How Private Equity Bankrupts Your Favourite Companies | Eric Ries

0:00Eric, listen, welcome to Room Where It Happened. Incorruptible was a book that I enjoyed so much because it forced me to look at business in a way that I never had before. Particularly in the modern era where we see businesses as so much more than just a way for someone else to make money. They're kind of part of the fabric of our life, right? And we're so emotionally invested in so many of these businesses that you talk about and we'll discuss some of those. For people that haven't read a book, I want them to really get a clear understanding of what you talk about when you talk about good companies going bad.

0:29Would you explain what you mean by that idea? I've been around a lot of company building in my life. Like you, inside companies, outside companies, as advisor, investor, every kind of role you can have from two kids in a garage all the way up to major multinationals. So I've seen this phenomenon firsthand where the thing that made the company worth building in the first place is lost as it gets bigger, more bureaucratic, sometimes even malignant. Sometimes because the founder is fired and removed. Sometimes because later managers drift from the mission, the company fails the test of succession.

1:04And sometimes because it's just like Frankenstein and his monster, it just kind of gets away from us as leaders. And I became really obsessed with this question because I've seen so many people make so much money and yet wind up so miserable because the thing that they ultimately profit from is not the thing they intended to make. So I really wanted to understand why is this happening? And of course, now that once people started hearing that this is what I was going to be writing and researching, everyone started sending me their favorite examples. Oh, did you hear about this restaurant that used to be delicious?

1:35And then Private Equity bought it. And now it tastes disgusting. How could it be that you can taste Private Equity in the food? You know, like it's become such a ubiquitous experience of a brand that betrays its promises. Someone told me once at a company that had brutally laid them off after many years of service. I wasn't just drinking the Kool-Aid there. I was serving the Kool-Aid. And yet, you know, they were surprised when the company betrayed them. So I feel like we've started to view this as inevitable, that companies, as they get bigger, as they get more successful, will eventually betray us.

2:12And yet there are these outlier companies that seem to have resisted this pull. So that's really what the book is about. Would you share then some of the outlier companies for people? Because I think that this is really important, right, to see those that haven't become so-called corrupted. Yeah, yeah. Even the same people that are busy telling me that this is inevitable and that this is just what happens when you get bigger will say, well, except for Costco. And you're like, huh? Wait, what do you mean except for Costco? Costco is a$400 billion public company. Surely if it's inevitable when you go public and get big, it would have happened to them.

2:49Or, you know, in the UK, people tell me about John Lewis Partnership. Or think about Nova Nordisk or Vanguard or Patagonia or REI or so many companies. And if you push people on what makes those companies different, we tend to say either that they're just an outlier, we don't know, or that we'll point to some specific indication. Ikea had a farsighted founder who set up a really strong culture or something like that. But I think these companies have something else in common, if you study them, which is that they defy every single one of the so-called best practices we currently teach about how companies are supposed to be built, structured, and governed.

3:34So I started to, and especially in my own work, helping people build companies with these so-called alternative structures, it started to become very obvious to me that we are teaching people a set of practices that are designed to build weak companies, companies that could be easily bullied, companies that easily give in to temptation, and that this weakness is what's causing this widespread institutional collapse that we're all living through. What is the best practice that in theory you think that's great for a company, but in practice it turns out to make that company weak? The most important one is called shareholder primacy.

4:08And this is an idea very prevalent in the US and the UK, but frankly has metastasized into almost every developed economy now, that says that the purpose of a company, a company is not a vital, living, beautiful thing. No, no, no. A company is not designed to make a product or make customers' lives better or enact some mission. No, how foolish of you to think so. A company is merely a financial instrument to enrich its shareholders. That's what it's for. And what's wild about this idea is on the surface, it seems like it should be very favorable to shareholders. Some people even see it as an act of class warfare by investors against the rest of the economy.

4:48That's understandable. And yet the data shows that this idea is not even very good for shareholders because companies that are run simply to enrich themselves ultimately hollow themselves out. They give into these kinds of betrayals that are not just morally, ethically and environmentally unsustainable, but they tend to be economically damaging also. So can I talk about my own personal experience creating high performance, which is the business that creates the podcast that you're a guest on right now? Because I can see so clearly how this happens. But here I am with maybe 30 people working for high performance.

5:22And like any small business, there's a constant conversation about cash flow. There's conversations about making sure that we do the right thing by our people the number one right thing is make sure they get paid every month and then we've got advertisers that are willing to spend money and then we've got shows where we can put those ads and suddenly you end up in this really hard challenging place where the company that we've created is big enough that we have to do the things that mean advertisers can partner with us but the whole point of this business was not to advertise businesses or products to people it was to change people's lives so I suddenly find myself even with a small business of 30 staff which is not even close to the size of a Costco or a Cadbury's or something like that, I'm already having to struggle with this issue of what's the right thing for our audience.

