In short
Eric Ries argues that many companies “make money without creating value” in a hyper-financialized economy, because profit calculations ignore deferred liabilities, negative externalities, and even “input factors” like stolen value or human harm. He blames shareholder primacy and public-market incentives (“ghost of the public markets”) for steering strategy toward quarterly stock-price targets, eroding product quality and customer trust. He proposes “governance fortresses” and alternative fiduciary structures to prevent “financial gravity” from corrupting good companies.
Guest backgrounds
Eric Ries is an entrepreneur and author of The Lean Startup. He later focused on how founders can protect what they build, including building a long-term stock exchange.
Key claims
Value creation requires fully informed, uncoerced transactions; legal isn’t necessarily moral or value-creating. Public listing makes employees watch the ticker and treat it as a veto. Independent directors can betray missions due to career incentives.
Notable examples
Whole Foods price-lowering blocked by “the markets might not like it”; the “legend of Saul Price” (FedMart → investor takeover → liquidation; later Price Club → Costco); Costco’s capped-margin, membership model as an enduring governance fortress.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Chapters
Tap a time to open that second in VOUnderstanding the Impact of Capital Markets
0:15 to 1:25
Discussion on audience experiences with brands affected by capital market decisions.
“Check out the latest episode of Why Are You Like This wherever you get your podcasts and on YouTube.”
Introduction to Eric Ries and 'Incorruptible'
1:25 to 1:50
Eric Ries discusses his background and motives for writing 'Incorruptible'.
“strategy meeting, trading long-term customer trust for short-term stock price bumps.”
Defining Value in Capitalism
1:50 to 4:00
Ries explores the definition of value and its implications in capitalism.
“All right, Eric, let us start as Julie Andrews sang in The Sound of Music at the very beginning.”
Value Creation vs. Value Destruction
4:00 to 6:10
Ries discusses how misleading transactions can lead to value destruction.
“In order for that to be true, we have to have fully informed, uncoerced, voluntary transactions.”
Legalities and Morality in Business
6:10 to 7:30
The conversation shifts to the legality of business practices and moral considerations.
“So that's like the basis of competition is who can improve their product the most.”
Redefining Profit and Value
7:30 to 11:00
Ries provides a comprehensive definition of profit and its relation to value creation.
“And, you know, I won't do the whole derivation now, but when you ask somebody, like even ask an entrepreneur and say, hey, you're making a for-profit company.”
The Flaws of Current Economic Definitions
11:00 to 13:00
Critique of existing economic definitions and an argument for a new framework.
“That value transformation, what they call value add, that created$150 of surplus value.”
The Role of Public Markets in Value Destruction
13:00 to 14:00
Discussion on how public markets influence corporate strategies and value.
“So I don't, this is not an argument for stakeholder capitalism in the sense that we're saying, well, we just stop caring about profit.”
The Tyranny of Capital Markets
14:00 to 18:00
Explore how capital markets influence company decisions and value creation.
“I have, for the last couple of years, referred to it as the tyranny of the capital markets, wreaking havoc, certainly on long-term value, nurturing, sustenance, and creation.”
Historical Perspective on Business Ethics
18:00 to 22:20
Understand the historical shifts in corporate purpose and ethics over time.
“directly to another one of the central tensions in really, I think, across your work, but in this book, which is the exploration of the relationship between the short-term and the long-term.”
Show all 23 chapters
The Consequences of Short-Term Focus
22:20 to 25:00
Learn about the negative impact of prioritizing short-term profits over long-term value.
“that the official purpose of a corporation is to be a financial instrument to enrich its shareholders.”
Case Study: Saul Price and Retail Innovation
25:00 to 28:00
Discover the story of Saul Price and the evolution of big box retail.
“And we're confusing objectives and strategies.”
The Story of Saul Price: A Retail Legend
28:00 to 31:34
Learn about Saul Price's innovative approach to retail and trust-building.
“without any value to the customer and it led to perhaps bankruptcy.”
The Downfall of FedMart and Rise of Costco
31:34 to 33:38
Discover how investors undermined FedMart and paved the way for Costco's success.
“They were able to convert the company to what they viewed as business best practices.”
Understanding Costco's Unique Governance
33:38 to 36:55
Explore the governance structures that allow Costco to thrive against market pressures.
“Jim Senegal at Saul's funeral was asked by a journalist, sounds like you learned a lot from Saul.”
Fiduciary Responsibility and Market Dynamics
36:55 to 42:05
Examine the concept of fiduciary responsibility in modern corporate governance.
“But I want to ask you a follow-up question to something that, you know, triggered by what you said about Saul.”
The Choice of Company Structure
42:05 to 44:30
Learn about the importance of individual agency in shaping company structures and fiduciary duties.
“that seems to be a bit in, you know, with that force's contribution to the problem, it can leave one feeling a little bit hopeless, like, well, what the fuck do we do to fix that?”
Unlearning Corporate Norms
44:31 to 47:00
Eric Ries discusses unlearning assumptions about shareholder primacy and corporate governance.
“Can you give us one example of something you had to unlearn to get from there to here?”
Understanding Financial Gravity
47:01 to 49:55
Explore the concept of financial gravity and its impact on organizational structure and behavior.
“The last question before the last question, the subtitle of your book is Why Good Companies Go Bad and How Great Companies Stay Great.”
Mental Models and Institutional Change
49:56 to 51:44
Discover the significance of changing mental models for institutional building and the pursuit of human flourishing.
“And in this last question, because I am all powerful, at least for this question.”
The Power of Individual Action
51:45 to 54:05
Learn how individual actions can drive systemic change and challenge the status quo.
“And I think a lot of the minds that need to be changed have a strong vesting in the problem.”
Fragmentation of the Audience
54:06 to 56:00
Examine how audience fragmentation affects value perception and loyalty in today's market.
“whether and how every decision a company makes either creates or destroys value, I would say it's wildly important.”
Navigating Loyalty in a Fragmented Market
56:00 to 57:27
Explore how audience loyalty varies across different segments and its impact on value creation.
“And as it turns out, he could do a whole lot of egregious things and not lose many voters at all.”
