Redefining profit, centering human flourishing, and building an incorruptible mission-driven roadmap w/ Eric Ries #260

Speaker A: I think we have a big challenge ahead of us. AI is a massive exacerbator of existing problems because it's a power amplifier. To me, this is like the first electric guitar. You're like, what's the big deal? It's just a guitar plugged into an amplifier. Oh, an electric guitar is a very different thing. It is far more powerful and it is capable of new things that the humble regular guitar is not. And it's not super obvious at first what happens when you plug in the amplifier. You know, distortion and feedback and all these other things are now new live possibilities we'd had to deal with before. So I think we should all be on the lookout. As entrepreneurs, we have this incredible opportunity. Be on the lookout for the problems that will inevitably be caused by the equivalent of distortion and feedback as we take analog processes and make them magentic. But more importantly, understand that if you don't get the governance of your company right, no other decision you make in the long run will be at all consequential because you won't be the one making it.

Speaker B: Hello and welcome to the Engineering Leadership Podcast, brought to you by elc, the Engineering Leadership Community.

Speaker A: I'm Jerry Lee, founder of elc.

Speaker B: And I'm Patrick Gallagher and we're your hosts. Our show shares the most critical perspectives, habits and examples of great software engineering leaders to help evolve leadership in the tech industry. In our conversation today, we are joined by Eric Reiss and we get to talk about his new book, Incorruptible Launching Today. And in our conversation, we discuss how to build an incorruptible organization that centers mission and human flourishing and what this means for engineering leaders. It's filled with stories and moments that explain why maybe you've been disenchanted or disillusioned with companies that you've worked for or companies that you've seen in the market do something that is extractive or violating of the trust of different customers or consumers. And so we talk about the psychological pressure that shapes the behavior, values and decisions inside those companies. We talk about a reimagined definition of profit that centers mission and human flourishing and how that changes what you build, measure and govern. And we also talk about rejecting making money by any means necessary in favor of finding solutions that are both economically sustainable and mission maximizing, where literally by accomplishing your mission, you do more business. If you're unfamiliar with Eric's work, let me introduce you to Eric. Eric Reiss is the creator of the Lean Startup Method and the author of the New York Times bestseller the Lean Startup, the Leader's Guide and the Startup Way. As ah a founder, he's put his own ideas into practice with the Long Term stock exchange answer, AI, an AI R&D lab, the Lean Startup Company which teaches and supports the implementation of the Lean Startup Virgil, a legal services startup and imvu, where the ideas that became the Lean Startup method were forged. On his podcast, the Eric Reiss show, he talks to guests including world class technologists, thought leaders and executives working to build profitable companies for the long term benefit of society. Eric's also served as an entrepreneur in residence at Harvard Business School and ideo. Let me tell you about his new book, Incorruptible. It's the blueprint for companies that will prosper and endure without losing their Soul. Drawing on two decades of work with founders, CEOs and investors, Eric reveals the forces that make companies vulnerable to destruction from within and without. Its lessons and tools are designed to help founders, executives, investors and citizens of all kind build organizations and a society truly aligned with human flourishing. Enjoy our conversation with Eric Ries. First off, welcome. Thanks for joining us. It's good to have you here.

Speaker A: Nice to be here.

Speaker B: When I first moved to San Francisco, uh, I moved into a garage with no windows and I started working at a startup. So it was like very much like the classic.

Speaker A: That's the classic. Yeah, exactly. Welcome to the business.

Speaker B: And on my bedside was a copy of the Lean Startup and by the time I had finished living in that garage and moved on, it had become a heavily thumbed through and used and underlined book.

Speaker A: Great, that's awesome.

Speaker B: And so, you know, to set this up, like your work has defined my early experience in the industry and I think for so many people in our community, engineering leaders, it's defined their work and how they approach building the things that they build. And so, you know, I set that stage for then the next conversation I'm zooming to, which was, you know, I'm catching up with a mutual friend, um, of ours, James Birchler, uh, who I was telling you about.

Speaker A: Shout Out James.

Speaker B: Uh, yeah, and you know, you know him from the Imbue days and he's helped pilots some of the lean startup ideas in that work there. James is somebody who I deeply admire and respect and we've done a bunch of things. He's been on the podcast, we've jammed on engineering leadership topics together and we're catching up on the phone and we end up diving in for 90 minutes just in this call about how he's applying concepts from incorruptible to his new business. And I was just absolutely geeking out. And I was like, at the end of this, I was like, james, I haven't read the book yet. I'm talking to Eric in a couple weeks and I'm doing a deep dive and I can't wait to deber with you after. And I texted him this morning just like with a head exploding sort of reaction. And I was like imagining the world. And what I was struck by after reading the book was how urgent and important to me the ideas are in this book. And when I think about the possibility of what if CTOs, VPs of engineering, the engineering leaders in our community, could make mission their operating system, protect it, and then really build organizations aligned with human flourishing, to me, that is the most urgent thing to be focused on right now. So I was just thinking about, like, why do I care about this? I was like, for me, like, this is. This is it.