6:08Yes. And does that still allow me to pay all the people to make the shows that I know are making a difference in people's lives? That's the challenge, I think.

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7:23Yeah, no, you've got it exactly right. And the analogy I would use is a human body requires oxygen to live. Yeah. So if you don't have oxygen for some reason, then oxygen becomes the most important thing in the universe to you and you'll do anything to get it. But under normal circumstances, it's not like you would say the purpose of a human life is to breathe as much oxygen as possible. Nor would you say that human happiness will be increased the more oxygen you have, as the old Tennyson poem says, as though to breathe were life, right? We somehow in business get confused about this money. We need money to operate a business, of course.

7:58To pursue the mission requires having some kind of positive margin product that we can sell. That is the oxygen of business. Good. But does that mean we want to have as much oxygen as possible? No. And are there some principles that we would rather die than betray. That's really the ultimate question of a business is what are we committed to? The legendary entrepreneur, Saul Price, who I talk about a lot in the book, he was a lawyer before he became an entrepreneur. And so when he was a lawyer, he understood he had a fiduciary duty to his client. The word fiduciary just means the person whose interests you put before your own.

8:34And so when he became a retailer, he thought it was really obvious to say, I am a fiduciary to the customer. So even if he had the opportunity to make money from a customer, if it wasn't the customer's interest, he wouldn't do it. Now, as a result, this is the paradox, the paradoxical thing about this. You know, the expression, easy choices, hard life, hard choices, easy life. This is like the business equivalent of that. If you're willing to put the customer first, to say you would rather die than betray the customer, you generally don't die. Customers trust you. And you have the same thing in your business.

9:07If you say the audience comes first to enrich and teach and improve the quality of life of my life, then you have a fiduciary commitment to your audience that is going to help you navigate these challenges. Because although you do want to have advertising in your products in order to make money, if an advertiser tries to bully you to do something that would be bad for your audience, you will have the strength to say, no, no, thank you. I won't do that. And Saul Price used to do this all the time. competitors would try to undercut him on price using the loss leader strategy, for those who know what that is.

9:42And he would put their Sunday circulars up in his own store and put up signs that say, don't buy this product from me. You can get it cheaper down the street. Because he was living his principles every day. That's why people were fanatically loyal to him, both his customers and his employees. He believed in low prices and high wages. And yet that tension that you're talking about is very real. I call it financial gravity. We live in a highly financialized economy in which we all feel this tug, this pull down into mediocrity, into exploitation, into the idea that we could make a little extra money if we just cut a corner here, we just cut a corner there.

10:20And it usually doesn't start with the founder. I bet you would have a much, you see this pretty clearly, but maybe you have one of your employees who's just thinking to themselves, well, we're a for-profit company. My job is to make as much money as possible. Well, if you're the head of partnerships for high performance, your number one job is to bring partners, right? Yeah, yeah, exactly. So if a partner says, listen, could we just do a little under the table, you know, you might think it's your job to do that. I didn't, this story didn't make it into the book, but in the US, we had this massive opioid crisis.

10:49I'm sure it was major news. And we had many, like when the lawsuits came out and all the documents came out, a lot of companies were destroyed in the blast radius because they had taken money from the family who had done these illicit opioid deals. Anyway, to make a long story short, there was a healthcare company that did patient records for doctors. And they were a high-flying startup. I think they had like$100 million valuation or more. They were doing very well. And they got paid$1 million to push opioids on the doctors so that the doctors would push them on the patients. And when this ultimately came out, the company was utterly destroyed.

11:31And it was just a massive scandal. Nobody wanted to work there. Everyone felt betrayed and the company collapsed. And what I love to think about is who was in the meeting when they took this$1 million? Because a million dollars is a lot of money to an individual person, but to a high-flying, big time startup, it's really not that much money. And I just had this feeling that whoever signed this deal, what were they thinking? So the only way to make sense of this act is to think that the person who made the decision thought their job was to make money by whatever means necessary. And this is actually a very subtle distinction between making as much money as possible versus making money by doing as much of the mission as possible.

12:11And it sounds very similar, but actually it's quite different. And one of the theories in the book, one of the ideas in the book is that if we want to build a mission driven company, we have to create this alignment between the business model, the strategy, the culture, and the mission so that everybody is aligned around what the company's purpose is so that they make the right decision, not just in the corporate boardroom and in our strategy meetings, but that in the thousand little decisions you have to make, you know, you're head of partnerships and they're negotiating an advertising partnership.

12:44Do they know every last detail of what the purpose of the company is so that certain advertisers probably wouldn't take their money no matter what? You probably have certain standards about what advertisers are allowed to say and not say. Under what circumstances can we be a little flexible versus under what circumstances, no, we have to hold a rigid line. Those little decisions ultimately determine how trustworthy an organization is. What have you seen as best practice for making sure that those values are aligned? Alignment requires three things, each of which sounds relatively easy by itself, but to do them all together is actually quite difficult.