Transcript
Automatic transcript. May contain errors.0:00Megan Rapinoe here. This week on Why Are You Like This, I'm talking with Vice President Kamala Harris. We talk about her thoughts on public service, how D.C. has shaped her, and we find out if she's planning to run for president in 2028. Check out the latest episode of Why Are You Like This wherever you get your podcasts and on YouTube. I've been on book tours, so I've been talking to audiences all over the country. I ask people, does anyone have a story for me of a favorite brand that you interacted with, bought from, worked at, where it got either taken over by private equity or taken over by a public company or it went public?
0:38And everyone, every single person got a hand up. Okay. Anyone have a story for me where, thanks to the massive financial resources of our capital markets, the product got better afterwards? And every hand goes down.
0:57Welcome back to Create or Destroy. It's a business show, a marketing show, and a show that argues they've always been the same thing. My guest this week is entrepreneur and author Eric Ries, who wrote the seminal book, The Lean Startup, and spent years teaching founders how to build companies before realizing he'd never taught them how to protect what they built, which is why he wrote his new book, Incorruptible. In an economy where profit and value are too often conflated, too many companies allow what Eric refers to as the ghost of the public markets to sit in every strategy meeting, trading long-term customer trust for short-term stock price bumps.
1:31Our conversation looks at why shareholder primacy became an economic orthodoxy that can destroy enterprise value, how product quality can get sacrificed when quarterly targets drive strategy, and what exceptional companies like Costco as one example understand about building a governance fortress that protects sustainable growth. Let's get into it. All right, Eric, let us start as Julie Andrews sang in The Sound of Music at the very beginning. So like this show, your new book, which I hold up for our audience, Incorruptible, which is a great book by the by, looks at what creates and destroys enterprise value as one of its central considerations, right?
2:14And in fact, to quote from the book, you say, in today's hyper-financialized economy, we support many ways of making money without creating any value at all. So I've kind of got one question, two parts. One, if somebody's making money, they're receiving money from somebody who at some point in the process think there's some value in exchange for their money. So I guess what I'm asking is, what's your definition of value? Because like, beauty isn't it in the eye of the beholder? Yeah. Oh, yeah. Well, let's start with that. Yeah. So if you look, you know, if you ask people to justify capitalism, to defend it on a moral basis for hundreds of years, people have been grappling with this question.
2:57And they, there's like, I kind of think it was like sedimentary layers of arguments that people have tried over the years. And anyway, eventually you dig down, dig down, you will hit the moral You have hit the only thing I remember from 10th grade geology, so I appreciate it. My pleasure. You hit the moral bedrock of capitalism and people say, well, look, if two people are engaging in a fully informed, uncoerced, voluntary transaction, then they must be better off afterwards than before. Otherwise, they wouldn't have engaged. And that, I think, is a very powerful logic. That is the logic of value creation.
3:32That is, two people can transact together, can trade together, and leave both parties better off. When you hit this moral bedrock, it makes sense. Like, I think people who think of economic activity as a form of theft can often be confused by this point because it looks like a magic trick. Two people transact, both people are better off, meaning there's more value in the world than there was before. Yet this value was not stolen, it was generated. Okay, that's the magic of it. The problem is in the criteria. In order for that to be true, we have to have fully informed, uncoerced, voluntary transactions.
4:09And that's where so many forms of this value creation today fall down. So just to take a simple example, if I deceive you, if I make you addicted, if I do something where I change the terms of the agreement afterwards, if I commit fraud, if I coerce you, like there's so many ways to violate this simple agreement. And I think one of the ways that we run into trouble in our supposedly free market economy is we've forgotten this simple lesson that in those moments, we are no longer engaging in value creation. We are engaging in value destruction. Yeah, I mean, that's extractive. And I think depending upon what you mean, at least as I hear you say it here, I think those are illegal activities.
4:57We have laws, right, to prevent against fraud. Well, we used to. So that's an interesting point. I think that those protections have become watered down to an almost unbelievable degree. And people have found a lot of innovative ways to evade those restrictions or even to do new things that nobody really ever considered when the laws were written. And of course, at the same time, we've had a wave of regulatory capture and, you know, obviously, I'm going to get into all the politics of the situation. But I think more and more and more and more people are finding ways to trick people. But frankly, just trick people to make money.
5:36Cory Doctorow has a whole book out about it called In Shittification, talking about the phenomenon of locking customers into a product and then deliberately making it worse. Now, is it a crime to make your product worse when people are obliged to use it? Not as the laws are currently constructed, although our grandparents would have been like, obviously, yes, what are you talking about? But I think you have to look at this. We're so used to focusing on this through a political lens, the lens of what should be permitted and not permitted. I think we lose track of the moral question of what ought we to aspire to do.
6:09So, for example, we tell ourselves this fairy tale that in a free market, companies compete to make the best product. So that's like the basis of competition is who can improve their product the most. And yet the inshittification that we're all watching happen left and right is people are finding other ways to compete. Compete by making products worse, competing by hiding negative externalities, compete by making people sick. I mean, we literally have health insurance companies hiring doctors en masse to help them deny legitimate claims more efficiently. What are we doing? Again, I grant these are all ways of making money.
6:47And even if you stipulate that they are somehow illegal, that still doesn't make them right. And it certainly doesn't make them profitable value-creating activities. Oh, well, first, I think your distinction between legal and right is an important one, as, of course, things like slavery were legal at one time, right? And the legal and the moral have oftentimes and for a long time had a tension. I want to, well, actually, I want to ask you to answer the part of the original question, which is what's your definition of value? Yes. So in the book, I give a much more thorough definition. And, you know, I won't do the whole derivation now, but when you ask somebody, like even ask an entrepreneur and say, hey, you're making a for-profit company.
7:40Do you know what that means? They'll be like, dude, come on. Everyone knows what it means. I'm like, well, indulge me. Tell me what it means. I'll be like, look, it's just, you have more money left over than you started, right? It's like revenue minus expenses. Come on, this is very simple. I said, I see, I see. I hear that it's very simple, but what about the case of a Ponzi scheme? Is that profitable? Does that create value? And they'll be like, no, why not? Revenue minus expenses, right? And they'll have to think about it for a second. They're like, no, no, no. I learned in Econ 101. Ponzi scheme pushes its liabilities, its expenses into the future.
8:17Accountants call this deferred liability. So if you don't account for those deferred liabilities, it seems profitable today, but it's not profitable in the future. And so we can internalize those future liabilities and recognize them in the current period, realizing that all we've done is taken revenue minus expenses and shifted the expenses in time. I see. I see. So when you said it was simple, what you meant was revenue minus expenses minus deferred liabilities. Yes, that's the definition. Okay. but what about a situation where I take pollution and I dump it into the river and I make people in the town next door sick?