Speaker A: Wow. Oh, I love it. I love it, man. That's awesome. That's how I feel about it. I mean, that's why I spent all these years writing it. And I'm especially keen, you know, to talk about it in the context of engineering leadership because, you know, I spent a lot of time with designers and product managers and executives and boards and investors. I mean, I spent a lot of time in a lot of different functions, but my home engineering leadership was my original, my original job. The original thing that I thought I'd be doing my whole career. So for me, this is like a, uh, coming home moment. I love it. Happy to talk about it.

Speaker B: So bring us into why incorruptible. So what inspired you to write the book?

Speaker A: My books all come from pain. Sorry to say this, like, I didn't write. I never asked anyone to do anything that I haven't done myself. And I don't write about things unless I've grappled with them for a long time. I was talking to Brad Feld, the great vc, and he was saying, saying that like, he, he's noticed this pattern that I, like, disappear off the face of the earth for years at a time. We'll go wrestle and with some like, crazy idea that's like ahead of its time and then come back and make things that are like in the ether that people want to do, but make them accessible. And that was like, oh, that's like, I didn't even know that's what I was doing. But I think that's a pretty good description. That's definitely what I aspire to. Do with all of my work. And that was true for the Lean startup, it was true for the startup way, and it's definitely true for Incorruptible. I have witnessed this problem firsthand and so have you. So is everybody. We live in this problem all the time. So much so that we don't even know what to call it. How many favorite brands have been totally ruined? How many companies have gone to hell? You know, just like you just, you work there and you're like, what's happening? Why is everything getting crappier all the time? Why have we lost the ethos? Whatever happened to don't be evil? Whatever happened to this company that like, we live it well? I've seen the inside of how the sausage is made. I've watched these little compromises step by step from the, you know, proverbial two people in a garage all the way up to big public companies. I've been in the boardroom, I've been with executives, I've been all over the modern economy. I feel like, I feel like I got issued a backstage pass. So I've seen how it actually works behind the scenes. And it's bad. It's grim in there, man. They were. If you go in the boiler room, like, the facade might be really pretty. Front of house looks really pretty, but there's some, there's rats in the kitchen, you know. So I feel like I wanted to give a report from the front. Here I am back from the war and I wanted to give first and foremost to builders who don't spent a lot of time on corporate governance, on investor rights, on all this arcane, detailed stuff. Seems like not really related to their work. I've done battle in the arena on your behalf. I've tried to build a long term stock exchange. I've tried to help countless companies keep their mission, protect it, go public, take, you know, how many, how many rounds have I worked on? Venture rounds. Hundreds, thousands, I don't even know anymore. So I've been in the trenches trying to fight this. And I've come back with a report, a report from the front. The war is going badly and we are losing. But good news, I also come back with a, uh, series of practices that I think should replace the best practices we were all taught. And I have the evidence now to prove that these are more value creating than the value destroying practices today. We preach as the best. So, yeah, it's kind of a good news, bad news situation. It's kind of grim out there, but there's something we can do about it.

Speaker B: I want to dig into this, uh, report from the front, which I think is a great way, a great way to reference this. Uh, there's a couple concepts that I wanted to sort of sample a little bit. But the first one that I had an immediate visceral reaction to where I was like, oh, this is it. This is the redefinition that we absolutely need to focus on was when you were talking about redefining profit. And so I was wondering if you could introduce that concept and sort of the aha, ah around that and I guess maybe define it and then like the aha uh around it and some of the stories behind what brought you to why we need to redefine profit.