13:23The first is we have to have a set of values or principles that we consistently defend. So if I ask people in the organization, what is the mission? What are the values? How do we work around here. It doesn't matter to me that they have the same mission statement. You know, obviously people can recite the words or not. That doesn't matter. The mission statement is worthless. What matters is the mission itself, the emergent property. Are we in fact all on the same page about what we're trying to accomplish? And it's very common, extremely common in organizations, even at 30 people, certainly let alone at 300 or 3000 for different departments to conceive the business differently.

14:00And you have one group that's like, look, we're trying to create high quality products and put them in the, in the world. And other groups is our, we're trying to make money here. I said, well, which is it? Hold on, which is it? Do we make money by making high quality products or is quality expendable in the pursuit of money? There's so many famous stories of really great leaders being just irrationally difficult on this point. You know, Yvon Chouinard at Patagonia very famously would just grill his employees about whether they really understood what the word quality meant. He believed, and this is such a crazy belief.

14:30He believed that quality was an objective attribute of a product. It was not in the eye of the beholder. All normal people think quality is a matter of taste or preference. He said, no, every product has a quality it deserves. And the products we make have to be of the highest quality. That was his ethos. His organization reflected it. It's a famous story about Steve Jobs. Steve Jobs would get into fights with engineers over the visual look of the wiring and cables inside a computer whose case he did not want customers to be allowed to open. And the engineers would say, who cares? No one is ever going to see these wires.

15:10No one's ever going to know if it's ugly. And Steve would say, but we'll know. Yeah. And so that was a way of showing that there were certain principles that the company was committed to in ways large and small. The second thing that you need for alignment, and I think this one gets overlooked in business because it sounds a little fluffy, but it's incredibly important. The values in question have to be aligned with human flourishing. I think we get so wrapped up in the dollars and cents, we easily forget that the reason people want to work, the reason people love craft or quality or whatever our principle is, is because they think this is going to help their and other people's flourishing.

15:51We have a very natural human instinct for that. So companies that are pure mercenary, pure economic engines, they see themselves that way can kind of never really get true alignment because you're just one spreadsheet away from someone coming up with some reason why the value should be betrayed for money. It's so easy to come up with a thousand reasons. And in fact, doing the right thing is almost always ROI negative by definition because the returns are intangible, but the costs are tangible. It's a huge problem. And the third thing is the organization has to be structurally strong so that if it gets bullied or pressured, it has the strength to resist.

16:30You can be as aligned as you want internally, but if the first time an investor shows up with a check and says, listen, I want to buy this company or I want to induce you to do something bad, you jump at the opportunity, then you're not strong enough to really create alignment. So those really are the three dimensions. I think it's so interesting and I think what you've really tried to drum home so far is that we're not talking about bad people creating a bad company like good people can still create a bad company without a line yeah let me let me tell you a story from the UK that's one of my one of the most grim in the whole book but since we're since we're talking why not uh there was a company called Vectura that I used to use as a hypothetical for many years I used to say look imagine if you have an operating company, imagine whoever you think is the most evil company in the world tries to buy you.

17:19So they show up and they say, listen, EvilCo here, the company that you would never want to work for no matter what, I'd like to buy your company from you for$1 more per share than it's worth. Jake, you selling? Excited to sell for$1 to EvilCo, right? Probably not. Most founders are horrified by the idea, and yet they don't realize that according to the default corporate charter that most companies have. You have what's called a fiduciary duty to say, yes, you have to sell. Anyway, for years, I've used this hypothetical to scare entrepreneurs straight, you know, to make them take this governance stuff seriously earlier in their life.

17:56But anyway, because my father is a pulmonologist, I always use Philip Morris as my boogeyman, you know, because I was raised the idea that cigarettes are a product with no redeeming value whatsoever. They just kill their customers for no benefit. You may not agree with me. There are probably people listening to this who feel differently about it. You have your own values. It's okay. Substitute whatever company you want in the hypothetical makes no difference to me. The point is not that we should all have the same values, but that companies should be able to defend and define their own values.

18:21But anyway, because I've been using Philip Morris as a hypothetical, I was very interested in this company called Vectura, which was a university spit out from the University of Bath. They made inhaler therapeutics, so inhaler therapies for diseases like asthma or COPD, lung diseases. And if you've ever seen someone carrying an inhaler around, it was that kind of technology. They were a successful healthcare company. They had gone public on the London Stock Exchange. And one day, 2020 or 21, I can't remember now, one day, the actual Philip Morris tried to buy them. And it's just such a wild story because Philip Morris shows up deciding to diversify outside of nicotine.

