#168 - Why Good Companies Go Bad: Eric Ries

Speaker A: Welcome to the Outthinkers podcast. Plug into fascinating minds and breakthrough ideas that are transforming industries and the world. I'm your host, Kyan Krippendorf, founder of Outthinker, a global ecosystem comprised of strategy and transformation officers who are shaping the future of business. If this describes you, join us@outthinker.com this episode is sponsored by LHH. A beautiful working World starts with leaders who inspire and elevate others. LHH Executive Solutions partners with boards and senior teams to ident and support executives who drive meaningful transformation. Because when leadership thrives, organizations thrive. Learn more@lhh.com LH A beautiful working World now let's dive into this week's episode with Eric Rees.

Speaker B: They tell me I have mission statement. I hate the word mission statement phrase. Mission statement. So you have a mission statement.

Speaker A: Oh, good.

Speaker B: That's like saying, like, I have a miss. My immersion statement is to be an Olympic athlete. You're like, oh, really? It is. What are you doing? I eat Doritos every day. You know, I watch TV tomorrow, but I'm going to be like, that's my mission statement? No. But my actual behavior, my habits, and my train of thought is not aligned with this mission statement. If you say you have a mission statement to build a great product, to care about quality, to take care of your customers, but your legal purpose and your corporate structure says to maximize shareholder value, you're lying. I'm sorry? You're lying to your customers, you're lying to employees, you're lying to yourself.

Speaker A: What if the way that we've been running companies for the last 50 years isn't just inefficient, but fundamentally corrupt? Not corrupt in the dramatic headline grabbing sense, but in the older, quieter sense of the word, a slow corrosion of the bonds that make an organization strong, trusted, and worth building in the first place. Eric Ries is the author of the landmark the Lean Startup book, one of the most influential business books of the last two decades. And now he's back, which what may be his most important work yet. I would say that this is the most important book written in business in the last two to three years. His new book, Incorruptible why Good Companies Go Bad and How Great Companies Stay Great, makes the case that shareholder primacy, the idea that a company's sole purpose is to enrich its investors, is not a law of nature. It's a relatively recent invention, one that has quietly reshaped corporate governance, corrupted our definition of profit, and hollowed out the trust that makes great companies great. And crucially, he argues, you don't need a revolution to fix it. In this conversation, Eric and I dig into how shareholder primacy took hold without a single vote ever being cast. Why the distinction between citizens and tourists in corporate governance changes everything, and what most enduring companies in the world, from Costco to Patagonia to Madragon, uh, have quietly been doing differently all along. We'll also explore the practical mechanisms any founder or leader can use today to build what Eric calls a government fortress. Structural integrity that protects the mission from the forces that will inevitably try to erode it. If you're building something you want to last or leading something worth protecting, this conversation will give you a completely new lens for thinking about what your organization is actually for.

Speaker C: Eric, it is so great to have you here with us. I know that you are very busy, and honestly, I think that your latest book is the most important business book I've read in the last few years. And I'm thrilled to be here. Thank you. And thank you for taking some time to unpack it for us. I want to open with two questions that I ask all of our guests. The, uh, first one is just to get us to know you a little bit personally, may have nothing at all to do with your work at all. Complete this sentence for me. If you really know me, you know

Speaker B: that if you really knew me, you would know that my main job, like, the thing that's most important to me in my life is to be a father. I got three young kids, so that's the inner reality of my life. All this other stuff is just the, uh, you know, the thing I do in the hopes of that one day they'll think, you know, that I made an attempt for that they should inherit a better world from me.

Speaker C: How old are your kids?

Speaker B: They are 12, 9, and 3.

Speaker A: Wow.

Speaker C: Mine are 20, 18, and 15. And same thing. Uh, of the last 20 years, it's been, you know, I think Gary Vee said, like, you got your steak, and then you've got your vegetables and potatoes on the side. My steak has been my kids. And all this other stuff is just the stuff on the side. That's awesome. Second question. And I get different answers to this no matter who I ask. And we've had, like, the greatest of greatest strategic authorities, and no one gives me the same answer. So whatever you say is right. Uh, what's your definition of strategy? Really?

Speaker B: Okay, I'll explain why that's a really funny question. Uh, in a second. Okay. So for me, strategy is the bridge, the connective. Tissue between vision, where we're going, that sense of destination, and the actual on the ground business model and operating theater of the company. And people hear a bridge and they think, oh, that's the thing you walk over. Which it is. But what defines a bridge is all the area that it doesn't cover. Right. The bridge is only a bridge because it spans a massive canyon of things that you're not going to do, even though, of course you could do them. M. They're conceivable that you could do them in your operating theater. But strategy is that narrow slice of the universe that you're prepared to make yours in defense of your mission, vision and value.