Speaker A: Sure, yeah. What's interesting is that if you take an economics class, the problems with our profit definition are well known. But at the end of the class, if you say, what are we supposed to do about it? They're mostly like, ah, maybe regulation or something. No, this is wrong. So let's go through it now. I tell a story in the book of an entrepreneur. I just call him the professor, uh, where this is like, I've done this exercise many, many times. And so I did it with this one. Very like a really brilliant entrepreneur. He's like, very talented. Technology he's working on. His super cool company's a very cool company. And I asked him, do you know what it means to be a for profit company? He's like, come on, everyone knows that. Like, he's been fundraising. He's like, I have to spend, like every meeting I have to talk about how much profit we're going to make. I was like, but just humor me. What does it mean to make a profit? Now, a lot of people who I call builders, he has two different definitions. He has the intuitive definition that I call the builder's intuition that we should all create more value than we capture, as Tim O'Reilly put it. But in his head, he carries around a formal definition of profit. And he says, to make a profit is just how much money you have left over after paying expenses. Revenue minus expenses equals profit. He looked at me like a moron. Like, come on, really? So I asked him, let's just do a quick couple hypotheticals. Like, is a Ponzi scheme profitable? And again, he's like, no. His intuitive sense is instantly like, no, but why not? Isn't it revenue minus expenses? He's like, thinks things, things. Well, but hold on. The Ponzi scheme, the bill will eventually become due. So even though I don't pay for the expenses this quarter, the fraud eventually compounds and I will have to pay. So I said, oh, I see. So if there's a deferred liability into the future, we can't. That doesn't count. You didn't really create value if all you did is earn the revenue now and delay the expense till later. He's like, right. But I said, well, does that mean that if I create a toxic waste dump, is that profitable? You know, I'm going to have to clean it up eventually. He's like, oh, I guess not. Okay, what about instead of a toxic waste dump, I dump pollution into the river and people downstream get sick. Now remember, in all these hypotheticals, I want you to always imagine that I'm so clever that I get away with it. No one ever finds out is that profitable again? He's instantly like, no. I'm like, why not? According to the definition in your head, you told me it's revenue minus expenses. These expenses are on their books, not mine. And he thought about it for a while. He's like, no, but hold on now. Before you were moving the expenses in time, now you're just moving the expenses in space. Just because you someone else incurs the expense doesn't really count. In economics this is called a, ah, negative externality. Just because you don't pay for it doesn't mean it's not there. But as soon as you accept that negative externality should count against profit, you're in big trouble. Because I'm like, okay, but what about a product that makes people sick? What about a product that's addictive? What about for a product that does damage to people's communities? Is that profitable again? Instantly he said, no. But then according to the mental definition, he was having a hard time. I said, okay, now let's do the really hard one. Let's talk about the input factors of production. When we talk about revenue minus expenses, it matters where the expense comes from. So for example, I said, how about this? If I take a $50 piece of wood and turn it into a $200 table, what's my profit? Easy. 150. Great. But what if I steal a $200 piece of wood and turn it into A $100 table? Is that profitable? He instantly was like, no. I said, why not? According to my revenue minus costs, I made $100. He's like, that's like a kid's lemonade stand. You know, you spend $400 of your parents organic lemons and you make 25 cents a cup. Like at the end of the day you made $23 and you're really proud of yourself. But, like, that's not real profit. I said, oh, what's real profit? So he's like, no, you have to account for the input factors of production whether you paid for them or not. I said, great, but what about a business that uses a human life as the input factor of production? He's like, like what? Imagine I made a darknet bitcoin murder for hire business. Is that profitable? Again, he was like, instinctively, no. How horrible. He was like, tried to get out of having to answer. He's like, but that's illegal. Okay, but what if I made so much money that I could lobby the government to make it legal? Now, is it profitable? No, it's unethical. What if I made a religion that says it's actually my moral duty to do, like, right, like, whatever your objection is, forget all that. Is it profitable? In his heart, he knew the answer was no. But in his head, he's been taught the definition is yes, of course not. Of course it's not profitable. A human life is worth way more than the hundred bucks I get on the darknet for destroying it. But the second you accept that a human being can never be an input factor of production, so many businesses are instantly rendered unprofitable. If I sell people cigarettes that kill them, is that profitable? No, of course not. If I do things that make people, like, cause them to be addicted, that cause them to. I heard this horrifying story recently. Recently where private equity took over Panera Bread. And among the many horrible, typical private equity things that they did, they made the quality worse. They stopped making the bread fresh. Just like every kind of way they could get away with cutting costs. We live in an economy where people cut costs and are rewarded but are never held accountable for the brand damage, the quality damage. But anyway, among the horrors that they introduced was something called charged lemonade. Lemonade sold at the tap next to the soda with, like this, the caffeine content of six espressos. Kids could just walk up and drink as much of this as they want. They didn't disclose that it was hyper addictive. They just figured this is a good way to make a buck. And people died. They died for Panera Bread. What are we doing here? So this is not some weird hypothetical. We know for sure that this silly definition of profit that we use all the time has these mega problems with it. And my view is if it can't see deferred liabilities, it can't see negative Externalities. It thinks human beings are an input factor of production. And it's at odds with the building builder's intuition that every builder already carries. Why are we using it? What good is it? No, enough. We should replace it with a new and better definition of profit. Mine is very simple. Profit is about the maximization of human flourishing. And with that very simple definition, so many impossible, intractable business problems become easy again. Including all the ones we just talked about.

Speaker B: There was uh, a line in your book that just rocked me as I was reading it. And it was this bargain that you talk about of when you swallow a pill. You are betting your life that the corporation that manufactured it calculated that keeping you alive by ingesting that pill serves its fiduciary duty to shareholders better than the alternative of like, maybe. And I'm like, in my head I'm thinking like, what a crazy bargain that people make. Is that like, like when you're talking about like the human as an input, input value for production. Totally crazy.

Speaker A: If I hadn't already told the Panera story, I'd tell it now. That's like literally what we're talking about. When you eat food you didn't grow yourself, you're betting your life on this. What is especially crazy about this? If you read the govern the corporate governance literature, they view this as obvious, a self evident truth like life, liberty and pursuit of happiness.

Speaker B: And one of my favorite parts that you break down in the book is like, it wasn't always like this.

Speaker A: No, it's very recent.

Speaker B: To me that was the wildest part was like you're breaking down like in 1899, like you had to incorporate by like understanding how you were public benefit or how you were benefiting humanity. And then that shifted. So I don't know if you can share a little bit of like the context. It wasn't always like this and it doesn't have to be like this.