18:58That was basically someone must have told them this was a good idea. Some consultant proposes this idea. They show up and they offer 165 pence per share to buy Vectora. At the same time, a private equity firm shows up and says they'll pay 155 cents per share. Sorry, it's not cents, pence per share. And of course, the board has to make a choice. Three doors, door A, B, or C. In door A, do nothing. There's no problem. The company's doing fine. It doesn't need to be sold. In door B, take the private equity for 155. Or in door C, Philip Morris, 165. You can imagine the outrage and the furor about this.

19:35Why should big tobacco own a healthcare company? The British Thoracic Society begged them to say no. But the board of directors said, we have no choice. It's our fiduciary duty. We have to say yes. So Vectura was sold for 1.1 billion pounds to Philip Morris. Within three years, Philip Morris had taken a$650 million write down and sold the remains of Vectura for peace parts, because of course, this was an immensely value destroying transaction. Yet the best practice that we teach is that this is what a modern economy requires, these kinds of acts of destruction. So I really want to emphasize this in the conversation about alignment, because imagine even if we were all inside of Vectora Virtuous, even if everyone was aligned, even if everyone was mission driven, even if, even if, even if, none of that would have mattered because anyone can show up at any time and poof, the whole thing is gone.

20:29Most founders, most leaders think this is crazy. And they often assume that I'm exaggerating. Like when I used to give the hypothetical about losing your company for a dollar per share. People would tell me I was exaggerating. But if you study the Vectora story, you'll realize I was exaggerating. It's true. It wasn't a dollar per share. It was closer to 15 cents. Obviously, the ultimate decision to sell that business or to do that deal is a bad one, right? So when we talk about bad companies, are we talking about a good company that makes one bad decision? Or do you think that companies actually go bad over time?

21:04So it's one, what seems like a small decision that really doesn't matter in the grand scheme of things. But when you stack hundreds of them together, you end up in a company that will make a wrong decision. Yeah, you've got it exactly right. We tend to see the collapse as one event. And the press loves to write the story of business collapse as a personal drama involving individual bad actors. I mean, how can you? It's irresistible as a story frame. It makes for really, it's very entertaining. I understand why we do it. But no, generally, this is like the weakening of the joints. You know, if there's corrosion in the joints of a bridge, the first bolt that goes bad doesn't collapse the bridge.

21:42It just makes it a little more rickety. And eventually we see a collapse. And if you analyze, what's interesting to me about how we talk about businesses, let's say you hire me as an engineer and say, my bridge collapsed. I need to come in and analyze what happened. Why did my bridge collapse? I say, oh, gravity. You're going to be very unsatisfied. But I'll be like, what? That's true. I mean, it's a true answer. It's completely true. If it wasn't for gravity, you're like, but come on, man. First of all, there was gravity yesterday and the bridge didn't collapse. These other bridges didn't collapse.

22:12What's going on? So, okay, so we go analyze the load, the wind shear, the tension, the material fatigue. And we look, oh, all the bolts are rusted and corroded. Of course, it collapsed. But then you say, oh, I guess since gravity and rust are universal, I guess you can't build a bridge that stands up. No. You say, well, hold on. Why don't we make the bolts with stainless steel next time? And the question for us needs to be, what is the organizational equivalent of stainless steel? And it turns out that there's techniques that are well studied. We have really good evidence resist this corruption, both the inner side of it and the outer side of it.

22:47So that's when you're talking about the little decisions, the day that Vectora was sold is too late. It was too late to do anything about it because the company had already committed itself unknowingly, I think, in it, in unintentionally to this path of shareholder primacy and profit maximization. But that could have been reversed earlier in its life. The earlier, the easier actually. And yet they didn't have, you know, by the time the collapse came, they didn't have the strength to prevent it.

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24:22So actually, if you're talking about the most dangerous time for a company, maybe when they are successful is the most dangerous time because that's when they're forced to make decisions they wouldn't have even had to make. Oh, yes. Yeah, this is something I wish someone had told me early in my career, that the more successful an organization becomes, the more valuable it is as a target. Yeah. So I was taught that success would make me free. Success would give me power and money and status. And those things would give me freedom to do what I wanted. I'd finally be in charge. I can have the organization I want.

24:50But so many leaders find out that this is not true. And the way I think about it is when you're when you're like Saul Price, you're a fiduciary to the customer. You're doing right by your employees. You're doing the business the way we all wish everybody would do business, a high integrity way, a high alignment way. you will generate the most underrated and most valuable asset in the world called trustworthiness. And it's really important to see this as an asset, like a financial asset, because most organizations that have trustworthiness just leave it piled up on the floor. They're just stockpiling it.

25:22It's coming out the windows. It's just everywhere that you look, but it's not protected. It's not in a vault. There are no locks on the doors. It's just lying there. And then they're like, they act so surprised when somebody tries to steal this asset from you. No kidding. It's super valuable. Have you met human nature? If you leave a massive pile of something really valuable unprotected, it will need protection. You can be sure. So that's really what's going on in a lot of these stories. You have companies that built up trust with customers and somebody figured out, sometimes an investor, sometimes a board member, sometimes private equity, sometimes fill up more.