Speaker C: I love that metaphor. I think. I mean, we're going to go into some of your other metaphors as well, but I love the metaphor. Yeah, the bridge. Like you don't want to step off the bridge.

Speaker B: Well, you can.

Speaker C: Which tells you. Yeah, you can. That's true. That's true. But it clarifies where you step and where you don't step, where you've chosen to step and not step. Yeah, that's great. Awesome. All right. Okay. I've got more questions that we have time to cover, so we'll just kind of, kind of jump in. As I said before, I think this is one of the most important books that I have read in recent years in the realm of business. And, uh, the central tension here is that we have somehow built a system that prioritizes investors over other stakeholders, customers, employees, society, who you could argue are more invested in the longevity of a company than investors. They're switching costs are really high. So my first question is just like, talk to us about how did we get lost? How did the system evolve such that investors became the primary, uh, stakeholder?

Speaker B: Yeah, yeah. This idea in academic circles is called shareholder primacy. And the history is, to me, really fascinating because I was taught that this is just what capitalism is all about. It's right there in the name, you know, you. We all are beholden or the servants of the owners of capital, but that's really not true. I mean, you can debate what capitalism is all about, but this specific idea that, that a, uh, for profit company's primary purpose is to enrich its shareholders, that is a very new idea on the scene. So if you look at the writing, on the vast majority of time there has been joint stock corporations on this earth, it was pretty much seen as obvious that they should be commissioned only to do something specific. So, for example, in the 19th century, if you wanted to incorporate a Company, you had to get permission to form it, form your state legislature, which was a bit cumbersome of a process. But in order to do that you had to make the case that you being given this corporate charter was serving the public interest. And the way you did that was you said, look, yes we are going to make money. We are a for profit company, but we're going to make money by operating a railroad or a canal that connects point A to point B. And that's really useful. We're going to run a fire insurance scheme, uh, that's going to help us as a community defray risk like you were required to state the public benefit. And over the course of the 19th century, the United States outgrew this system because state legislatures were not really a great spot. That's not really the right venue for this. As always there was all kinds of issues of corruption and cronyism and it was a big problem. So reformers fought for this idea that they called m general incorporation, which was the idea that anyone should be allowed to form a company pretty much for any reason without needing special permission. It was very controversial. Like this had to be democratically battled state by state by state. But over the course of the 19th century States adopted this idea. Some states paired it with the new idea of limited liability for investors. So they kind of went together. And anyway, by 1899, uh, which is the key date because that's when Delaware adopted this idea, we had moved into the 20th century with the idea that companies could be incorporated for any specific purpose. But keep in mind, so seen as obvious in those days that you would have to incorporate for a specific purpose. And again, if you'd said, I'm just trying to make money for my shareholders, people would have been like, that's a, that's not a really a good reason to form a company. But over the course of the 20th century this became more and more of a problem. First of all, lawyers started encouraging companies to just incorporate for, quote, any lawful act or activity, just keep it open ended, which was fine because you know, in those days still people had the idea that a company was for a thing. But over time courts were being asked more and more frequently to determine what was valid, like what activities were valid or not valid. Because we didn't have a good legislative guide here, the courts wound up having to make a lot of these decisions. And so starting in the 60s and 70s, a very small group of, uh, legal scholars, judges, board members, it was like a first pretty small group, decided that they would try to make the pitch that companies actually would be, life would be simpler for everybody, be easier to regulate, it would be easier to run companies, it would be easier to invest in companies. If we just said that, look, companies are basically agents of their shareholders. They have one and only one responsibility to maximize returns for the shareholders. At the idea of shareholder primacy. This idea was very popular in elite circles starting in the 70s. It really took hold in the 80s. Most of the key court cases that established this rule date to the 1980s in Delaware. What's interesting is, notice I haven't said the word legislature because legislators were never asked to weigh in, um, on this. The public was never asked to weigh on. This was done purely through a series of judicial actions and what's called a normative consensus among board members. So because the governance class of artists decided this was so, it became so to the point now that business schools teach this as just a natural law. This is just how things are. And this idea has spread from not just for profit companies in the US but spread all over the world. And it's spread into even nonprofits and universities and all kinds of organizations. Now, you'll hear this more and more commonly cited. You know, I was listening to a controversy involving a nonprofit just the other day, an academic nonprofit with a really, like, very obscure mission. And they were having a big fight, and the president of the nonprofit was like, look, we have a fiduciary duty to do this thing because it's what, uh, it's ultimately what our donors want, and we won't be able to raise money anymore. It's just so like, the idea that having a fiduciary duty to the growth and financial, like, rules of the organization, to the preferences of donors or investors, that's become really entrenched in our society. And of course, it's been around long enough that we can see how malign its influence has been.