Speaker A: We have all been bamboozled with the idea that this is some kind of natural law or an essential element of capitalism. Bullshit. For the vast majority of the years there have been joint stock corporations on this earth. It was seen as completely obvious that the purpose of a corporation is to do something specific. In fact, in the 19th century, let's say you were the richest man in America and you decide you want to borrow a bunch of money to randomly take over some company and forcibly redirect it to whatever your agenda is. Okay, first of all, in the 19th century it would have seen as perfectly normal for boards to fight you tooth and nail to prevent this from happening. Nobody thought that was in any way weird because they're like, obviously you have. That's their job. Their fiduciary duty is to defend the mission. What else would they be there for? Whereas today, when Elon Musk tried to take over Twitter, the board had a fiduciary duty so strong they had to sue him to complete the transaction, even though they didn't want to. What are we doing? But even worse, let's say in the 19th century, you succeeded. In those days, every company, as you said, had to. Had to permission to form their corporate charter, and the charter had to be approved by the state legislature. You had to make an application where you said, this is the public benefit of having a railroad or a canal between this. Every business was designed to do something specific. If you managed to take control of company and you decided, you know what I'm going to do? I'm going to change its mission from make a railroad to enrich shareholders, the courts would have voided your charter. That would have been considered a crime. Now we consider it a governance best practice. So this is all very recent. And in fact, even in 1899, when is the key date when Delaware finally joined the party of what was called general incorporation? That was, uh, a state legislature by state legislature battle. Over the course of the whole long 19th century, people fought about this. When Delaware joined the party, we entered into this golden age of corporate prosperity because we still had the ethos, the idea that companies did something specific, but anyone was now allowed to create a company without having to go to the state legislature. So that was a big improvement. For a while, this worked out great. But over time, people got this idea that we should switch from what I call purposeful incorporation to this new idea called shareholder primacy. This only happened in the 60s and 70s. The key court cases in Delaware that established this rule were in the 1980s. Okay, this is not Benedictine monks or Mozart. We're talking about Depeche Mode. Okay? This is not that old. And yet the question that I ask in the book is, what is the source of democratic legitimacy for this idea? See, general incorporation was fought by legislators. So, you know, it was a democratic process. Shareholder primacy has never once in the history of the world ever been subject to a popular referendum or vote of any kind. It was enacted by a very small cadre of lawyers, legal scholars, board members and judges who just decided that this is how it is. And it's actually very funny if you read their justifications for this, like, they put us into this weird situation where if you ask any board member in America what is your job? They instantly will say, fiduciary duty to shareholders. That's like. That's my main job. If you say, like, what is the purpose of a corporation? They will dutifully say, to maximize returns for shareholders. But if you say, is that the law? They're like, oh, yes, it is. You're like, great. Can you point to me where this law comes from? What stat I learned in kindergarten how a law become a bill becomes a law. Well, when was it passed? There's nothing they can point to. It was never passed. So if you read the legal scholarship, they, uh, go through these crazy gyrations trying to explain why this is actually okay to have a law that's not a law. They'll literally say things like, shareholder primacy is not a legal obligation, but it is a legal duty. Oh, good, that cleared it up for me. Thanks a lot, buddy. And in fact, when they. When they. If you read it all, you read thousands of pages of legal scholarship, at the end of the day, what they come down to is they say, well, you know what? Whether it's the law or not, at this point, we have what's called a normative consensus in favor of this idea. Normative meaning not a descriptive consensus. Descriptive consensus would be companies do this. Since they all do it. Whatever. No, a normative consensus means everybody who matters agrees that this is what companies should do. I quote one scholar in the book saying, managers not only can, but should break the rules if it is profitable for them to do so. This is a normative consensus. Now, what's so interesting to me about this legal scholarship is if you ask engineering leaders or any normal people, are you part of this normative consensus? They're always like, no. Are you kidding? This is the dumbest thing I ever heard. Then you ask them, well, that's interesting. Have you ever told any human being other than me just now that that's how you feel? And they're like, no, you can't say stuff like that. It's bad for your career. So this normative consensus is bullshit. It is powered by the fact that we're all too afraid to say anything out loud about it. And so we allow the myth to persist that this is a universal idea. It is not a universal idea. In fact, I maintain that the era of shareholder primacy is already over because we've moved actually into the phase of extraction primacy. Like, we're not. This is originally supposed to be good for shareholders, but it's not. This is value destroying. We are eating the beast. Uh, this thing is eating itself alive. It's like a cancer. And also, if you talk to young people, all young people are just, like, horrified by this. Beyond belief. This is all they've ever known. And they're just like, why? Why would I have think this is a good idea? I've seen nothing but institutional collapse caused by this idea. So I have homework for you and for everybody listening. Okay, your homework is. It's very simple. Tomorrow, all you have to do is pick one person. A friend. Don't go jumping up on the boardroom or making a scene. No post on social media. Just find a friend and ask your friend, hey, I just want to let you know I'm not part of the normative consensus of shareholder primacy. Just want to let you know. And you might be surprised, your friend might say, oh, really? Me neither. And now there's two of you. Okay, that's a start.