25:58Somebody figured out that precisely because people trust you, you could betray them and get away with it and make a little money on the way. So Saul Price's company, FedMart, he built that company for 20 years. Investors forced him out of the company and they had bankrupted it within seven years. The bankruptcy came in the name of profit. The destruction of Vectora was done in the name of profit. In the US here, we have a food chain, I don't think they're in the UK, called Panera Bread. Panera Bread come to the UK yet? I can't remember. I don't think so. Maybe it hasn't. I haven't seen it. Yeah, it's only in the US, I think.

26:35Anyway, it was like a sourdough, mass, fast, casual, sourdough bread bakery kind of cafe. Perfectly successful small business, raised a bunch of money, was a very purpose-driven company trying to bring healthier, fresh food into places in America where there weren't a lot of those options. And anyway, it got acquired by private equity. I just saw this the other day. and people have been sending me, people sending me their now collapse, horror stories. So I'd like to become a collector of them. And in addition to the standard private equity playbook, they stopped baking the sourdough fresh. They stopped, they started doing smaller portion sizes.

27:10They started replacing the higher quality ingredients with lower quality ingredients. So the food starts tasting bad. We're all used to that. That wasn't enough for them. They still wanted yet more profit and they started serving this extremely addictive lemonade that had more caffeine in it than six espressos that you could get in the soda dispenser right next to the regular lemonade, like where kids could get it. And people died. They're being sued because people died from the extra. I mean, it's just, it's an absurdity that a bakery should have a fatality count. Yet this is the inevitable consequence of this way of thinking.

27:51that unless we have a way to resist this temptation, it will always come. And people trusted Panera. They assumed that if they drank something there, it would be safe. In fact, all of us live, I think, with this danger and maybe don't think about it very often. Like if you swallow a pill made by a for-profit company, or if you eat food that you did not grow and prepare yourself, then you are literally betting your life with every bite that the company who made that product thinks it is in their shareholders' financial interest to keep you alive. And people, again, accuse me of exaggerating all the time, but if you read the legal scholarship on shareholder primacy, they say it is impermissible for a company to consider externalities, aka your health and well-being, except insofar as it benefits their shareholders, and worse, because we live in an age of deregulation, They say that it is not only permissible, but required for managers to break the rules if it is profitable to do so.

28:54So not only are companies no longer constrained by our increasingly weak consumer protection rules and forms of liability, they have the ability to take their money and lobby to have those same rules weakened. And a lot of people say it is their fiduciary duty to do so. So we have unleashed a monster in our midst that cannot help itself, but try to do everything it possibly can. It's an addict every much as a cigarette smoker. It is addicted to finding every conceivable way to make money. It's so interesting, isn't it? Because I've never really thought about the fact that the life of me, my wife, my kids, my family is in the hands of the people that produce and sell us our food.

29:35And the supermarkets are more for my house. I trust implicitly. And now I'm thinking, well, I trust them. Why? why because they're good at telling me i can because they're good at advertising that they care because their brand is green and it looks friendly and kind but i think it's so important that we ask ourselves these questions because actually eric like if we're asking a question about whether a multinational conglomerate is a good or a bad company right already cares about its customers and it sells us swimwear i can see people going they're good and bad but i have to buy swimwear so i'm gonna buy it from them i think when it comes to just buy whatever exactly but When it comes to our food and what we drink and what we breathe, like, you know, I think like, I don't know, scented candle companies.

30:18We're lighting those things in our houses, like, because they're the trendiest things in the world right now. Like, what am I breathing from these things? And we never ask it because we just have this trust. And this is where it becomes vital that companies have us at the heart of what they're doing. Yeah. And that's really the divergence between companies' stated mission and their legal purpose is the source of so much of this problem. So companies say they are, you know, if you look at your grocery store's mission statement, probably they have one. I bet you it says something great about serving customers and treating them with respect or whatever it says.

30:55But if I pull their legal documents and say, what is the legal purpose of this corporation? Unless they've taken special steps, it will just say shareholder primacy to make money by whatever means necessary to enrich shareholders as much as you can. Now, in the UK, I think the defaults are a little bit more friendly to what are called stakeholders than here in the US. But when push comes to shove, as you see with Vectora, generally speaking, we live in an era where the financial considerations, the shareholder primacy considerations win out. But it doesn't have to be that way. We have examples of organizations that defy this so-called best practice and are able to make commitments that are real.

31:33Because we've been talking about retail and grocery, let me tell you about a company in Texas called HEB. HEB in Texas is like, if you know anybody who lives in America, in Texas in particular, and ask them where they shop for their groceries, they will start waxing poetic about HEB. So be careful. It can be a very time-consuming conversation. People in Texas mistakenly think that the name of the company, the initials stand for here, everything's better. But that's not even true. It actually just is the initials of the founder's son. Anyway, I tell a story in the book of a time when there was a massive ice storm in Texas and the power goes out in an HEB store.