Speaker C: I think what really one. One thing. You've got great metaphors throughout the book, but one that really struck me, that maybe I think illustrates here is this distinction between citizens and tourists. So can you talk to us a little bit about that metaphor as applied here?

Speaker B: Oh, yeah. Uh, that's one of my favorites, actually. Imagine that I went to the political science department of some university and said, hey, I need you guys to do some research for me. I've got a new idea. The idea is, in my country, I want to have a system where the tourists can vote. And not just they can vote, but, like, literally, if the election's on November 4th, they can come on November 3rd, vote and go home on November 5th and their vote counts same as a citizen. Worse than that, I actually want to make it even worse. I actually want to have a system where you don't even have to come, you can just buy a passport and anyone who buys a passport can vote. And actually I want to make it worse than that. People can buy as many passports as they want, okay? And in fact you don't even have to use your own money. You can borrow as much money as you want, buy as many passports as you want, hold them for one day and you decide what happens in my country and then you leave. That idea is so stupid, there's never been a political science paper written about it because it's just self evidently unworkable. Yet that is exactly how we conduct corporate elections. That's considered the best practice. Whoever holds the shares, one share, one vote, makes no difference. Any other reason or intention doesn't matter. And so because we have moved to a world, if you look at the investing world, we've moved to a world of much shorter holding periods for stocks. I think the average is down from like eight years to six months, which is actually like really much lower than that because of course you have tons of index funds and pensions and people like that whole who never trade. And you have just an absolutely metric ton of high frequency trading going on, more than we've ever had in the history of humanity. So we have a lot of temporary holders of stocks, we have a lot more margin lending, we have a lot more shorts, synthetic shorts, all these ways of coming into the possession of shares of stock without really being a citizen of the republic, someone who actually has uh, an interest or a stake in the long term outcome of the company. So I think this idea is foolish. And it's not that tourism is bad. Like I think people who get all hung up on short selling and short and all this short term trading activity like is, it's not bad in itself. I mean it has its problems. But the main issue from a corporate governance perspective is that you're basically making no distinction between the citizens and the tourists. From, uh, a governance perspective, and especially as more and more of the stock market is being held by passive low fee index funds and folks like that, and ETFs, those shares, the people who own them, the people who hold them on behalf of the public, they feel like they have to vote, but they own too many stocks and they don't have the fee structure to support research. So they're even like they're Even worse, they're outsourcing their voting decisions to what are called proxy advisory firms who are telling them how to vote. So the number of actual citizens, I.e. long term holders who both have a long term interest in this company in particular and know enough to be an informed citizen to do a good job voting, that, that pool is dwindling. So in any given corporate issue now, the vast majority of people that show up to vote are going to be tourists. And as a result we're seeing a lot of insane results.

Speaker C: Um, yeah, that makes so much sense in much of what we'll cover here. Kind of the mechanisms that you suggest corporations embrace, I keep coming back to, I mean just because we're in the US but there are other countries, but just the founding fathers and the structures they put in place, the checks and balances. I think there's like interesting parallels there. We'll get to that. But I'd like to start with human flourishing. I have two copies of your book. The one was the pre purchase, the pre published one and then the published one. You can see the published one behind me here.

Speaker B: Yeah, thank you for having prominently on this place. Yeah, that's nice.

Speaker C: Sure.

Speaker B: I love the title.

Speaker C: I love what you have on the first on the COVID of the pre published one. The organizations that truly serve human flourishing don't need sacrifice. They win by being better. So just, just tell us what you mean by human flourishing. What does that mean in practice?

Speaker B: This is a central concept in the book that to me, this is what making a profit is all about. So many of us have an intuitive understanding of profit, what I call the builder's intuition. And then we carry around this mental very limited definition of profit that's really just about finance. And part of my thesis for the book is that if we're going to build organizations with the strength to endure, we should embrace the fact that making a profit is about creating more value than you capture. It is by definition leaving the world better off than you found it. Unfortunately, today we have legalized far, uh, not just legalized, valorized, far too many ways of making money.

Speaker C: Sorry, what do you mean by valorized?

Speaker B: What's that?

Speaker C: Explain what you mean by valorized.