8:53Somebody has to pay for their healthcare but not me. Imagine I get away with it so no one ever finds out that this happened. Is that profitable? And again, people have this intuition that that can't be right. They're like, no, no, no, that's not profitable. Just like before you shifted the expenses in time, now you've displaced them in place but that doesn't mean they weren't born. The expense still happened. So in economics, they call that negative externalities. Now, what's funny is you're like, okay, so the simple definition is revenue minus expenses, minus deferred liabilities, minus negative externalities.
9:26Anything else? Oh, no, no, no, no, no. Okay. But it seems to me you're defining profit, not value. Well, I don't think there's a distinction. Because to me, all profit is, is the capture of the value that's previously been created. So I personally do not think that companies that make money without creating value are profitable. That this is part of the difficulty that we've gotten ourselves into. Agreeing with the difficulty, is this an argument for stakeholder versus shareholder capitalism? No, no, I'm not into that stuff. In fact, I tried really hard to write the whole book without using the word stakeholder, which was very difficult because of course that is the way we currently talk about this.
10:09But the problem is, we'll get into the problem with stakeholder capitalism before, but let me answer your question about like how do we derive this properly? Because everything I'm saying, deferred liabilities, negative externalities, you'll learn this in an econ class. This is not like some new thing that nobody knows. If you take econ, they'll walk you through all these problems with our current definition of value. And then if you say, well, should we change the definition? They're like, no, that's just the one we've used for this all the time. And it sounds very abstract. I know this is all sounding very philosophical, but let me give you one more error in thinking.
10:43And you can see how this starts to become very, very, very consequential. What about a product that uses up its inputs in an inefficient way? So for example, most people will give you the example. Tell me about value creation. I'll say, well, I take a$50 piece of wood. I turn it into a$200 table. That value transformation, what they call value add, that created$150 of surplus value. But what about this situation? What if I steal a$200 piece of wood and turn it into a$100 table? Imagine again that I get away with it. No one ever finds out that I did this. Have I created value? According to my balance sheet, I have made a profit because I had zero expenses and now I have$100 in returns.
11:30Calling that profitable is laughable. That's like a kid who takes$200 of their parents' organic lemons makes a lemonade stand and makes$25 and thinks they made a profit, right? They didn't have to pay for the expenses, of course. But that's not, everybody understands intuitively that cannot possibly be profitable. Economics has a term for this too. We call that the input factors of production have to be accounted for. But it's worse than just theft. What about a production process that consumes a human life as part of its production process? Imagine a hitman for hire, which is pay me money, I murder somebody.
12:07Is that profitable? Like you do this exercise with people in the real world that get real quiet at this point. Like, oh no, that can't possibly be right. The human life has almost infinite value. There's no way you can, but once you accept this premise that value creation is really about revenue minus expenses, minus deferred liabilities, minus negative externalities, minus the input factors of production, the whole thing collapses. and so we need a better and much more durable definition. Now, I frame it in the book in terms of profit. I personally think what it means to be a for-profit company is to be one where we attempt to maximize human flourishing, not just to make money.
12:48And again, it sounds philosophical, but I give many examples in the book of concrete business decisions that today's frameworks make difficult, that this framework makes easy, that lead ultimately to companies being more profitable, literally making more money. So I don't, this is not an argument for stakeholder capitalism in the sense that we're saying, well, we just stop caring about profit. Shareholders don't matter. It doesn't matter if companies are efficient or inefficient. I care about those things deeply. The issue is the current way we are thinking about these terms leaves us blind to numerous consequential business opportunities that modern business is not capable of pursuing.
13:28All right. I'm kind of pulling myself back from going down that road because I want to ask you about the why and how we got here. And I'm wondering, it's one of my favorite lines amongst many favorite lines in Incorruptible. You write, companies are, quote, allowing the ghost of the market to be a silent participant in every strategy, product, and board meeting. I have, for the last couple of years, referred to it as the tyranny of the capital markets, wreaking havoc, certainly on long-term value, nurturing, sustenance, and creation. What role, putting aside the startup world for the moment, even though they're looking at the capital markets just as clearly as they raise capital and look at their valuations and dilate, blah, blah, blah.
14:27what role do the public markets play in our having gotten here? And is there a way out of their tyranny and ultimately value destructive expectations? Oh, yeah. Yeah. I feel bad. Like, I feel like when I talk about this, we're used to seeing these as like absolutely intractable problems caused by these massive systems and no one knows what to do. But having worked on this problem a lot myself. I mean, I literally started a new stock exchange, so I know something about it. We're going to talk about that. Yeah. The problems are not difficult to solve. We actually know what to do. So this is the really wild part, and I'll get to the public markets in a second, but before we get into the specifics, you've got to understand that for many of these problems, we are following a set of business best practices, finance best practices that have become an economic orthodoxy in the last 50 years.
15:22If you go to the core of each of those practices, you will find there are academics whose job it is. Their full-time job is to study these practices to see how they perform. And if you talk to those people, they're like pulling their hair out. They're like, yeah, it's well known. I can't tell you how many academics I've talked to who are like, yeah, everybody knows that this practice is value destroying. I'm like, well, if everybody knows it, why is it our economic orthodoxy? Like, I don't know. So not only do we know these practices are destructive, we actually also have real well-studied alternative practices that are superior.
15:54So go to the public market. Let me explain the quote that you read from the book. I've talked to a lot of CEOs who've taken companies public a lot. And if you ask those CEOs, what's the one thing that changed immediately before and after you went public? Like, what do you notice? They'll always say the same thing. They say, after we go public, every employee is like watching the stock ticker all the time. and they start to take product direction, strategic direction from this stock ticker. And you're like, well, that doesn't make sense. They're like, I know. And we tell, in every meeting, we tell people don't do this, don't.
16:29But you start to sit in these meetings and people start saying stuff like this. They're like, hmm, you know, hey, should we raise prices or lower them? Should we, you know, like there's a famous story about Whole Foods in the book I tell. Whole Foods is in a major dilemma where they were no longer price competitive and they had to lower prices. And they kept having these meetings or like, hey, I think we should lower prices. And someone would say, yeah, but the markets might not like it. And that phrase, the markets might not like it, it's like a veto over anything that someone might do. It is perfectly natural and logical because you give people stock options.