Speaker B: You know, you're talking about, like, people are experiencing these problems, but haven't really been figured out how to name them. And so I was wondering if you'd talk a little bit about the role of financial gravity and why maybe it feels so hard for them to do what they want to do in alignment with the mission and all of these invisible forces that are maybe shaping them to make decisions that are against their mission. So I was wondering if you can maybe talk a little bit about that and maybe some specific tech examples of where this tension is really present.

Speaker A: So just to be super clear, we teach board members now that it is a governance best practice to betray the mission. It's literally a best practice. Like, if you read I included in the endnotes for the book several of these governance guidelines for what constitutes good governance. Governance according to these big rating agencies. The word mission is not in the document at all. It's just not considered a relevant perspective at all in what is considered good governance. As a result, since 2008, companies that are rated to have bad governance have actually outperformed companies rated to have good governance. So what on earth are we doing here? This is not even good for shareholders.

Speaker B: And you're talking about Costco. In the book, Costco scoring the lowest on all the ratings, but is like outperforming.

Speaker A: Yeah, yeah, it's incredible. Costco. One of my favorite things is that every couple years, someone tries to attack Costco for having bad governance. So far. And what's funny is you can. Here's how you can tell that ideology has blinded the people that do this. They'll. They'll make these arguments that Costco's governance fortress. That's what I call it. It causes management entrenchment, and management entrenchment leads to poor performance. I'm, um, like, buddy, at the point that you're criticizing Costco for poor performance. This is one of the best performing stocks in the whole S&P 500. They're worth $400 billion. They seem to be doing okay performance wise. They seem to be doing pretty well for their shareholders. So maybe pick a different target. It's. It's ridiculous anyway. This pressure to conform to these practices doesn't even have a name. Most people don't even know it exists. And yet it's there. It's as pervasive as gravity. That's why I call it financial gravity. I named it after gravity because just like with physical gravity, if you say, I don't believe in gravity, you still can't fly, okay? You jump up in the air. Gravity proves that it believes in you just fine. So this financial incentive that people have is very. It's real. It's psychological, but it's real. And what happens is whenever people are faced with the prospect of future success, when they calculate what will give me future success, they can't help it. It's an unconscious thing. They secretly, unconsciously want to please whoever has the resource that they think might help them get ahead. So that m. That's why people are obsequious to their boss. It's why they're obsequious when they meet a celebrity. It's why they're disgustingly obsequious if they meet a billionaire. I can't stand it. It's so gross. You watch these, like, strong, super high int people, and it's like, oh, millionaires here now, they just start fawning all over them. They can't help it. And I understand you meet someone like that, that person could look at you and be like, here's $10 million. Good idea. Let's go make it happen to them. That to them would be like giving you $5, right? Like, it's just. It would be insignificant, but to you, it would be life changing. Life changing for you and all your descendants for all of time, with a snap of the fingers, they could do it for you. It's why medieval courts were so famously unstable. We've built these ridiculous situations around all these powerful people in an organization. This effect is multiplied by every conversation where someone says, uh, I don't know, investors might not like It, I don't know, the market might not like it. Like, it's like a ghost who's joined every strategy and product meeting the ghost of the market who's whispering in the ear, you know, it would be better if we lay a bunch of people off. You know, it'd be better. As if we take cost out, you know, it'd be better. Let's put some hyper caffeine in the lemonade. I bet investors would like that.

Speaker B: That.

Speaker A: Now, the most important thing to understand about gravity, it is not a natural phenomenon. That what's natural, what's organic about it, is the fact that values are transmitted whenever people transact. But what values are transmitted are up for grabs. Now, we happen to be living in this moment in a financial system that has grown incredibly large and powerful and has sociopathic extractive values at its heart. But it doesn't have to be that way. You could imagine building a financial system with different values. And in the later chapters of the book, I try to lay out how that could be done.

Speaker B: So that gravity force that you're talking about, to me, like, this is this invisible thing shaping people's decisions. I guess maybe one example of, like, how this sort of impacted people is like, I'm thinking of shareholder primacy and the impact of financial gravity. And I think of the Silicon Valley bank story that you highlight in the book.

Speaker A: Oh, yeah, yeah, that's a classic.

Speaker B: I wanted to bring that up specifically because we sort of had a conversation with somebody on the negative externality side of this. So on our podcast, a week after the Silicon Valley bake incident, we were talking to the. The SVP of engineering at, uh, Rippling, who owed hundreds of millions of dollars in payroll to people that they had all stored in Silicon Valley Bank. And so these decisions from this bank that directly impact their business. And the crazy part of the story is the people that were owed that payroll were like hourly people where most of them relied on paycheck to paycheck. So it's like, it's not just like, oh, you know, like, you know, people like, didn't get a paycheck and it's not going to matter. But it was like these people depended on it, and it was like their bills and their livelihood and their ability to exist as a human being. Two sides of the story. So seeing the one of, like, the incentives that led to the decisions that caused Silicon Valley bank to collapse. And then on the other hand, like an organization at the time that was committed to doing whatever possible to figuring it out to make sure that they didn't go without payroll for these critical people. And so I was just like, what an incredible mirror to look at the story there. So I don't know if you want to recap. The Silicon Valley banks.

