. It was a public company on the London Stock Exchange. And one day the actual Philip Morris tried to buy them. I only know this story because I was using this exact hypothetical so long, it occurred to me one day to like—I should start a search if this has ever actually happened. If it’s—oh, it’s no hypothetical. It’s actually happened once.

So, Vectura was targeted for acquisition by Philip Morris. Philip Morris offered to buy the company for 165 pence per share. They had a private equity company that offered to buy the company for 155 pence per share. So the board had three clear, simple options. Option A, do nothing. There’s no problem to be solved. You’re like—this is what’s so interesting about all this M&A and this obsession with financial engineering and transactions. Oftentimes we’re not fixing a problem, we’re just doing something to make money. So the board could have just said, “No, thank you. We’re a perfectly fine independent company going fine.” Option A. Option B, sell to private equity for 155 pence, or Option C, sell to Vectura—sell to Philip Morris for 165 pence.

Now, every normal person who looked at this was like, “We can’t sell a healthcare company to Philip Morris, like Big Tobacco. What are you talking about? This is crazy.” The public was outraged. The British Thoracic Society like begged them to say no. The board had, I think, like two meetings about it, and then they decided to vote unanimously to say yes, citing their fiduciary duty to shareholders. It’s like so crazy what happened. Philip Morris bought the company for £1.1 billion and within three years had utterly destroyed it. They took a $650 million write-down, if I remember right, and they wound up selling the assets for piece parts because it just—it was a completely illogical act of value destruction in the first place. So this when people tell me I exaggerated, I started to be like, “Yeah, you’re right, I did exaggerate. I said it was a dollar per share. In real life, it was closer to 15 cents.” This is what passes for governance best practice today. And if founders think they’re immune from this, they have another thing coming, unless they make the structural changes needed to ward this off.

Melina Palmer: Yes. And so let’s talk about some—some of those. And as you’ve alluded to here, there are so many examples in the abyss, in the dark side in the book, that people can be learning more and understanding these different aspects and angles of what can go wrong and things to be looking out for, so that when we get to like—and this is how you fight it, right? And these are some things you can do. A lot of it is kind of just like stand on convictions of what you know to be right and don’t believe that, you know, when someone says, “Oh yeah, we’ll do that,” that it’s in the document or that the lawyers are working for you and not just the company, right? Like really great advice and things in there. But so, can you share, you know, of course, in your much better words about some of the advice and thoughts to be the bridge that stands, right, to—to fight that?

The Paths of Ethos and Structural Integrity

Eric Ries: Yeah, exactly. So I’ll give the answer, like, in—in two broad categories of things, and then we can get into some of the specifics. But I urge people to, like, study the details here. Don’t just, you know, just like—you didn’t learn accounting from some guy on a podcast, like, you need to study this stuff. It is important to get the details right. And every company is different, so make sure, you know, I’m not—I’m not your lawyer either. Okay. So be careful.

Melina Palmer: Yeah.

Eric Ries: I would say, broadly speaking, there’s two categories of things we have to study to do this. There’s the first, what I call the path of ethos. Ethos, meaning the ancient Greek word for character. Like, how do we build a high-character organization that has a set of values, a mission that it’s committed to, that its culture, its business model, its leadership structure are all aligned around? And that as managers and leaders, that’s the stuff that we have relatively more control over day-to-day. Because at the end of the day, this is a human problem. Like, most of the important decisions that cause an organization either to be strong or weak have to do with, like, what does an individual employee do? You know, if someone calls into customer service with a problem, and, like, technically, by the, like, fine print of our terms of service, we don’t have to solve this problem, but we know we really should—well, do they do—do they take the extra time to fix the problem, or do we just say, “Sorry, you know, we’re going to deny your claim because we can”? These are the little decisions that really matter. So that’s ethos.

Then we have the path of integrity. This is a little bit more tricky because for a human, if I say that you’re a person of high integrity, what I mean is, if you make me a promise, you will keep it. So I can trust what you say. But we also have this alternate interpretation or connotation for integrity, meaning structural integrity, like a bridge that doesn’t fall apart. For organizations, these two things are the same. Only a company that is independently strong, that can resist outside pressure, can ever be trusted to make or keep a promise. An individual promise from an individual person at the company is worthless, even if it’s the CEO, even if they’re the owner, even if—because they can be replaced. Humans are finite and fragile, but organizations are immortal; they can live for a really long time. So if we want to have strong companies, we have to do things like write the mission directly into the corporate charter.