17:02Their personal net worth is going up and down with the ticker. It's perfectly natural to start to be worried about that and also to start to look for patterns. I don't know, we did this thing before and the market, the stock went down. So I guess that means the markets don't like it. And I call this a ghost because this is very different. When someone says to me that the markets might not like it, investors might not like it, I'm always like, oh, have you talked to some long-term investors and found out that this is what they do want? Oh, no. I'm just inferring it from the ticker, right? So it's having a healthy long-term partnership with your investors, very healthy behavior.
17:37Letting the ticker be this ghost, this Ouija board in your business decision-making, almost always a path to ruin. I completely agree. And I think what the line speaks to, and you referenced the new stock exchange, which is the long-term stock exchange you created, the line and the naming of the long-term stock exchange speak really directly to another one of the central tensions in really, I think, across your work, but in this book, which is the exploration of the relationship between the short-term and the long-term. And in Corruptible, you do talk about the value destructive outcomes. I'm going to quote you again when, if I can read my own handwriting, when investors demand we prioritize short term profits, focusing on stock price more than product or customers over everything else.
18:37Right. What CEO, what have we taught chief executives about the primacy? And I'm going to use stakeholder, but not in the context of stakeholder capitalism. You mentioned, you know, your employees' wealth goes up and down with that ticker. The investor has a point of view. But to your point, we're forgetting the customer, which seems at least from a common... Oh, Peter Drucker would be so mad. So mad. He would be so mad. which seems like a pretty common sense, stupid fucking thing to do. How have we lost sight of the customer so often in this current iteration of economic behavior? Yeah, yeah.
19:22You ready for a little history lesson? Yeah, I mean, yes, sure. Depending upon how long. Yeah, well, so listen, I'll try not to belabor the point. But this, I think, is very important to understand how we got here. So many of the problems that we're talking about are the ways of making money that don't create value. Our grandparents and great-grandparents would have seen them as crimes, okay? Like we've changed our perception of what is legitimate and not legitimate in business quite a lot in very recent memory. So just to give a simple example, in the 19th century, if you tried to convert a company from its stated purpose, every company in the 19th century had to have a stated purpose and that purpose had to be aligned to some public interest.
20:04You say, I want to borrow a bunch of money, take over this company and change it from being a railroad to just being a company that exists to enrich me and my shareholder buddies. That would have been considered a crime. Crime. The courts would void your charter. Okay? So we've come a long way. This didn't change, by the way, in the state of Delaware until 1899. This is not ancient history. 1899. And even after 1899, you still had to declare a corporate purpose. that didn't change until the 1980s. Because what happened was over the course of the 20th century, we started to get more and more and more comfortable with writing in a corporate charter that the purpose of this company is to, and there's like a mad lib, like a blank line, and you write in any lawful actor activity.
20:49Having just started a company seven, eight months ago, this is exactly what I've ever been. Lawyers are like, look, write it in. Any lawful actor activity. Because lawyers are like, look, having maximum optionality is good. And I always ask people, listen, call your lawyer, do me a favor. Do you think, like I talked to a founder, I've helped so many people start so many companies, I talked to a founder. Do you think your corporate purpose includes, I don't know, let's say it becomes legal in the future to kill your own customers, convert them into Soylent Green and eat them? Is that covered under any lawful purpose?
21:22And every founder, of course not. I'm like, well, why don't we, do you think you could change it? Do you mind if we write any lawful purpose except Soylent Green? And they're like, well, let me call my lawyer. I'll call my lawyer and ask. I'm sure that would be no problem. They call the lawyer and they're stunned when the lawyer says, because they expect the lawyer to be like, sure, if you want to, it's your funeral, whatever. Lawyer didn't say that. Lawyer says, you know, you never know what you might need to do. Maximum valuation comes from maximum optionality. So we've gotten into this, this starting in the 1950s and 60s, we started to get into this ethos where corporations were starting to be perceived no longer as human institutions, but rather as financial instruments.
22:01This makes everyone's life a lot easier. The theory was it makes the lawyers and the directors, the boards, the courts, everyone's job is easier if we can simplify what is the responsibility of a company. So as companies more and more and more were saying, well, we're here to do whatever we want, the courts eventually decided through doctrines like the Revlon decision in Delaware that the official purpose of a corporation is to be a financial instrument to enrich its shareholders. And that shift from seeing customers as the primary, as Peter Drucker did, as most of the greatest entrepreneurs in history have, to seeing shareholders as the primary thing, that seemed like a good idea at the time, but we now have the data that has been an unmitigated disaster of an idea.
22:58and what it takes to make a cry-worthy pasta. You can listen now wherever you get your podcasts. Is the U.S. military facing a leadership crisis? It would be an obligation on the part of Secretary Hegseth and President Trump to say, look, here's why these officers didn't meet our standards. And it can't be because they were politically aligned with somebody they didn't like. I'm John Feiner. And I'm Jake Sullivan. And we're the hosts of The Long Game, a weekly national security podcast. This week, Admiral Bill McRaven joins us to reflect on the 25th anniversary of 9-11 and what the firings and resignations of senior military leaders mean for the armed forces.
23:39Search for and follow The Long Game wherever you get your podcasts.
23:47After years of rumors, Apple finally launched a folding iPhone. The iPhone Duo starts at$2 ,000, making it Apple's most expensive phone ever. It's Apple's bold attempt at proving that folding phones are finally worth your attention. This week on The Vergecast, we went live from Apple Park with our first look at all the new gadgets. Plus, Lauren Feiner explores the tech behind the two-hour marathon. And the story of how big tech set the agenda for how students are taught to code. Check out The Vergecast wherever you get your podcasts.
24:29it seems to me and and i've talked about this i think on this show but certainly in things i've written before that you can still the math maths until you get it wrong which is you can still be there to maximize returns for investors, that's an outcome of maximizing the value you add for the price you charge for the customer. And we're confusing objectives and strategies. It's like it's a very typical legal mistake, I think. It's actually kind of funny when you think about it. Because it's true that if you do the things I recommend in this book and the things that Peter Drucker recommended, if you, you know, maybe we can talk about some case studies.