Speaker B: I mean that we celebrate the people that do this. It's not just. It's one thing if you have like a world of gangsters like Al Capone, you know, that operate in the shadows of society and that are known to be breaking the law. But here, what we've done is we legalized many forms of making money that our Grandparents and great grandparents would have seen not just as morally dubious, but they would have been crimes not that long ago. Okay? And many of these ways of making money, they make money for the person doing it, but they don't actually create any value. In fact, a lot of cases they destroy value, they destroy human lives, they destroy economic value. They create all kinds of what are called negative externalities, deferred liabilities. I could tell lots of these stories, of course, a bunch in the book. And so it's really important before we get to the question of what should be legal or illegal, before we get to the public policy questions and the polarizing political questions, which are important, but I think are downstream of this first question. Do we as builders sanction this behavior? Is this what we want for our organizations? Or can we just admit that this is a form of corruption? Our grandparents would have said this is a corrupt way of making money. It corrupts the moral logic of our financial system.

Speaker C: System.

Speaker B: So I've gotten comfortable using this language to say, look, what we really should be trying to do is maximize human flourishing and we should see forms of making money that are not aligned with that goal as corrupt. And again, before we get to the policy question, the first question is do we want, what is our intention? Do we want our organization to be incorruptible? And it turns out the reason why I'm so glad the publisher used that poll quote on the pre print galley that you quoted. The research is really there. This is not just like my personal experience, although it's very much my personal experience. But we have a lot of good research that shows that purpose driven driven companies, mission driven companies, aligned with human flourishing, they are not sacrificing financial performance to do that. We and a lot of us have internalized this idea that like being mission driven is a trade off. It's the most common question I got from test readers, by the way. They kept saying, you're not being honest enough about the trade off. And so I was really worried about that. So I re interviewed a bunch of the mission driven CEOs that I work with and I asked them this question. I said, listen, I need to be able to explain this to other people. What do you see as the trade offs of working this way? And they all looked at me like I was just the dumbest person they ever met. And they were like, trade offs? What are you talking about? He goes like, I'd ask them, m. What are the trade offs between committing to only eat food and never eat poison? Uh, yeah, I quote from the book, Jim Senegal. He told me this quote himself directly to my face. He said, is the founder of Costco. He said if you raise prices, he was focused on the easy way of business. You know, he was telling me this story. He said if we could raise prices on everything in the store at Costco by $0.03, 3% and nobody would ever notice if we did that, we would instantly double our net income. So why don't we do it? Well, it's like heroin. He called it the business equivalent of taking heroin. You do it once and now that's baked into your future forecast. So you got to do it again and again and next thing you know, you have no strategy. Next thing you know, you're not the low price leader or whatever. So I think this corrosive, like to me the word corruption, it has an older connotation than the narrow version we use today. It was more like the corrosion that rusts metal bolts and that causes a building to collapse. Right. Like it's a corrosive dissolution of the bonds that make an organization strong.

Speaker C: So self fulfilling.

Speaker B: Sort of, yes.

Speaker C: So I mean, pulling, uh, on Costco a little bit, you know, you talk about governance as an advantage, and you highlight Costco Patagonia as having this governance fortress. I love this. I think it's. I know, I think it's. I think it's you talking also about the cost of a hot dog at Costco.

Speaker B: Oh, sure.

Speaker C: And so just to talk us a little bit, we don't have time for us to go too deep. But like Costco Patagonia, governance as an advantage, creating this governance fortress.

Speaker B: Yeah, as soon as I use the word governance, a lot of people are like that. Uh, sounds really boring. And it is. Today. Board meetings are incredibly boring. I can barely sit through a board meeting these days. They're just compliance. And to the extent that they touch on corporate purpose, it's just shareholder primacy. So it's just like, how do we stay compliant? It's like financial metrics and legal compliance and very little else. Maybe a product demo or whatever, if we're lucky. We discuss strategy a bit, but mission, the most vital thing that matters for an organization. What is the mission and are we committed to it? Is the organization internally coherent against that goal? And have we built the structural integrity to resist outside forces? It's not even on the agenda. So I call this the new governance in the book Four dimensions. Compliance, purpose, coherence and integrity. And when you do those four things, not only do you make organizations stronger, much more likely to endure. Again, not my opinion, but what the evidence shows. You also make board meetings a lot more interesting because now we're focused on the really vital, juicy stuff in the book. I quote in the endnotes. If you check there's, I quote a couple different of, uh, the governance expert, like race rating agencies who decide what constitutes good governance and bad governance. And in their like documents, the giant document that guides how they vote on things, how they rate things. The word mission does not appear. It's just not a consideration. They don't care. Companies like Costco have routinely get the worst or you can get from those guys. So I think as a result, by the way, this is a, this is a wild stat since 2008. So that's 18 years now. That's a pretty big data set. All the public companies, over the course of 18 years now, companies that have been rated to have bad governance have outperformed companies that are rated to have good governance. So what are we doing here?