Like, one of the big issues in the book is the divergence in most organizations between the mission statement—I hate mission statements. Mission is not the same as mission statement. Yeah, mission statement: “We are this great company that’s trying to do this good stuff in the world to do whatever,” and the legal purpose, which is like, actually maximize shareholder value. So this divergence between what the company claims to be doing and what it’s actually doing causes tremendous problems. And people sometimes call this hypocrisy or mission drift or whatever. Like, let’s just be real. These people are lying to you. If you’re a founder and you’re—or you’re a leader and you’re telling people, “This is our mission,” but when they look in your charter it says something different, then you’re not being honest about what’s going to happen in the future. You are building an engine for betrayal. You shouldn’t be proud of that.

The good news is—truly the good news, though—is that we actually have a lot of data about the structures that can resist this phenomenon, and most leaders have never heard of them, but that doesn’t make them new. This is, I think, the hardest thing for a lot of people to really understand is that there is this vast body of knowledge that has been hidden from you. Why? It’s a bit of an open secret. Like, why? So, just like to give one example, the German optics company Zeiss makes the lenses in my—in almost everybody’s glasses. They’ve had this unusual structure that I talk about in the book since 1885. So I would say just because it’s new to you does not make it new.

So the good news is we have so much data on these structures that we have a data set for how those companies perform. And one of the most striking findings in that research is that companies that have a particular structure called the industrial foundation structure are six times more likely to live to year 50 compared to conventional structures. We’re talking about 10% versus 60% probability. This is not a marginal advantage; it’s actually a huge deal. And yet most founders, most boards, most leaders never even consider—consider these possibilities.

Melina Palmer: Which, again, of course want to be changing some of that. I know you’re sharing a little bit here. Can you give an example of—you have a couple in the book of some of the companies that are, you know, fighting the good fight even today, and like, continuing to kind of hold up, and like, some examples of what you’ve seen actually like, get written into documents or the fact it’s—it’s fascinating to just to be able to read where it’s one thing, like you’re saying, to do the, like, kind of in that secondary research, which you, of course, have plenty of that as well. But there are so many examples where it’s like, guys, I was in the room for this. Like, I—I had the conversation before I sat in the thing. I saw what happened afterward. Like, it’s so much firsthand accounting that—

Eric Ries: I’ve really definitely been in the trenches. I almost saw myself as a bit like a war correspondent in this book. Like, yeah, I get to the front of this war. This is my—I’m returned from the front with my report on how the war is going. Bad news: we’re getting our butts kicked. Okay, the war is not going—we live in dark times. Have you noticed? Like, it’s dark. And this is part of the reason why we’re getting our butts kicked. But the good news is, like, we know how to fight this battle and win it if we have the courage to grab the tools and do it.

So, yeah, I mean, of the contemporary companies in the book, of course, the one that is most in the news right now is Anthropic. And that’s one of those companies where I was in the room and was around when the company was started. Again, I take no credit for their incredible success. For the record, credit goes to Dario and Daniela and the whole team, not to me. But part of the reason they’ve had this success is because they have followed this pattern. They were—they were able to build a structure that has given them the courage to resist a lot of the pressures that their competitors have fallen into. And, I’m very proud of them for that.

There’s a bunch of companies of a variety of scales and sizes that have found a way to do this, that have this unusual structure. So, like, you know, we talk about Novo Nordisk. Novo Nordisk adopted this structure 100 years ago. It was put together by a Nobel laureate and his wife. They figured this out a long time ago, and it’s worked really well. I tell a story in the book about a time when the non-profit trustees of Novo Nordisk had to intervene to stop one of these for-profit betrayals like we’ve been talking about. And in doing so, they created more than $500 billion of shareholder value. So I just keep emphasizing how profitable this approach is on top of all of its other many, many benefits.

There’s a story in the book of a company called Tony’s Chocolonely. There’s a lot of chocolate in this book for some reason, I’m not sure why.

Melina Palmer: It might have been fueling a lot of the writing process.