25:21We can get into some of these examples. The evidence is really clear. Like we have really, really good evidence that if you prioritize customer welfare, employee welfare, community welfare, like if you actually invest in your company for the long term, you produce outstanding, absolutely outstanding in returns for investors. So it's not like, this is not anti-investor. In fact, it's - To the contrary. It's absolutely the opposite. So like, to me, the analogy I use all the time is profits or investor returns or whatever the thing is that we're trying to optimize for. That's like the exhaust that comes out the engine of an internal combustion engine, right?
25:57Someone notices, hey, look, the faster the car is going, the more exhaust it produces. Therefore, the purpose of a car is to produce exhaust. And therefore, the best way to measure its speed is to measure the exhaust. Uh-oh, Goodhart's Law would like a word. Next thing you know, you're throwing sawdust in the engine to create the perception of exhaust rather than the real thing. Now, Sherald of Primacy is even worse. Sherald of Primacy is taking your tailpipe with all that exhaust coming out and moving it around to the air intake. And now you're just in this circular thing where you're choking yourself off.
Read the full transcript
26:26Again, I don't mean to make light of this. This is extremely consequential in people's daily lives. When I've been on book tours, so I've been talking to audiences all over the country. I ask people, does anyone have a story for me of a favorite brand that you interacted with bought from worked at where it got either taken over by private equity or taken over by a public company or it went public and everyone every single person got a hand up okay anyone have a story for me where thanks to the massive financial resources of our capital markets the product got better afterwards and every hand goes down.
27:01Everyone's got a story about after the capital infusion, after the change of corporate purpose to be more shareholder-oriented, things get worse, not better. And in fact, I have a whole archive of these stories now. Not only do things get worse from a customer point of view, these companies often go bankrupt because the value-creating engine that served customers and employees before is now broken and then shareholders suffer. So again, this is not anti-shareholder at all. You mentioned, exactly. And it's, you know, I think a lot about private companies like New Balance and Mars and so many others that plan in generations.
27:43But, I mean, they plan in shorter cycles than generations, but they think in generations. You talked about case studies. Give the audience, if you would, a case study of where they focused on the customer to the upside and where they extracted value without any value to the customer and it led to perhaps bankruptcy. Oh, not perhaps. I'll tell you a literal story. This is one of my favorites in the book. So this is the legend of Saul Price. Yeah. You know, when I was a kid, Saul Price was much more famous than he is today. I feel like his legend is not as well known as it should be. But I like this story because it has a tragic arc and a happy ending.
28:27So that's kind of unusual for these stories because you usually get one or the other. So in the 1950s, Saul, who was a lawyer, he was like a successful mid-career lawyer, decides to make a career switch and become a retailer. So he's widely considered today to be the father of modern big box retail. Like he invented the concept. So many of the big brands that exist today are derived from his ideas. in fact, Sam Walton once said that when he was thinking about starting a company and getting into retail, he named his company Walmart as an intentional tribute to Saul's original company, which was called FedMart.
29:02Started in my hometown in San Diego. Now, Saul had been trained as a lawyer, as I mentioned. And so as a lawyer, he was taught that he was a fiduciary to his client, meaning he has to put the client's interest before his own. So as a retailer, he just asked himself this simple question, well, who's my client? And he thought, oh, my client is the customer. Therefore, if I do right by my customer, then everyone else will benefit. So he had an explicit, what we would now call a stakeholder hierarchy, although he never used that word, customers first, employees second, shareholders last, you know?
29:37And he would do stuff, he would go to just outrageous lengths to try to get people to trust him. Like that was really his focus. How can I build a company that is trustworthy? He paid above average wages. You know, he was an early opponent of segregation. Uh, if he, if he did a discount, like with, if he had a partner, like a vendor, there's a famous story where once one of his vendors, he said, listen, why don't we, why don't we both discount this product? Cause we'll sell more volume. And then it didn't sell more volume. And he made his category buyer go back to the vendor and give them their money back.
30:08He's like, we promised it didn't happen. My favorite of all the stories is he would say, if one of his competitors were trying to sell a product below cost, product dumping to try to drive him out of the market, he would put up signs inside his own store that would say, don't buy this product from me. You can get it cheaper from these bozos down the street. He viewed his responsibility to his customers to look out for their well-being. And so as a result, people would drive miles out of their way to shop at FedMark. Okay, so this all sounds great. The company obviously grew and thrived. It became a huge success story.
30:44He took the company public. He became a wealthy man. And yet his investors were never, ever satisfied. No matter how much money he made for them, they felt like he was always wasting money, spending money on things he didn't have to. They're like, why do you pay higher wages than you have to? And he would say, well, I don't pay wages because I have to. I pay wages because I want to. He said, well, why do you charge lower prices than you have to? I don't charge low prices. He believed in low prices and high wages. That was the engine of his prosperity. So he fought this battle with his investors for more than 20 years, culminating in one day in 1975 when he came to work, tried to get into his office and they had changed the locks on his door because the investors had intervened to fire him.
31:29He didn't work there anymore. So the investors got what they wanted. They got Salt Price out of there. They were able to convert the company to what they viewed as business best practices. and as a result, by 1982, within just seven years, they had managed to drive the company completely into liquidation. They utterly ruined it because they were betraying the trust that Saul had built up over all those years. And that's something I think the investors kind of cynically understood is that trust is an asset that can be used or abused and they were excited to abuse it. Of course, eventually they got their comeuppance.
32:03Now, I promise that the story has a happy ending though. This is my favorite little detail. Saul took two weeks off after this happened to him. Like he was really upset. But he was such a classic entrepreneur. Two whole weeks. He took a two-week vacation. As far as I can tell, for the first time in this whole enterprise, he took a vacation, took his time off. And after two weeks, he decided he was just going to start again. And so he leased the office upstairs from FedMart. Like he went back to the same building where he had started the company originally. Leased a new office, started a new company.
32:33That company was called The Price Club, which today is not that well known. but that's because of something else that happened around the same time. One of the people that quit in protest because Saul had been fired was a guy named Jim Senegal. And students of modern business history will now understand where this story is going. Jim started his own version of this idea and his company and Saul's company years later were to merge to form a company that they called Price Costco. But of course, we just call it Costco. See, I've snuck in the deep cut origin story of Costco into this story. And what I love about this...