Speaker A: And that is the uncomfortable truth at the heart of this conversation. The metrics we use to measure m good leadership and good governance may be pointing us, uh, exactly in the wrong direction. Which makes this a perfect moment to thank our sponsor of today's episode, LHH. LHH. Executive Solutions partners with boards, CEOs and senior teams to shape that type of leadership, helping organizations identify, develop and strengthen the executives who drive meaningful transformation. And now back to the conversation.

Speaker C: Have you heard of David Wharton, a, uh, Stanford professor?

Speaker B: Tugboat.

Speaker C: Oh, Tugboat Institute. Yeah.

Speaker B: Yeah, he actually was quoted very briefly in the book.

Speaker C: Yeah, okay, gotcha. Yeah, we had him on the podcast and sort of like it. It seems to me like, yeah, that because you talk about that this need to actually, that that mission is actually rarely in the corporate charter. So we're never parenting. Yeah.

Speaker B: If you. I work with a lot of entrepreneurs and most of them have frankly never read their own corporate charter, have no idea what's in it. So they tell me, I have mission statement. I hate the word mission statement phrase, mission statement. It's like you have a mission statement. Oh, good. That's like saying like, I have a mission statement. My mission statement is to be an Olympic athlete. You're like, oh, good, it is. What are you doing? I eat Doritos every day. You know, I watch tv, but I'm going to be like, that's my mission statement. No, but my actual behavior, my habits and my train of thought is not aligned with this mission statement. If you say you have a mission statement to build a great product, to Care about quality, to take care of your customers. But your legal purpose and your corporate structure says to maximize shareholder value. You're lying. I'm sorry? You're lying to your customers, you're lying to employees, you're lying to yourself. And you know now Tugboat Institute, they have the seven P's, you know, which is about a whole bunch of things that they do, including mostly arguing that companies should stay private. But one of my goals in the book, and of course for certain companies, that's great. And if you want to get the Evergreen certification, I have a whole chapter about that, so check out the chapter. But I really wanted to write the book. Even for people who intend to raise money or who have to raise money, people who intend to take their company public, and frankly, for people who want to make a lot of money, that's okay, no problem. I got a problem with that. If you're creating more value than you capture, then the richer you get, the better off everybody else is nothing. There's not even the slightest ethical problem with that whatsoever. But you have to actually align your mission and your legal purpose. And so if you talk to your lawyer, I tell a lot of founders, go talk to your lawyer. Ask them what's in your charter. Most people have no idea. So they pull their charter. The charter says the Acme Corporation is hereby incorporated to pursue. It's like a mad Lib. There's like a blank space and it says any lawful act or activity. I'd say pick something like this, ask your lawyer. Does that include the ability to turn my customers into Soylent Green and eat them? Your lawyer would be like, well that's not a legal act or activity, but if it ever became legalized, yeah, so could we at least say that we were going to do any lawful act except that one? People expect their lawyer will be like, of course, no problem. But no, your lawyer will say to you, you know, you never know what you might need to do. The path to maximum valuation is maximum optionality. Don't rock the boat. Keep it simple. And then people wonder why no one trusts them. But your legal charter, you're just a paperclip maximizer. And unfortunately this is of course situation is much worse than I've just described because according to the shareholder primacy theory, which, be fair, is the dominant theory of corporate governance today, any lawful act or activity is routinely interpreted to mean maximize shareholder value. So people think they've developed this really open ended charter that gives them flexibility in the future, but it really does, is it gives people the flexibility to get you out and convert the company to something else.

Speaker C: Yes, yes. And some, I don't know, trap doors that there are. You're proposing some corrections for include for example the idea that hey, I can have super voting shares. I'm the owner, I'm the founder. But uh, you point out that several founders have been outed when even with super voting shares. You talk about the need to have, I love this term, mission guardians. The idea of having directors like in for doctors and other professions. You have to take the Hippocratic oath. Maybe uh, just talk to us about two or three mechanisms that you can consider putting in place as you're founding a company or if you have any company and you want to put in place to avoid this mission.

Speaker B: Yeah, so, so I know time is short, so, so I don't want to get into all the stories but I

Speaker C: tell ah, a lot.