Eric Ries: Yeah, I must have been like, really into—anyway, so, really into chocolate. Anyway, so Tony’s Chocolonely started by a guy who tried to get himself arrested for eating chocolate because he was like, “If there’s so much child labor in the cacao supply chain and that child labor, that child slavery really is illegal, then why isn’t it illegal to eat chocolate?” But of course, the authorities refused to prosecute him despite his request that they arrest him. And so he built this company that builds—that makes extraordinarily tasty chocolate. Now that I’ve mentioned it, you’re going to start seeing it in stores all over the place. They’re growing a lot in the US right now, but their mission is not just to make chocolate. Their mission is to eradicate child slavery in the supply chain. And they’ve done a lot of really cool things.

They have again, what Anthropic—it’s like you’re like, “Wait a minute, what does Anthropic, Novo Nordisk, and Tony’s Chocolonely have in common?” They all have this two-tiered entity governance structure that just the data shows produces much more stable, much more long-term outcomes. So that’s just like one example of the kind of thing we can do if we want to resist this financial gravity.

Melina Palmer: Yeah, absolutely. And I love how you talk about, too, just the idea that, you know, hearing about gravity can make it feel like, “Well, we’re stuck, too bad.” But like understanding—my dad was a pilot, so understanding the laws of gravity allowing us to, to break through it, right? We have to know what’s there and understand the force to get to the other side.

Demystifying the Infrastructure of Our World

Melina Palmer: And so with that kind of in mind, and as we go to close out the conversation, I love that you’ve created, you know, your own stock exchange. And my very favorite piece actually, and I will badly paraphrase kind of the like what I see in the story, but so many people fighting against you and saying, “It can’t be done. Why would you even ask that? It’s not possible. It’s the hardest thing. No, no way. It could never happen,” whatever. And you finally get to the right person, right? It’s like you’ve opened enough doors and like somebody says yes, and you keep like—you’re like Sisyphus seeing your way up the hill.

Eric Ries: Oh my God. Yeah. Yeah, that’s exactly how it felt. So true.

Melina Palmer: Oh, you get to the top of the mountain. And he’s like, “Oh, it’s form 62 AB. It’s ABAB, up, down, up, down. Like, BA start or whatever,” right?

Eric Ries: Like, yeah, yeah, yeah. I wish—I wish it was—wish it got unlimited lives. That’d be super useful.

Melina Palmer: But, like, it’s—oh, it’s just a standard government form to start your own stock exchange. Like, it’s actually like—it’s not an easy form.

Eric Ries: It’s funny. It’s funny you say the ABAB thing because it’s actually called Form 1. So the guy was like, “You have to fill out the Form 1 applicant.” I was just like—I couldn’t parse the sentence. I was like, “What are you talking about, Form 1?” And he was like, “You understand how government forms are all numbered?” I’m like, “Huh? Huh?” He’s like, “This is literally SEC form number 001.”

Melina Palmer: It’s legitimately the first form.

Eric Ries: “What are you talking about?” He’s like, “Look, it’s a complicated form. It will take you hundreds of pages to fill it out. This is not easy, but it’s not magic. It’s not some kind of black art. It’s a—it’s a form.” And that just blew my mind, like, how many things in our modern world we mystify that are just like, you know, because, like, people treated building a new stock exchange like I was proposing building a new moon. You know, like it’s like a double, double mistake. First of all, we already got one—like they say in Monty Python, like, “We already got one!” What do we need another one for, right? It’s like, it doesn’t make sense. But secondly, like, it’s a celestial object. Who do you think you are to do this?

And I really think, like, one of the biggest problems we have in our generation is we have forgotten that all this infrastructure that we take for granted that runs our world, it was made by somebody. It was made mostly by our grandparents.

Melina Palmer: Yeah, it was made by the Wizard of Oz, really.

Eric Ries: Yeah, yeah, exactly. It’s just like, you know, I don’t know if you remember that there’s an episode in the original Star Trek where, like, they land on this planet that, like, seems to be a paradise and people have, like, no technology or anything. And then it turns out that there’s a whole, like, subterranean world of robots and machines that are making this thing a utopia. And the machines are breaking down, and nobody alive even knows they exist anymore, let alone how to repair them.

Melina Palmer: Yeah.