33:08By the way, sorry to interrupt, but for those who haven't listened to the Costco episode of Acquired, you must. I say episode like it's not four hours long, but, you know, it's brilliant. It's really terrific. And what's really interesting about the Costco story is that Costco, to this day, still maintains the ethos of Saul Price. They still do the capped margins and the membership fees and the low number of SKUs and what he called the intelligent loss of sales. So many things they do that are Saul Price originals. Jim Senegal at Saul's funeral was asked by a journalist, sounds like you learned a lot from Saul.
33:46And Jim said, no, that's mistaken. I learned everything from Saul. So he was a giant. And yet I think a question we have to ask ourselves, and this gets back now, but let's get back into the modern times and to our current problems. Today, Costco is a$400 billion public company. Huge. One of the best performing stocks in the whole public markets. And yet every couple of years, investors try to destroy it, to convert it away from these, quote unquote, money losing practices. One analyst I quote in the book said, Costco takes money that rightfully belongs to shareholders and instead invests it in the customer experience.
34:26As if that was a criticism. so why was costco why is costco endured when fed mart was destroyed this is one of the big questions we have to grapple with when i ask civilians this question like i watch videos i watch videos about economics and business all the time you know because i'm curious what's in the pop culture and i was watching a video the other day and the guy's going on a long rant about just what you said a minute ago only family-run companies only private companies can truly ever be trusted to maintain a multi-generational sense of purpose and promise to avoid getting sucked into the ROI thinking, the quarterly capitalism.
35:01And he's listing off companies. I think I remember what, you know, Mars and Ford and this and this and this. And at the end of the video, he's like, oh, and also Costco for some reason. Anyway, moving on. And I'm like, wait, what do you mean moving on? Moving on? Wait, you just said that only these companies can do this. Why has Costco been able to? Most people you ask them will say, well, because it's so big. It's too big for Wall Street to mess with. That is a ridiculous statement. Nothing is too big for Wall Street to mess with. It turns out Costco has been proven over and over again. Over and over.
35:31I have so many tragic stories in this book. I'm sorry for those who find the book kind of down a bit of has a bit of a downer to it. I'm sorry about that. But we have to grapple with how big this problem is. However, Costco is a member of this unusual set of exceptional companies that have not fallen prey to this phenomenon. And we don't think of them as a set. We just interact with them and kind of like, oh, those guys seem like the good guys. That's nice. That's good to know. But if you take this set of companies, Costco, Nova Nordisk, Patagonia, Vanguard, a lot of them have acquired episodes, interestingly.
36:10If you take this companies that you say, well, what do they have in common? It's not culture. It's not values. It's not geography or decade or personality. None of those things, not brand. Think about how different the brand of Costco is from the brand of Patagonia. What they have in common is that they defy our modern governance ideas about how a company should be structured. They are protected by what I call a governance fortress that prevents investors and outsiders from bullying them and pushing them off their mission. Yeah, and you talk about Anthropic protecting itself in this moment similarly.
36:48And so I think we're going to get more into that in a little bit towards the end of the show. But I want to ask you a follow-up question to something that, you know, triggered by what you said about Saul. Saul's perspective was that he had a fiduciary, lawyer's perspective, fiduciary responsibility to his client, and his client was the customer. Inside the book, you cite a National Bureau of Economic Research study of 401 CFOs that found that 78 % of these CFOs would willingly cancel profitable projects if it meant hitting analyst targets, which is both proof of the ghost of the market that we spoke of earlier that you wrote of, but also raises the question of to whom does that CFO have a fiduciary responsibility?
37:43That's right. And so I look at that and it is a complete breach of responsibility, but maybe that's definitional. How do we allow that to be perpetuated? Yeah, I think things are a major muddle. And one of the things I learned building a stock exchange is you have to spend a lot of time with investors, not just with companies. And if you talk to long-term investors, they're just as mad about this as any of the rest of us are. So when people say the market or investors want this, shareholders want this, I always ask them, which ones exactly? Because the quantitative hedge fund is very different from the long-term family office or university endowment.
38:25In fact, I was once having lunch with two CIOs, one at a quantitative trading firm and one at a long-only hedge fund. And they were comparing their trading velocity for trading frequency. And the guy at the quantitative fund said, yeah, our fund, we've gotten our average holding period for stocks down to 10 minutes. And the guy at the long-only place, really? We haven't made any trades yet this quarter. We like our position. And the other guy's like, what do they pay you for? They pay you not to do anything? He's like, yeah, that's right. When there's nothing to do, we don't do. You guys, anyway, so like very different perspectives.
39:04So when you say shareholders, who are we talking about? Who are we talking about? Most market movements today are being driven by non-substantive factors relating to technical trading velocity and stuff. So most market movements today are noise. And that's why we're seeing these extended bubbles where the market trades away from fundamentals for long periods of time. And trading is not really being done. I'm sorry to interrupt, but for clarity, when you say they're non-substantive factors, is that another way of saying it's just sentiment and narrative? Yeah, yeah. It doesn't have to do with the specifics of how that business is performing.
39:39It has to do with some other fact. Like think about the massive boom bust that SaaS software stocks have gone on in recent years. The massive boom that they had during the pandemic. Some of those stocks were justified, but a lot of companies that had nothing to do with them just happened to ride the wave up and then collapsed. A lot of CEOs were fired when that collapse happened as if it was their fault. Meanwhile, now those same companies, the stock is trading like at abysmally low multiples and companies are frantically trying to figure out what do I have to do to get ahead of this? But a lot of what's happening has nothing to do with them.
40:15So that's part of the problem. The other part of the problem is as more and more and more of the market moves into passive vehicles. Passive funds are great. Indexing is great for an individual investor. It's a wonderful way to reduce their risk, spread it across multiple companies and not have to pay for technical trading. But somebody has to do the work of valuing these companies in order for the index to function. So what's happening is that the indices, as more and more money goes into passive indices, the fewer remaining active traders have a much bigger impact on the volatility of the market.
40:48So we're creating a situation in which market prices are no longer a reliable indicator of how valuable a company actually is. And yet we are allowing those same numbers to act as a ghost directing the strategic choices that companies make. It's an untenable situation. I don't know. Maybe I'm just making a semantic, leaning into a semantic distinction. Market prices tell us what it's valued at, not what it's how valuable it is. And I think that difference, that distinction between valued at and valuable is more than semantic, of course. No, but the justification of financialized capitalism is that these two things converge over the long term.