Speaker A: Oh, my God, I remember that weekend. I wanted to tell that story in the book because, uh, it affected me personally. Silicon Valley bank was my bank. I had multiple companies banked there with more money than I care to admit. Banked with Silicon Valley bank on the day that it collapsed. It was an incredibly stressful time. And I was. I was on the phone with so many startups trying to figure out what to do to deal with this. And yes, you're right, the consequences of these failures are not just financial. They have real profound human costs. Now, what really pissed me off about the Silicon Valley bank story is five years earlier, the bank spent money like, it went out of its way. The CEO traveled to D.C. they spent all this money on lobbyists to lobby the government to relax the rules that would allow them to make the risky bets that ultimately destroyed the bank. Bank. And they succeeded. They got the rules changed. They were able to make the risky bets. The risky bets blew them up. Now, what's so crazy about this is if you read the marketing materials of Silicon Valley bank, this was like the bank of Silicon Valley, okay? Right. The bank of the innovation economy. We trusted them. We thought they were the only. Like, in the early days, man, they were the only bank a startup could bank with because they wouldn't ask you dumb questions like, I need five years of financials. And you're like, I just raised $20 million from Sequoia yesterday. I have one day of financial, what do you want from me? But, like, my money is good. Can I please deposit it? And normal banks would be like, no, you're a fraudster. What are you doing? We've never heard of this. What is this? Sequoia Capital? It's like. Anyway, so you had a bank that was like, we know what that means. We were willing to bank you when nobody believed in you. Like, they built this reputation based on the tremendous trust of the whole ecosystem, and then they flushed it all away for what? Now, this is the interesting part. If you read their marketing materials, they had a really cool mission statement. I don't have it in front of me. It's something like, to advance the innovation economy or something. Something like that. But because they're a bank, all their documents are public, and you can read their actual legal charter. Does a legal charter say advance the innovation anything? No. It just says, the Silicon Valley bank is hereby incorporated to pursue any lawful actor activity. So, like, when I see that in a charter, first of all, most founders don't appreciate what that means. Today, any lawful actor activity means shareholder primacy. But even worse, even if it didn't mean that, any lawful actor activity. So I'm like, oh, even turning your customers into Soylent green? Like, if that becomes legalized, you're prepared to do that? If you talk to your lawyer and say, I don't want to, shouldn't we take that off the table? Your lawyer will be like, you know, better to keep your options open. And then you're like, why does nobody trust me? It's like, you won't even promise not to turn me into soil and green. Like, so the risky. So here's the question. Was that in keeping with their mission or a betrayal of the mission? If you think their goal was to advance the innovation economy, these bets did nothing to advance that mission. Literally nothing. The only reason they're doing these risky bets was to make more money. So if you think the bank's job is to do shareholder primacy, as the board obviously did when it authorized all this, and they were doing good governance, they were doing what they're supposed to do. And this is when I say that the governance standards don't include mission, nobody seemed to care that all this lobbying was potentially putting the mission at risk. So this yawning chasm, um, between organizations, stated mission, the mission statement, and the actual purpose, this creates so much of the distrust and so much of the cynicism we see all over our modern economy.

Speaker B: We've named a lot of the things that people are experiencing and I want to give people a quick roadmap out because I think at this point they're like, I get it. Like, this is really capturing all of the frustration that I have and why I don't trust institutions anymore and the declining trust in institutions and all this. Keep painting a little bit of a picture on the way out. So I think maybe one specific area I want to focus on because I want to encourage people. This is a must read. Uh, if the Lean Startup for you was a foundational text, this should be your operating manual for building a mission driven business, full stop. Let's give people a pathway out. So I don't know if maybe highlighting a little bit about harder is easier as the key roadmap or if there's another part that you want to really dive into into, but for me, I was like, okay, like, that's the recipe is like, you do these things in addition to some of the government governance protections, like, it will help you drive. So help, uh, help us give people a way out.