Eric Ries: And I just feel like that’s—our grandparents built us a utopia like that. And we have just been like, not only not learning how to maintain the machinery, make new machinery, but like almost hacking away at the foundations and being like, “Look, we chopped up some of the floorboards for firewood and nothing bad happened. I guess that’s a success.”

And that’s really like going back to the theme of corruption. Today when I use—I say that there’s corruption, people have a very narrow view of what that word means. It’s like, “Oh, I’m talking about embezzlement or fraud,” the kind of thing that you think of as an illegal act. And even then, we’re like legalizing more and more and more of these acts, like every day. Insider trading is now basically legal. Gambling is legal. All kinds of things that used to be illegal are legal. Stock buybacks used to be illegal. Now they’re like considered a perfectly normal tool of corporate financial manipulation.

Anyway, the word corruption, its original sense was much broader. It was much more like corrosion. They share a common Latin root. It was more like the rust on the joints. It was more like a thing that breaks completely the moral logic of a system. And I think this is the real thing we have to grapple with now. It’s like we are allowing people, we are encouraging people, we are training people to make money by corruption instead of by building. And so those of us who share the builder’s intuition—the idea that the best way to make money is to create more value than you capture—we have to start to stand up and say, “This is what we believe.” And we’re not going to pretend that no one really thinks these other ways of making money are good. Okay? We’re all supposed to pretend because people are really rich, but nobody really thinks it. So, like, let’s just stop pretending and just say, “No, we don’t think that is the way to go. We want to build organizations that are designed structurally to resist this corruption.”

And if we start to do that, every technique in this book, I promise, is something you can do today. Some of them are as easy as you fill out a two-page form. Okay, I filed a multi-hundred-page form. This is the two-page form. Very easy to do. There’s stuff in the book that if you haven’t done—if you haven’t filled out this form, you’re crazy, okay? I don’t know why it’s not considered completely standard to do this, but a lot of companies have not done it. Obviously, the vast majority have not done it. But—and some of the things are more difficult. You want to be like Novo Nordisk, you want to be like Anthropic? Well, you want to be a great company, you have to do some—you have to do some hard work. Sorry, too bad. That’s how it goes.

But the thing that I think people really don’t understand is if we each just do the things that we can do within our own power, this has more of an effect than just for us to have to prosper and to live our values. We start to stitch together a whole new financial system that has its own different gravity. A gravity that transmits a different set of values—a set of values aligned with human flourishing. And if we accomplish that, who knows, the world our grandkids might inherit from us could be pretty cool.

Melina Palmer: Oh, yeah, I—like I said, we—we have to go through the, you know, dark forest to come out on the other side and to, you know, see what’s really happening here. But I do appreciate that, you know, we’ve got two other parts of the book that are kind of talking about how to be in this, like, better world.

Eric Ries: Yes, we got to get to the how.

Melina Palmer: You got to keep going. It’s, you know, the only way out is through. And, you know, we’re here now, but it’s not the end. If we all are willing to, you know, stand up and do something right, there’s a little bit that we can be doing. Even if you’re not a founder, if you’re not at the helm of one of these companies, there are still things to be done and really great tips for that in the book, and for the founders out there, please do talk to Eric. Get on his stock exchange. Like, do the things. Fix the world. Help us all.

Eric Ries: Thank you for saying that. I appreciate it.

Melina Palmer: Yes. Well, for everyone, we’ll have links in the show notes, of course, but for everyone who’s so excited to get their copies of the book, to share with themselves and all of their friends and to follow you and learn more and all of that, what are their best paths to do?

Eric Ries: So the easiest thing to do is go to Incorruptible.co. We have a whole website where we’ve tried to create every conceivable bonus that you might want to have as an incentive to come join the mailing list, to pre-order the book, to do all the usual things. So implementation guides, readers’ guides—like to see this from a founder perspective, from an employee perspective, from a—if you’re like interviewing for jobs perspective, if you’re a board member, like, really try to broaden out. Here’s how to think about these ideas in your domain. For people who want to implement, we have an implementation guide and an advanced implementation guide. We have a secret chapter that got cut from the original manuscript and a bunch of other cool things. So please check that out.