41:30But what if they don't anymore? What if they don't? Now, I want to stay on this fiduciary responsibility thing because I'm going to quote you yet again. And you talk about hours being an age, this current time of, quote, an age of, quote, temporary operators managing temporary organizations for temporary owners. The most temporary being, you know, that hedge fund or the PE firm that holds for 10 minutes or less. that seems to be a bit in, you know, with that force's contribution to the problem, it can leave one feeling a little bit hopeless, like, well, what the fuck do we do to fix that? Yeah.
42:19Where do we go from there, given that it does seem likely that temporary operators managing temporary orgs for temporary owners is a feature, not a bug? Well, you know, this is all a choice. One of the big themes of the book is that the way things are is a choice and we can choose differently. And I don't just mean we can choose collectively differently in the sense of we can choose at the ballot box politically to have a different system, although that is, of course, true. I also mean we have a lot of individual agency here, including as founders. And of course, my primary concern is when we set new companies up, we don't have to accept this default.
42:58The question, for example, of fiduciary to who? who should a company have a fiduciary duty to? The fact that the courts have argued that companies should be fiduciaries only to shareholders, that doesn't mean that that's the only way. Remember I said people are writing this into their corporate charter. People are choosing this. If you look at the court cases, the court's like, look, you chose this, buddy. You can't now complain to me about it. But why did they choose it? Most founders don't even realize they have a choice. And so in the book, I lay out all of the mechanisms people can use to establish new and different fiduciary duties.
43:33Again, this is not some crazy, wild-eyed thing from the future. There are multiple, multi-billion dollar companies worth hundreds of billions of dollars who have made these different choices. And again, you always see this. People say, well, of course, Anthropic or Novo Nordisk or Grundfos or whatever. Of course, well, they, of course, can do that. They can afford to do that because they're so successful, ignoring the possibility that the reason they're so successful is because they did that. We have cause and effect totally backwards. So yes, I think it is absolutely a tractable problem. First, at the level of where do we choose to work?
44:08Second, at the level of what kinds of companies do we choose to build? And of course, also as citizens, what kind of political economy do we want to have? We have to be willing to put our money where our mouth is in every sphere of our lives if we want to see this change.
44:30one of the reasons you wrote incorruptible is is um because you realized you know you're also the author of lean startup which is you know freaking legendary and iconic and and a classic was that you had taught founders how to create and build companies but not how to protect them and that to get to where you are, you had to unlearn a lot of things. Yeah. Can you give us one example of something you had to unlearn to get from there to here? Sure. So I always assumed that this fiduciary duty to shareholders and, you know, primacy of investors and all, like that was necessary, a necessary part of the formula of capitalism, like an ancient pillar.
45:16And I had to unlearn it. Like I write in the book about certain specific practices. Like, for example, first time someone pitched me on becoming what's called a public benefit corp or PBC. It sounded crazy to me. I'm like, what? We can't, that seems risky and strange. And how can we do that? No, it's not risky and strange. It is a restoration of the historical way we viewed corporations. It's actually like far more logical than what we do today. I used to think that independent directors were the bomb. You know, like modern corporate governance is all about independent directors. Having independent directors on your board is going to help you have better governance, help you avoid conflicts of interest and all these other good things.
45:52Well, the evidence shows unless you structure it properly, independent directors are much more likely to betray your mission than to support it. And then there's a bunch of operational things that I also really didn't understand. Why is the independent director more likely to do that? You simply have to ask the question of how do you get independent director gigs? You get recommended for independent director gigs by bankers and investors and lawyers and the people that serve them. So like you are nominally independent, but that doesn't mean you have no stake in the outcome. You're not focused on the mission.
46:23You're focused on your own personal career. I call it career equity, right? The future potential. And I give a bunch of examples in the book of companies that were betrayed by their boards where the board members went off to all kinds of great things as a reward for their betrayal. So I want to also emphasize that this is just as true on the operational side. In the book, I talk a lot about trustworthiness as an asset, the most valuable and underrated asset in the whole world. Yet nobody ever taught it to me as an asset. That's not how I learned management. So, so much of us have been indoctrinated into a way of thinking about management that is, I think, frankly, very limited and we could do a lot better.
47:01The last question before the last question, the subtitle of your book is Why Good Companies Go Bad and How Great Companies Stay Great. And I've given it no shrift to hear. I'm wondering, and of course, We've talked about some of this throughout our time together. If you can give the audience a couple of reasons of why and an example of a company that's another example of companies that have gone from good to borrow somebody else's title, good to great and great to gone. Yeah, so this is just a question of what I call financial gravity. I think one of the really challenging things about the way we talk about management today is we focus so much of our energy on the surface characteristics of organizations.
47:49Org chart, culture, strategy, even vision. Not that those things aren't important. They're totally important. But there is something deeper. there are physical forces that operate on organizations that warp them from the outside and cause them to converge on commonalities. If you look at modern public companies, they're all the same. It's pathetic how similar they are. Why are they so similar? Because there's a force molding them, crushing them from the outside, like a submarine whose hull has been green. From the inside, too, I think you have a great line, which is, you know, It's these forces that no one controls, but everyone obeys.
48:28Everyone obeys. Exactly right. So imagine I was an engineer. You called me over and said, hey, Eric, my bridge collapsed. Can you help me out? Sure. And I come over and you say, here's the wreckage of my bridge. It collapsed. Can you take a look for me? I look over. Yep. Gravity. That's what happened here. You'd be mad. You'd be like, wait, what? What do you mean gravity? I'm like, listen, if it wasn't for gravity, the bridge would still be standing, which is true. it's a true statement. But you're like, but first of all, why did it, it broke on Wednesday. Was there no gravity on Tuesday? What about all these other bridges that are still standing?
49:05They're still, like the fact that there are exceptions proves that there's something more we can say. And so I say, fine, fine, I'll come take a look. I look at all, I say, aha, all the metal bolts in your bridge have been rusted and they're corroded. And so of course the bridge collapsed. Would we then say, oh, well, too bad, can never build another bridge again. No, we'd say, well, hey, about next time we build it stronger. Why don't we use stainless steel next time so it won't rust? The thesis of my book is that we can learn the organizational equivalent of stainless steel. What are the elements we can build organizations out of so that this corruption becomes impossible?