Speaker A: Yeah, thanks for saying that. And, yeah, I really like. It's tough when you write a book where the first part is called the Shape of the Abyss. There's going to be some dark moments along the way. Okay, I promise. It's not all like that. And in fact, the goal of writing this book was actually to create a blueprint if you want to avoid these problems, if you want to protect yourself against them, what do we do? And some of the things are legal in nature. Like, you don't have to have a mission statement with the soil and green. You can have a mission statement that actually supports and, uh, protects your purpose. That's called a PBC or a Public Benefit Corporation. But there's a bunch of other things you can do. But most of the book is actually operational in nature because before we can protect, we have to build something worth protecting. So let's start with this principle. Harder is easier. This is one of the key ideas in the book. The best leaders have an ethos, a character, a business philosophy. For example, I tell the story of Saul Price, the father of modern retail, who built fedmart on the principle of being a fiduciary to the customer, not just to the investor. Fiduciary to the customer. You put the customer's interest before your own. So, for example, when competitors would try to undercut his company, fedmart, by selling products below their own costs, Saul would put signs up in his own store saying, don't buy this product from me. You can get it cheaper down the street. Because he said, my job is to get you a better price. I don't care who you get it. That's almost unthinkable in business today, and yet that's why fedmart was such a success. There's a bunch of operational techniques to do this, and what they do is they require a combination of a mission aligned with human flourishing, like we talked about before, and a commitment to a principled way of business. So let me, let me make this all really tangible because I think it can all sound very theoretical, but, like, let's talk about how this actually can help companies make not just a little bit more money, but a lot more money. Let me tell you the story of cloudflare. All of your listeners know Cloudflare, I am sure, the firewall in the cloud. We all use it every day. I can't remember some high percentage of all Internet traffic passes across Cloudflare. They're a very cool company. So in the early days of Cloudflare, the reason I like this company so much is that the founders were very anti corporate speak, corporate jargon, consulting stuff. If you'd asked them at the beginning, do you have a mission statement? They'd just be like, f, no, we're just trying to put a firewall in the cloud, like f off. Uh, do you have cultural values? They'd be like, uh, I don't have time for this right now. Firewall in the cloud. But there's a difference between having a mission statement and having a mission. Mission is an emergent property of organizations. It's actually not something you choose, it's something you discover about who you really are. So Cloudflare found this out multiple times that there were all these situations they would be in. I remember one time that they, um, I think this is all public, so maybe I won't say the details just in case. I think so they were in a situation where pro democracy activists in a certain country were using the Internet to organize and the nation state in question was real mad about it and was trying to, you know, using their hackers to take them offline. So these activists were going around to all these Silicon Valley mega companies and begging for help, like, will you please help us stay online? And one big company after another was too cowardly to do it because they're like, well, we don't want to make this nation state mad because, you know, we do business with them or whatever. So just chickening out left and right. Cloudflare, which at the time was a tiny little startup, was like, we'll do it. And I was like, these were free customers, not even paid customers on the free tier. Right? Uh, this is like you're taking on nation state level hackers for what? For nothing, for no reward. Nobody ever found out they did it. They didn't get to like go. It's just like they just was like, this is the right thing to do. This is why we exist. So we did it. They did that kind of stuff all the time in the early days. And this is the thing with doing the right thing, things that build trustworthiness, that asset I was talking about before, these are things that by definition are ROI negative because the returns are intangible, but the costs are oh so tangible. Right? You're doing battle with these hackers, it's costing you a lot of money. What do you get for it? Nothing. Just the right thing to do. Now what's interesting to me about this story is that several years later they're having lunch and one of the engineers says, you know why I like working here? I feel like this is the first job I ever had, uh, where my job is really to make a better Internet. And everyone on the table is like, yeah, make a better Internet. I think someone even asked m. Matthew, hey, is that our mission statement? He was like, no, we don't have a mission statement. Firewall in the cloud. Get out of here. But over time, that phrase stuck around. People in the company started using it more and more. And his employees convinced Matthew actually, okay, that is our mission. So they adopted it formally as their mission statement to make a better Internet. They also eventually adopted corporate values. Value number one, by the way, is to be principal. So this all sounds like, okay, so what? They have corporate values, but the question is, do you live those values in a principled way when it costs you something? So one day an engineer walks into Matthew's office and he's just like, hey boss, isn't our mission to make a better Internet? You were just talking about how our number one highest performing feature that causes people to upload, sell from free plan to paid plan is Internet encryption. SSL encryption, huh? Uh-huh. Where are you going with this? Well, wouldn't an encrypted Internet be a better Internet? Uhhuh. Uh-huh. So shouldn't we give encryption away for free? If you've ever had someone make this kind of argument to you and find it extremely annoying, I am with you. It's like, oh God, I don't have time for this. Right? I'm too busy. This is our number one performing feature. Can we discuss this another time? But way Matthew described it to me, he said once I saw it, I couldn't un see it. This was just logically, right? So he gets his team together and says, look, the reason we charge for encryption is expensive. So we need to find a way to give this away for free where it won't bankrupt us. So figure it out. Those are the three keywords. Figure it out. And this is the harder is easier principle. You, you do the hard work up front, you reap unexpected rewards later. So the team worked really hard, I think for months. They rebuilt the, uh, technology, uh, infrastructure. I remember one of the engineers had to do like a hand rolled assembly thing to, to get the computational cost down. They, they built tech that now even like 14 years later is still state of the art, by the way.

Speaker B: Way.

Speaker A: Because no, who else would even try to do this. It's just so crazy. They worked out these very complicated biz dev deals with the certificate authorities called contra deals, where they got the cost anyway. They managed to get the cost down so much so that they could give it away for free. Now I want to freeze frame, pause, record, scratch. Keep in mind that once they've eliminated their own costs, they could have just pocketed the difference as increased margin for free free money forever. Uh, not what they did. They shipped the product anyway. The board said, aren't you worried that our conversion rates might go down? Conversion rates did go down. Again, freeze frame. The company could easily have backed out at this point and be like, oh, we can't have, uh, conversion rates go down. Nope, they did it anyway. They didn't calculate the roi. They just did the right thing. Now, of course, it's a happy ending story. The traffic surge their trust that they built up with developers endures to this day. This is a huge part of the reason why Cloudflare, uh, is a 70 billion dollar company today. Because they're willing to take the harder road. Well, if you do that, you get these unbelievable superpowers. Have you ever wondered like, why does everyone and their mother want to work in Cloudflare? They don't. Like, every company's like, oh, we can't find talent. Cloudflare is drowning job applicants. More, far more than they can ever actually hire. If you talk to companies that are super focused, you're like, uh, my company's all over the place. How are you so focused? Like, like you'll often be like, well, yeah, we don't know. It's just, we're just really aligned. What do you. Why, why is business so hard for you? We don't understand. You get these advantages.