Speaker B: There's a lot of stories in this book of founders who, you know, tried to get this right and messed it up. You know, the founder, the founder like the giant of Johnson and Johnson, Robert Wood Johnson, second, he carved the ethos, what's called the famous credo. He carved it into eight 10 foot tall limestone blocks and installed them in headquarters. But that didn't get the job done. All kinds of founders who installed a really strong ethos of trustworthiness into the company really, you know, had an operating engine that really caused the company to grow like Saul Price at fedmart or Edwin Land at Polaroid. Anyway, there's a zillion of these companies are documented, but it never got it done. And even a lot of companies that have super voting shares, it still hasn't been sufficient because those things can be defeated, needed. So rather than advocate for like, I can give you like a long laundry list of things to do, but that's what the book is for. Broadly speaking, there are two things you need to be an incorruptible company. I call them the path of ethos and the path of integrity. Ethos is the internal character of a company. If you don't build something worth protecting, it's you're not going to be able to protect it because in order to do this thing you have to activate a uh, force that is stronger than the financial gravity that pulls organizations down. You have to do something that your employees, your customers, your everyone views as like really powerful worth. They like really eagerly want to see it in the world. You have to have a mission aligned with human flourishing. And there's a bunch of cultural leadership, management, business model Techniques to align all the resources you touch to be in alignment with that purpose. That creates a character, a durable character that operates even when you're not there. But if you do that, you will start stockpiling the most underrated and most valuable asset in the world. Trustworthiness. Today, we don't account for trustworthiness as an asset. So we don't. When we cut costs, we don't hold the people who did the cost cutting accountable for the brand damage that those cost cuts caused. And, um, so in order to stockpile this asset, you have to be aware that people will try to steal it from you. The more successful an organization, the more of this asset it has, the more valuable it is as a takeover target. Yeah. And you can lose control of your company to your employees. You can lose it to your board. You can lose it to your existing investors. You can lose it to outside investors, activist investors, private. There are so many ways. I give examples of every kind of way you can lose control of your company in the book. But the solution is to create structural integrity. That is the ability to disrupt these vectors of attack. One of the important ones is to have somebody or something act as the mission guardian, uh, who can have the final say as to whether a given action is aligned with a mission or not. You can create a multi branch, almost like a government. Right. So you have checks and balances. You have, uh, two and three entity structures, what I call constellations.

Speaker C: I do want to go to constellations.

Speaker B: Right, yeah.

Speaker C: Right.

Speaker B: Are much more stable than single entity solutions.

Speaker C: There's like, a lot.

Speaker B: There's actually a lot you can do within the current law. None of the things in the book require, like, a revolution, you know, after the revolution, then you can do it. They're all things you can do today. And they're all things that we have really good evidence are working.

Speaker C: So let's talk a little about the constellation. And I loved your, uh, case of Mondragon Corporation.

Speaker B: Oh, Mondragon.

Speaker C: Yeah, Mondragon. Tell us a little about that, uh, unpacking that for us.

Speaker B: Yeah. Mondragon is like such a funny story because it almost sounds like I'm about to tell you a joke. Like a priest walks into a bar. I said, this is a priest walks into a town in the shadow of the Spanish Civil War. Devastated, uh, an economically devastated area. And he has this idea that through a certain kind of economic arrangement, this town can turn itself around. Anyway, I'll make a very long story short, because he set up a school there. He taught technical trades and he taught people how to build these worker cooperatives.

Speaker C: And I remember there was like seven students or something that.

Speaker B: Yeah, there was a handful of students who did the first one. It was a very small, you know, it was a very small. It started very humbly. But today Mondragon is this massive enterprise with tens of billions of dollars of euros in revenue. I think they have 80,000 employees. They control so many brands. They make everything from like bicycles to refrigerators. They own grocery stores. They're just an economic powerhouse. And when you hear that story you're like, oh, I guess it's like a company like brought, you know, like Berkshire Hathaway or Procter Gamble that has many different brands. But when you look under the hood, Mondragon is something totally entirely different. It actually is not a company at all. It is a network of interlocked worker owned cooperatives. It's what I call a mission locked constellation. And although that sounds very exotic and you hear about worker cooperatives and this seems a little bit weird if you're used to conventional businesses. This is an odd story. It turns out that these structures, these multi entity structures, the constellation structures, are more common than you think. In fact, most of the things you think of as a company are not one legal entity at all. Like there is no Apple Computer, the one company. There's like hundreds and hundreds of subsidiaries and other entities that are all linked together all over the world. That's actually par for the course. So one of the ideas in the book is that since constellations are going to form anyway, most companies have, you know, they have a union or a foundation or they have different, like delivery vehicles that operate under legal, different legal jurisdictions. Most healthcare companies have to have a local entity in every state. Insurance companies are often fragmented into thousands of individual entities. Nonetheless, if you lock them together appropriately, you can make the consumer the employer, employee. All the people that interact with this organization can see it as one thing. You walk into an Apple store, you bought an Apple computer. If I say who did you buy it from? I bought it from Apple. So anyway, the story of Underground is really interesting because it demonstrates some of the mechanisms that can hold together a really dispersed kind of, of constellation. But of course there are others that are much, much simpler. Novo Nordisk very famously I think is a four entity constellation. You uh, know Patagonia is a three entity constellation. There are all these examples in the book.