32:08And I mean hard out. Point of sale systems are down. Nobody can buy anything. And there's a big collective groan of everybody and be like, oh, no. Why is there a groan? Because there's an ice storm. Why are they in a grocery store? Obviously, people are stocking up, right? So now they're not going to be able to get the things their family needs. The manager of the store gets up on the table, yells to everybody, gather around. Everyone just take your cart and go home. Take everything with you. And someone yells out, how are we going to pay? You're not. Just take the stuff. We can't charge you. That's on us.

32:39Take what you need and go. And people in the aisles are in tears. You know, what a moving act of corporate generosity. And when people hear this story, they say, wow, what a brave manager. you know, to defy corporate in this way and give people those stuff for free. Because we all can imagine, imagine being in a conference room with a guy with a spreadsheet being like, excuse me, what is the ROI of giving people free groceries, right? You say, well, the return is that we just have enduring loyalty of our customers. I'm like, uh-huh, how much is that worth? Zero. What's the cost? I can calculate down to the last penny the cost of all these groceries walking out the door.

33:17But this is not a story of a brave manager. HEB trains for this. They drill for it, not for ice storms, but for the idea of taking care of customers whenever possible. In the U.S., we had a big round of what was called eggflation a couple years ago where the price of eggs was skyrocketing. HEB just kept the cost consistent and just ate the losses themselves rather than pass the cost on to their customers because they understood it was transient. And they said, look, a lot of our customers are low income. They can't afford to pay more for eggs. Our job is to be a shock absorber in the economy. This is their explicit ethos.

33:52And that's why if you talk to someone from Texas, they will wax poetic about their grocery store. If your grocery store says that they care about you, but you don't see the evidence in their structure, then they're lying to you. And we live in an age of an epidemic of corporate lying. Most corporate policies are designed to minimize liability. I won't tell you anything true about them. Most mission statements are total BS. Most companies are trying to put a nice face on their extractive practices. And yet some companies do do this in a sincere way. And so we as customers, first of all, we should reward those customers, those companies with our loyalty.

34:35That's what the research says on average that is what happens. But more importantly, when we are in positions of leadership, we should seek to emulate these outliers and try to create these highly aligned companies. You've honestly helped me to see things in such a different way. I mean, I want to talk very briefly about the story of Blockbuster, right? Because until I read your book, I always thought that Blockbuster is an obvious story. They had a business that was kind of linear. The world went digital and they couldn't adapt. And actually, this idea that they were addicted to late fees, late fees were a dream for them because it was making them money.

35:07and they couldn't see another world. It, for the first time, took me away from thinking that what killed Blockbuster was external. And I realized actually what killed Blockbuster was internal. It was internal. This is one of the things that blew my mind the most doing the research for this book, is how many stories that we tell as disruption stories. And you think to yourself, whatever happened to good old Blockbuster? Oh, it must not have changed with the times. Whatever happened to Sears or whatever happened to Circuit City or Sunbeam or, you know, it's all these old brands. Whatever happened to Polaroid?

35:41I guess, you know, digital cameras killed them. And you read the story and you say, oh, no, somebody took control of Sears and managed to extract$1.4 billion for himself while the company lost$11 billion and collapsed. Blockbuster is an egregious example where they were making all this money from late fees. They couldn't give it up. But when they finally brought in a CEO who realized that they had to stop it with the late fees and be more pro-customer, activist shareholders had him fired. So they could restore the late fees so that they could drive the company into bankruptcy. You're like, how could invest?

36:16These are investors in Blockbuster. Why would they want Blockbuster to go bankrupt? Because they have this extractive mindset and they're not interested in how to create the most value. They're interested in how to get the most money for themselves. And these two things are not the same. So the reason I use the word corruption right in the title of the book, because this is controversial, I know. But to me, our grandparents saw this much more clearly than we do. That when someone finds a way to make money without creating any value or even by destroying value, that this is a corrupt act. And it may not be a crime, especially as we've lived through a wave of legalizing practically every kind of crime.

36:53But whether it's a crime or not doesn't change its corrupt nature. And so when we talk about how to resist this mission drift or bureaucracy or whatever, I just thought, no, let's not call it by a corporate euphemism. Let's say what it is. This is a corruption that we're trying to avoid. And so if we want to build an organization, we don't want to build an organization that's like slightly less corrupt or is corrupt on Tuesdays but not on Fridays. No, we want to build an organization that is incorruptible, that would never fall to this temptation in the first place, or if it ever did, would have the strength to resist an outside investor saying, you've got to keep the late fees.