Speaker B: The storytelling is incredible. And just like to preview, like, we haven't even delved into stories of like Novo Nordisk yet or Anthropic or Johnson and Johnson or you know, Twilio and like some of these other ones of like both like what worked and what hasn't. Um, I want to end with just like the quick the, the stakes here. And you cited a, a Ted Chiang quote. Most fears about AI are best understood as fears about capitalism. And for me that was the big unlock around where people are really uncomfy with maybe how AI is so of eating up different work jobs or tasks or things like that. I think I just started thinking about the operational implication of like, what if this reality of a one person business operated by AI exists? Well, it's going to default to the governance structure or whatever rules and regulations or like, the, you know, the structure that you give it. And if it's a world of extraction, primacy and profit over human flourishing, like, that's the reality that will exist. And I'm literally sitting in SOMA right now in the shadow of OpenAI, in the shadow the of. Of Andreessen Horowitz, pumping out a bunch of new companies. Cloudflare just around the corner.

Speaker A: No, you're at. You're at ground zero, man. I'm actually. As soon as we're done here, I'm heading straight to Y Combinator. I'll be down the street. We're going to go. I'm going to go have this conversation with Gary Tan. We're going to do it. We're going to do an episode. It's going to be spicy.

Speaker B: I can't wait for the next generation of companies that adopt this and make this a core part of their governance, because I think that's going to be dramatically super important.

Speaker A: I think the next generation of founders deserve better than what we've inherited. On the point of AI governance. Since you have a lot of engineering leaders who listen to this podcast, we all know Conway's law, okay? We all know that the values of the human institution show up in the technical architecture of the product. That's like an old finding from years ago. And of course, if you think about AI, the number one most critical question in AI is the alignment problem. How do we align AI systems to human values? But to me, the much more important question is, who aligns the aligners, right? Like, who watches the watchers? If the people who are doing the alignment are captured by the gravity of extraction, no wonder that AI is going to be the same. And already seeing it, like, how many of these companies are run by people from Instagram? How dangerous it is to, like, train an LLM just to tell people what they want to hear. We're already starting it. We've already had our first, like, it's like the charged lemonade. We've already had our first suicides caused by people talking to LLMs. Like, it's a very dangerous situation. And that's before we get to the, uh, you know, all the fears related to agentic processing and all that stuff. So I think we have a big challenge ahead of us. AI is a massive exacerbator of existing problems because it's a power amplifier. To me, this is like the first electric guitar. You're like, what's the big deal? It's just a guitar plugged. Into an amplifier. Oh, electric guitar is a very different thing. It is far more powerful and it is capable of new things that the humble regular guitar is not. And it's not super obvious at first what happens when you plug in the amplifier. You know, distortion and feedback and all these other things are now new live possibilities we'd have to deal with before. So I think we should all be on the lookout as entrepreneurs, we have this incredible opportunity, be on the lookout for the problems that will inevitably be caused by the equivalent of distortion and feedback as we take analog processes and make them magentic. But more importantly, understand that if you don't get the governance of your company right, no other decision you make in the long run will be at all consequential because you won't be the one

Speaker B: making it a powerful way to close us off. Eric, thank you so much for your time. But also thank you so much for all of the work and the research and the care and intention you put into this book. And I'm just excited to be a part of helping shape the next generation of decision makers and the people listening to this and the role that they play. So just thank you for taking the time with our community.

Speaker A: Well, gosh, thank you very much for your really kind words and just, yeah, thank you for taking the ideas in the book seriously before they're popular. You know, I think we can see the early signs that this is going to be a thing just like Lean Startup was, just like these other ideas were. So I have a special appreciation, special gratitude for people that had the courage to stand up for them, you know, before it was the hype thing to do. So thank you for that. And everybody, uh, like and subscribe, you know the drill.

Speaker B: Yep. And I believe our this episode is coming out the day the book goes live. So if you are listening to this May 26th.

Speaker A: Yeah. So please run to your local bookstore, support your local independent bookstore. Run in there right now and just say I gotta have a copy of Incorruptible for everyone on my team. Please get them in stock. Need uh them as soon as possible. You help me more than you know whenever you do that. So thank you.

Speaker B: If you're listening to this and you're wondering how can I connect with other engineering leaders in my city. Pull up your phone right now and go to elc.community click our chapter page. You can see that on the menu on the left. Find your local chapter and click join. We're hosting virtual and in person events all the time and this is the best way to help you get involved, expand your network in your city, and support your leadership and career growth. So pull up your phone, head to ELC.community join your local chapter and get involved. A huge thank you to all of our local leaders who make community happen. And thank you for listening to the Engineering Leadership Podcast. It.