The thing I’m most proud of, though, on the website is not only can you find links to all the major retailers that are selling the book, which is all of them, you can find links to—I think we’re up to, like, 100 local independent bookstores around the country who are carrying the book. So if you want to support me, of course, please buy the book. But if you want to support your own community, maybe buy the book from a local independent bookstore. Those are really important pillars of your local community. They’re under tremendous pressure now from Amazon and other forces. So, that’s another way to just call them up and say, “Hey, I want 10 copies to give away to my friends.”

Melina Palmer: Yeah, absolutely.

Eric Ries: Then you’ll be my favorite person. But you’ll also be their favorite person. So you’ll be making two people really happy with one simple act and the—

Melina Palmer: You know, nine people you’re giving copies to. So, like, we were just building up—

Eric Ries: Such a great point. Such a great point.

Melina Palmer: So many amazing, happy people. We’re changing the world, you know, ten books at a time. So I love it. Thanks, Eric, for joining me today. It was really delightful to chat with you.

Eric Ries: Yeah, really great chat. Thanks a lot.

Closing Thoughts and Changing the System

Melina Palmer: Thank you again to Eric Ries for joining me on the show today. What got your brain buzzing in today’s conversation? For me, I think it’s seeing how many things we tend to accept as just the way business works when they were actually just designed by people, and not that long ago, so they don’t have to be the rules forever. The idea of financial gravity really stuck with me for that reason. Because Eric’s point isn’t that organizations are doomed or that every leader eventually becomes corrupt. It’s that there are forces acting on companies all the time—incentives, expectations and legal structures, investor pressure. If you don’t intentionally account for those forces, they can slowly pull organizations away from the mission they originally set out to serve and the people and the greater planet that really matters beyond that, right?

The example that Eric shared about the board approving a deal to sell to the worst company you can think of for effectively $0.15 more per share is a perfect example of this. When you hear it from the outside, and I’m sure many employees on the inside, it sounds absurd. A company gets pushed toward a decision that ultimately destroys it for pennies. But of course in the room, nobody’s saying, “Let’s destroy the company for 15 cents.” They’re responding to the incentives and pressures the system is telling them matter most. Which is why this isn’t a one-off example; it happens over and over and over and over. And Eric has so many examples in the book to really hopefully drive the point home so it can start to change.

And that’s why understanding the system itself is so important. And I think it’s also why this conversation felt a lot more hopeful to me than cynical doom and gloom. It’s because Eric isn’t just criticizing the current system; he is actively building something different with the Long-Term Stock Exchange. We’ve talked extensively today about how systems and incentives shape behavior. So if the behavior isn’t what we want as a society, change the system and the incentives. That has such a parallel for so many other things in life and business as well. But he and his team are doing so much work to create new structures that reward long-term thinking instead of constant short-term extraction. And knowing that value is more—more than just money, especially in today’s hands versus tomorrow’s.

If enough leaders and founders, investors, employees and consumers start choosing structures that reinforce long-term thinking and mission alignment instead of rewarding the opposite, eventually the old way will hopefully start to lose its grip. Doesn’t happen overnight, of course, but it also doesn’t happen unless people understand the rules well enough to decide they want to build and buy and exist and employ differently. And that’s one reason I think this is a really important book and conversation to share with as many people as you can. Especially people who are building companies and leading teams, sitting on boards or making decisions that shape the future for other humans. So please consider sharing this episode, maybe even a copy of Incorruptible with them. We can all do our little part to create a better future. And if you are building a company, consider learning more about that Long-Term Stock Exchange, connecting with Eric—you know there are links in the show notes to make it so that it’s easy to do that as we close out the show.

I would love to know what stuck with you most from today’s episode. Whatever it is, come share it with me on social media. You’re going to find me as the Brainy Biz pretty much everywhere, and as Melina Palmer on LinkedIn. There are links in the show notes to make it easy, as well as links to my top related past episodes and books, including Incorruptible, ways to get in touch and more. It’s all waiting for you in the app you’re listening to and at thebrainybusiness.com/580 and thank you again to Eric Ries for joining me on the show today. It was a delight to chat with and learn from you. Join me next time for another brainy episode of the Brainy Business Podcast. It’s going to be a lot of fun. You don’t want to miss it. Until then, thanks again for listening and learning with me, and remember to be thoughtful.

Announcer: Thank you for listening to the Brainy Business Podcast. Melina offers virtual strategy sessions, workshops, and other services to help businesses be more brain friendly. For more free resources, visit thebrainybusiness.com.