49:48And that should be our objective, even though financial gravity is real. With that, our last question, which I ask everybody. And in this last question, because I am all powerful, at least for this question. I love it. I grant you all the power in the world to create one thing tomorrow and to destroy one thing tomorrow. And you can answer that through any lens whatsoever. What would you create tomorrow and what would you destroy? Oh man, there's so many things. The question is, yeah, you got to pick something really at the root cause. But sticking with the theme of what we've been talking about, this simple shift, if we could destroy the idea of shareholder primacy and replace it with an idea that all of us are called to do institution building, to build a new kind of institution, one who is as committed to human flourishing as this previous era was committed to value extraction.
50:51Like if that became the natural objective of people who go into institution construction of any kind, I think that would do pretty well. Now, I can't tell if that's create that or destroy the forces that work against it. Which one is it? Both, both. You have to do both because I guess what I'm trying to say is this is not a physical problem. It is a 100 % mental problem. The only thing that has to be destroyed it is an idea in the mind. It has to be replaced with a new idea in the mind. And that is both why this is so depressing. Like, how do we get ourselves into this? This is not caused by a resource constraint or we ran out of energy or even something like climate change, which is caused by like physical reality of our planet.
51:35No, this is a purely mental fiction. We have convinced ourselves that this is our purpose and we have lost the sense of purpose tied to human flourishing. So yes, I just want to swap one concept for another in people's brains. I can't help but think that as you frame it that way of the Upton Sinclair quote, which I think I'm going to bastardize, but get the premise across, which is don't look to the person whose income depends on the problem to come up with the solution. And I think a lot of the minds that need to be changed have a strong vesting in the problem. right the status quo serves these few people relatively few um so do you have a last thought so i guess that wasn't my last question sorry um do you have a last thought on what's necessary to change those minds where who are doing very well with the current circumstance and situation yeah i think upton sinclair would say don't bother don't waste your time with those people Just stop listening to them.
52:43And in fact, in the last chapter of the book, in chapter 15, I give some suggestions for how we can use our individual power to make this happen. And I don't want to spoil the ending because it's not what people expect. And I promise it's not as lame as like, oh, you can solve climate change by recycling. It's a little more interesting than that, I promise. But to talk about it in a spoiler-free way, one of the things I really found surprising is how much money and energy is being spent trying to convince people like me to give up because the way the system is today is inevitable. And yeah, like there's all these rich and powerful people who are constantly, like our airwaves are just saturated with these people, especially with social media.
53:27And I just think they're not that interesting. I know a lot of these people personally. These are not the great philosophers of our era and they're not gonna be remembered that way, you know? So find more interesting people to listen to. I think you might find it might work out pretty well. Well, on that, you are certainly one of the more interesting people to listen to and to read. I'm doing my best, Vanna White, here and holding up your book. The book is fantastic.
53:58It's so readable, so interesting. and as somebody with a show that considers whether and how every decision a company makes either creates or destroys value, I would say it's wildly important. So thank you so much for being with us. Thanks. I really appreciate it. Thanks for the time.
54:21As we end this episode, consider this. It's June 18th, 1994, and it's one day after O.J. Simpson had led police on a chase in a white bronco watched by nearly 100 million people. It's six days after Nicole Brown Simpson and Ron Goldman were murdered, and USA Today runs a headline that reads, OJ Needs Miracle to Save Ad Career. Because it was among the stupidest and most absurd thing I'd seen about marketing and murderers to that point, I've had a clip of this headline in a$5 frame on my desk for the 32 years since. But what's worth considering now, 32 years later, is that at the time, there was this unquestioned assumption by everyone except the USA Today headline writers that credible implication in something this grave like murder would automatically, permanently, and deservedly destroy your commercial value, among other things.
55:14Back in the day, O.J.'s value as a spokesperson depended on, well, not being a murderer, but mass and undifferentiated American approval. When his behavior violated the values of that mass audience, not to say the legal system, His value collapsed instantly because there was no segment large enough or loyal enough to sustain it, just as it ended Gary Hart's presidential nomination bid for a far less egregious act, one that seems quaint today. And if you don't know who Gary Hart is, just Google him. Fast forward 22 years after the O.J. chase and in 2016 Iowa campaign rally, as I'm sure you all know, candidate Donald Trump tells a crowd that he could stand in the middle of Fifth Avenue and shoot somebody and not lose any voters.
55:59This seemed as absurd as the USA Today headline, but it turns out not so much. And as it turns out, he could do a whole lot of egregious things and not lose many voters at all. What changed between then and now is not human nature. But as we all know, the mass market that made O.J. no longer exists. And it's fragmented into segments that are defined by identity, ideology, and tribe. And within each of these segments, loyalty operates by different rules. Behaviors that would have destroyed value universally then now destroy it with one audience while sometimes actually deepening it with another.
56:36And if the audience you've deepened it with is large enough and loyal enough, the behavioral math can work in your favor in ways that would have been unthinkable once but aren't any longer. At their core, today's divisions in the U.S. and beyond aren't political. They're moral and ethical. They're values-based. and amongst the many human audiences your business may serve, it's essential to consider that they often don't agree on what's moral, ethical, or acceptable. Which makes the most important consideration not whether a given decision to do or not to do will be controversial, but controversial with whom, and are they the ones whose trust your value depends on.
57:15Because in a fragmented world, the cost of offending everyone is clear, even if it's harder and harder to do. but the cost of trying to offend no one, of standing for nothing in order to alienate nobody, not a new thought, but is arguably a quieter and far more corrosive form of value destruction. So it's worth considering in today's world whether to stand apart if you're willing to stand up. Today's episode was produced by Art Chung, Jim Mackle, Manolo Moreno, Brandon McFarlane, and Ashley Futterman From the Fox Media Podcast Network and the Wisdomist Company.
From the publisher
Entrepreneur and author Eric Ries wrote the seminal book "The Lean Startup" and spent years teaching founders how to build companies, before realizing he'd never taught them how to protect what they built. In an economy where profit and value are often conflated, too many companies allow what Eric refers to as “the ghost of the public markets” to sit in every strategy meeting, trading long-term customer trust for short-term stock price bumps.
Seth and Eric dive into the themes of Eric's latest book, "Incorruptible," examining how shareholder primacy became an economic orthodoxy that can destroy enterprise value, how product quality can get sacrificed when quarterly targets drive strategy, and what exceptional companies like Costco understand about building a governance fortress that protects sustainable growth.
Create or Destroy: Reimagining Marketing with Seth Matlins is produced by The Wisdomous Company and the Vox Media Podcast Network.
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