Speaker C: Yeah, I didn't realize. Ikea

Speaker B: anthropic, it's a two entity constellation.

Speaker C: Oh really?

Speaker B: Part of the reason it's you Know, more courageous than some of its competitors is because it has the structural strength to do it. But those two entities, so Anthropic has the Public Benefit Corp, the AI Research lab, and then it has a second entity called the Long Term Benefit Trust, which is an example of something called a purpose trust, a perpetual purpose trust under Delaware law. I won't get into all the legal specifics, but it's actually a very simple idea. There's a set of outside trustees who are not shareholders in the company. They're not on the anthropic board. They have the power to appoint directors to the board and they have the responsibility that I call being the spiritual holding company company. It's not a religious thing. It, uh, means they are the place where the animating spirit of the whole is held. So they have the responsibility to make sure that Anthropic stays true to its safety mission.

Speaker C: Gotcha. And what's the relation, what's the governance relation between them?

Speaker B: In this particular case, the LTPT has the power to appoint directors to the for profit board, to the PBC board.

Speaker C: Okay, gotcha.

Speaker B: And if I remember right, the number of directors, it gets to a point, was set to increase as the company hit various commercial milestones. Now I haven't checked in with them recently because Anthropic success has exceeded all possible forecasts or expectations. I don't know, I don't actually know that's a.

Speaker C: And I love that metaphor that you have though, gravity. You know, the gravity kind of. But you can stand up against gravity. But yeah, that's the, uh, as, as

Speaker B: companies succeed, I give them tremendous credit for having the courage to adopt the structure. And I think it's, you can see the evidence that's paying off.

Speaker C: I think it's IKEA as well that you said also has a similar structure and that there's sort of like seven board members or something like that that are voted that. Tell us about.

Speaker B: IKEA is also, I think, a four entity structure. And actually IKEA is interesting because the IKEA brand and the intellectual property of IKEA is housed in a nonprofit foundation which is separate from the holding company that actually does the Ikea, uh, warehouse operations, which is separate again from the IKEA stores, many of which are owned either by the first party IKEA franchising, uh, company or many of them are owned by third party franchisees. So the total number of legal entities in the IKEA constellation is quite a lot.

Speaker C: Yeah, that's why I was thinking from the very beginning, you know, the United States and checks and balances, Checks and balances.

Speaker B: That is what the evidence shows. I'll just give you one stat. The Novo Nordisk style of, um, industrial foundation. There's enough of those companies in the world that we have a data set to study how they perform on average. And according to the data, if you have that structure, you are six times more likely to live to year 50 than a company with a conventional structure. We're talking about 10% versus 60%. So it's pretty significant.

Speaker C: That's amazing. Yeah. We've had done a few interviews on this podcast. We've done some research kind of on these kind of more decentralized models and found interesting correlations between financial performance and your ability to recruit and retain top talent. I know we're reaching the top of our time with you. There's kind of a double click that isn't the crescendo. But I think it's really interesting, your metaphor on culture. I kind of have thought of culture as compliance, as, you know, this is what we do. And if you're either out of culture, not culture, not within the culture kind of norms, but talk to us about this, what it was, the bank account, the deposits and withdrawals and culture.