37:27No, absolutely not. And how do you feel about companies that are not customer-focused in the traditional sense, right, where you're not walking into a store and being sold something, but they're part of our everyday lives? I'm thinking about the Googles of this world and AI companies who I think sometimes a lot of us don't even feel like we're their customers, but we're all their customers because they need to control the world that we operate in. What's your latest thoughts on how they're governed, how they're structured, and how central we are to their mission? Yeah, look, the tech industry, I think, has gone through a very sad, sad period of these companies that launched with such high hopes.

38:07I think most people are frankly disappointed. In the book, I document the decline of Google's slogan, don't be evil, which used to feature very prominently in their marketing and now is hardly to be found. And I don't criticize Google as a bad company because they're the worst offender in the world. I think Google is a great company. But if you listen to the reports of people who worked there for a long time, like I compiled a whole list of longtime employees of Google who had left. People have been there 10 years or more and then wrote about it afterwards. All the essays are the same. they talk about this creeping mediocrity, this feeling of a loss of ethos, the feeling that don't be evil went from a lived reality to just a slogan to just nothing.

38:50Someone says in one of these essays, decisions went from being made for the benefit of customers to being made for the benefit of Google to eventually being made for the benefit of whoever was making the decision. So many of us feel, Cory Doctorow very memorably calls it in-shittification, most people feel like these products are getting worse. We use them because we need them. They're a necessary part of our lives, but we no longer feel that bond with the companies that make them. And yet there are some exceptions to that rule. Of course, very famously, Anthropic, who I cover in the book, has had situations recently where it has had to really stand up for itself and defend its values.

39:25That's not to say that it's perfect by any means, but simply that compared to a lot of other companies, it seems to be a little bit more courageous. And I think that's because it has a little bit of a stronger structure. So I think whenever we can, we should try to find these companies that have the stronger structure that are actually organized to put customers, to put employees, to put communities first and be of service to them. How interesting is the phrase in-shittification? I mean, I remember thinking that Instagram was going to change the world because I could talk to my buddies through photos.

39:57I thought Facebook was going to change the world because I can find all those old school friends I'd lost touch with. I thought that Twitter at the time was going to change the world because finally I could have breaking news controlled by the people not controlled by uh mainstream media and I look at all of those examples it could have been so good it could have been so good and I'm not sure that any for me anyway any area of the world is summed up by the phrase and shittification more than this chasing of the algorithm and the clickbait nature of social media oh it's just terrible I mean and we have the evidence now that it's really bad for your mental health.

40:35And worse than we have the evidence, we know because of whistleblowers that Facebook commissioned research very early in its life to find out what is the psychological effect on its customers of using its product. Found out that it made them depressed and it buried the research. This is what I call the acid test of any company. You will find out one day that you've made a terrible mistake. It happens. Will you come clean? Is your rule transparency? And making every effort to take it seriously and remediate or do you let it go, bury it, pretend it didn't happen? And I think when you do that, you reveal your true priorities.

41:10What are you really trying to do? I think companies, these social media companies, they're every bit as addicted to their algorithms as their customers are. So they're addicts creating more addicts. I think it's pathetic. And part of the reason why people are so worried about AI companies is because we've seen this story before. We imagine you know, this AI technology in the hands of the same kind of companies that ran social media, it seems extremely dangerous. Look, we can't talk about AI without talking about the incredible amounts of money that I mean, we're talking trillion dollar valuations, we're talking borrowing and fundraising at a rate that none of us have ever seen in the world before.

41:49Does that concern you from a corrupt business perspective? But also, does it completely tarnish the aim of AI to make our lives better? Once you talk about these huge sums, surely it just becomes financially driven. First of all, there's no question that this is the highest level of pressure and scrutiny of private companies have ever been in in history, as far as I can tell. I mean, this is a completely unprecedented technology with a completely unprecedented amount of financial engineering swirling around it. And I think it's really important to realize that you can have both a transformational technology and a massive financial bubble at the same time.

42:27Those are not mutually exclusive explanations for what's happening. Both things are going on. Yes, corruption can be hidden and masked for a long time if investors are willing to provide the capital to do so. So certainly we will discover many companies today that have high-flying valuations that were either fraudulent or were doing all kinds of weird shenanigans. When the mania passes and the investor dollars drain away, we'll find out who actually has a sustainable business model and who doesn't. Worse is one of the problems with shareholder primacy is it really, it basically concedes not just that whoever's richest should be able to do whatever they want, but whoever can borrow the most money from investors should be able to do whatever they want.

43:09So it is actually possible, even though in general we have data that shows mission-driven companies outperform, they are much more likely to be value creating. It's really important to realize that today's marketplace does not really reward value creation primarily. There are many, many, many corrupt ways to make money. There's ways to make money without creating value. And the number one way you can access that universe of ways is simply to have large amounts of investment capital at your disposal, which is why we have people who really seem to, as their full-time job, cultivate the ability to raise money as the most important skill that they have.