Speaker B: Yeah. Okay, so I'm going to tell you a story about a company called H E B. They're a grocery store in Texas. If you talk to. I have friends in Texas who I can't shut up about H E B. If I ask them about H E B, it's like, good, now we gotta take a whole hour now to talk about how great this grocery store is. And I used to think, you know, because I had friends who lived in Texas a long time, but I've never lived there, so it wasn't a big deal to me. But I used to think like, like people in Texas, like, are being irrational about this grocery store. But for the book, I was researching companies that have this unusual cultural cohesion and AGB comes up a lot in the case literature about this. So I know I learned all these stories. You start to study these stories of the things that they do, you're like, oh, this is actually pretty cool. So let me tell you, just tell you one of Those stories in 20, 20, 21, I can't remember if it was during the pandemic. I think, uh, there's a massive ice storm in Texas and there's an H E B store where the power goes out. And when I say the power goes out, I mean it's an ice storm. The power is out hard. The backup Generators are out, the point of sale system is down, lights are out, everything's out. And everyone in the store was like groaning like, oh, uh, no. All these people with full cards are like, so upset. Why are they so upset? Did I mention there's an ice storm? Well, and they're stocking up, obviously, right?

Speaker C: So.

Speaker B: So everyone thinks they're like, not gonna be able to get the provisions they need. And the store manager asks everyone to huddle up and just says, everybody, take your carts and take your stuff and go home. And people are like, how are we gonna pay you? And they're like, you're not. Just go, wow, that's crazy. So customers are in tears over this. I mean, it's just incredible.

Speaker C: I'm in tears now thinking about 2% margins.

Speaker B: It's an incredible story. Except people hear that story and they're like, wow, what a courageous store manager. No, they drill for this at heb, not for ice storms in particular, but for the idea of being a fiduciary to the customer. I mean, you put the customer's needs before your own. And if it's the right thing to do. Every manager is authorized to make these kinds of judgment calls. I tell a bunch of these stories in the book. The key to this is that in our modern system of okrs, we mostly treat, uh, we mostly stack rank activities by roi. But these trust building activities always rank at the bottom.

Speaker C: Why?

Speaker B: Because the returns are intangible, but the costs are tangible. So as a result, we tend to do things that are trust destroying rather than trust building. So we have to find that antidote to that. And a big part of the book is, how do we do that? One of the key ideas is to treat trustworthiness like an asset. I mentioned that before. We have an asset. Where is it tracked? Well, I say let's, we call it the culture bank. Like, let's deposit it in a bank account. A virtual conceptual bank account, meaning that h e B manager, when they made that choice, they made a deposit in the bank account. If they'd done the opposite, that would have been a withdrawal. The strong culture companies that I studied, they often operate by a simple rule. Always make deposits, never make withdrawals. It's that simple. If you have the chance to build trustworthiness, do it. Don't ask questions, don't do a spreadsheet, analyst, calculation, whatever, just do it and trust that the chips will fall where they may. And companies that adopt that rule, I think not only do they have financial success, not only are people happier working there but also life is a lot simpler because think about the meetings that you don't have to have anymore. Everyone understands this is what the company really stands for. Yeah.

Speaker C: And I love the metaphor that it's sort of more about, like, hope and building as opposed to fear of stepping out of line. And it reframes the value of sticking with the culture. Amazing. Uh, we don't. We've reached the top of our time with you. Certainly we will recommend people buy the book we've only covered. Some of you have got great. And I love that you have very, like, tangible lists of 3 things and 7 things and can be very specific and inspiring stories. We're, uh, for people who are inspired by what this book means for themselves and for their companies. Where can they continue to connect with you and learn from you on this?

Speaker B: It's nice of you to ask. You can go to Incorruptible Co. That's the best place to learn more about the book. You can join my mailing list there. And we've tried really hard to create every conceivable benefit for those that pre order the book. For those that join the mailing list, we have reader's guides and implementation guides. There's a secret chapter of stuff that got cut from the original manuscript. We're doing author Q and A and all kinds of cool experiences. So that's the place. Check it out. The book is coming out May 26th in the US May 28th everywhere else in the world. And you can get it in hardcover, in ebook, in audiobook, basically wherever books are sold, including at your local independent bookstore. So maybe stop, um, by there.

Speaker C: Yeah, stop by there.

Speaker B: Not just one copy, but buy a bunch of copies and give them out. You'll make. You not only make my day, but you'll make that store's day too.

Speaker C: Yes. And the people that you gave it to, Eric, thank you for writing the book, for making that all available. Just taking the time to unpack a little bit of it with us here today.

Speaker B: Thank you.

Speaker A: Thank you again to our sponsor of today's episode, lhh. We encourage you to check out their executive solutions and learn more about their beautiful working world@lhh.com thank you to our guest, Eric Reese. Thank you to our executive producer, Zach Ness, our producer, Nazanin Humayun Jam, and our editor, editor James Pierce. If you like what you heard, please follow, download and subscribe. I'm your host, Kyan Krippendorf. Thank you for listening. We'll catch you next time with another episode of Outthinkers.