43:44And unfortunately, those conditions often allow those people to engage in or even get away with all kinds of corrupt acts. So I think we should all be on alert for this kind of thing as the AI bubble unfolds, even though I agree that it is a transformational technology. Yeah, it can be both at the same time. It can be both at the same time. Absolutely.

44:07So good. Two questions before we wrap up. What's the number one thing that you would like people inside their own businesses to do after listening to this conversation, the question they should ask? and what's the number one thing you would like us as consumers and customers to do? So the book is a blueprint, not a manifesto. So both for leaders and for customers, I try to lay out exactly what we need to do and what are the questions we need to ask. So what do leaders need to do? We need to create an online business model. We need to create what I call the invisible leader, following pioneering management theorist Mary Parker Follett.

44:45We need to create a culture where everybody in the organization knows what to do, even if nobody's watching. And then we need to build structural safeguards that protect this ethos. So we need to, in the U.S., it's called becoming a public benefit corporation. I don't know the name offhand or the equivalent in the U.K., but we need to write into the corporate charter what the company's actual mission is. And then we need to adopt a structure of checks and balances where the corporate governance is not just a for-profit board eager to betray the mission, but that that board is accountable to somebody or something.

45:15For example, I recommend we have a director's oath, like the equivalent of the Hippocratic Oath for doctors. We should have that for corporate directors. Anyway, those are like the specific practices that leaders should be adopting. And what I really wanted with this book, though, is to help people see what questions they can ask to try to decide who is serious, who are the real companies and who's just greenwashing their corruption. So I'll give you an example. Of course, you know, you should buy from, you should work at, you should invest in companies that pass this test. But I got that question from a young person who was a test reader of the book and was very excited about the ideas.

45:52And they said, I want to be an activist for these ideas, but I need to tell you something. I said, okay, I need a job. So I don't feel very courageous right now. I need a job, you know, can you help me get a job? I said, yes. But he said, but I still want to do what I can to push for these ideas. but you need to give me something I can do with no courage required. So it was like I was being asked for a no-bake cookie recipe, you know, like a no-courage recipe for creating change. I said, no problem. See, the thing in my own life is the ideas in this book have given me these superpowers, allowed me to do these incredible things in my life I'm so grateful for.

46:28So I want to share these superpowers with other people. You can have it too. So it was easy for me to answer this person's question. I said, listen, here's what you're going to do. You're going to do a job interview. At the end of the interview, they're going to say, do you have any other questions for us? And you're going to say, yes, I do. Is this a mission-driven company? And they're going to say yes. What are they going to say? Of course, they're going to say yes. Okay, great. After they say yes, you're going to say, oh, how do you know? Tell me about how mission-driven it is. And they're going to say, oh, we're so great.

46:54We go volunteering on Saturdays and we have this thing and we give out free beer on Fridays. I don't know what they're going to say. It doesn't matter. Whatever they say, say great. And just before you go, just like, Oh, one more thing. Is that mission in the corporate charter? Or is it just a mission statement? Now, the person you ask this question to is not going to know the answer. But it's a fair question. You deserve to know. If it's not in the corporate charter, you're going to be betrayed if you go work there. So you have a right to know this. This is a perfectly fine thing to ask. You have a right to know.

47:26Even if they don't know, you just be nice. Okay, thanks. Can you get me an answer? would love to know. What's powerful about this question is you can be sure that in every modern company, the people that run the interview process, there's somebody whose job it is to make sure that every question that a candidate might ask in an interview gets answered. It's somebody's job. And now you've created a problem for somebody. That somebody's going to have to ask their boss, hey, what is the answer to this question? She's not going to know. She's going to have to ask her boss. And her boss, I've actually been in boardrooms where this kind of thing comes up, the CEO is like, look, we're getting this question in job interviews.

48:03We need an answer. What is our answer? Now, who knows? Maybe that CEO secretly has been wanting to put the mission in the charter for a while now, but hasn't been able to come up with a reason why the board should do it. Well, maybe you just gave them ammunition. That's all if one person asks. What if two people ask? What if 10? See, we have remarkable power because these companies are addicted to what you will do. They want to know what they can get away with. Can we make the product a little worse? Will they still buy it? Will the suckers still buy it? Still buy it? Still buy it? If we make employment here a little worse, will they still work here or will they quit?

48:40They're trying to calibrate what they can get away with. So by simply sticking to our own principles, we can wield more power than you can possibly imagine. So cool. It reminds me of one of my favorite quotes by a lady called Margaret Mead who said never doubt that a small group of thoughtful committed citizens can change the world indeed it's the only thing that ever has great thank you so much Eric um congratulations on the book thank you for writing it I feel like it is a book that will help a lot of people in business but more importantly than that I think it will help to change the way that we see business and I think we should so thank you very much indeed uh thank you so much for the kind words and thanks for this conversation Thank you.