Eric Ries on Why Good Companies Go Bad

24:50That is the result of an LTSC petition filed last year. So that company has not taken over the world, but it has been approved. It is operating and it's the first thing of its kind since the creation of NASDAQ 50 years ago. So in building that, of course, I wanted to make the environment of being a public company more conducive to long-term thinking and to multi-stakeholder thinking. I think that's really important. But the trick of it all is although we say these things are inevitable. Even as we say that they're inevitable, we know about exceptions. So obviously we talked about Cloudflare already, Anthropic, it remains to be seen.

25:20But there's plenty of other exceptions. Like for example, most people consider Costco to be the exception to every business rule. And it's like, wait a minute, but Costco is a$400 billion public company. Yet they seem to have been able to maintain their integrity. So if you study how is it done, you will always, always find this distinctive combination of an ethos, a character, a philosophy about business that puts something above financial considerations. In Costco's case, it's the idea of being a fiduciary to the customer, not just to investors. And then you'll also find what I call a governance fortress, some kind of deviation from governance best practice that allows the company to resist pressure.

25:59And there are so many of these exceptions. It's not just Cloudflare and Anthropic and Costco, but it's also Nova Nordisk and REI and Vanguard and Mondragon in Spain and John Lewis Partnership in the UK, like so many companies, Ecosia, if you know that, the search engine is structured this way. Like you just, you'll see it all over the place once you start to look for it. And I think what's really interesting is if this law was inevitable, there would be no exceptions. So just the fact that so many exceptions exist proves that something is wrong with our common theory about how markets work and how products work and what we're really all doing here in our day jobs.

26:37And if you say, okay, well, what is it? What exactly is the problem? If you take a data set of all the exceptions and put them up against each other, the pattern is really striking. The blueprint is really striking. So the fact that we treat them as one-off exceptions obscures the fact that they actually are avatars of a whole different way of thinking about business. One that is not just better for product, better for quality, better for the environment, better for whatever social cause you care about. but also a lot more profitable because it doesn't have these blind spots. Yeah. Looking at like some slightly more, I guess, nuanced examples, but I think ones that will really resonate with sort of day-to-day life of a software engineer.

27:16You mentioned GitLab in the book and a very interesting example there of effectively something going wrong and how they handled that. And I think that's a really great example to pull out of when maybe someone's listening today going, well, sure, but I'm just a software engineer sitting in software. Yeah, yeah. What can I do? Well, first of all, if you're a software engineer, you have one of the most highly coveted skills in the world, and you can choose where to work. So maybe make a better choice if you don't have this in your workplace. Yeah. GitLab has a commitment to radical transparency that's like so extreme.

27:47I just think most executives in the world would be horrified, like terrified even to do it, and would have said this can't possibly scale. You could never make a 10 person company out of this, let alone a$10 billion company out of this, like no way, right? And yet they've been able to do it. I didn't really know this until I met Sid Sobranji. Like they are very famous. And yet somehow I was not, like I vaguely knew they were into transparency. Like the entire handbook by which they make all of their company decisions, meaning every corporate policy, the history of every policy, every detail of how they run their business is available on their website for free.

28:20It's literally in a Git repository. You can clone it, analyze it, look at it. It's just an incredible document. But you might say, okay, well, so they publish a lot of stuff, so what? But of course an ethos is not about what you publish. It's about how you behave. And I give the example in the book of a time when an engineer accidentally dropped a production database. I can't remember now. Did they delete a customer record? It was deleting six hours of customer data, I think. Yeah, I think it was one of these situations where it's just the worst possible thing you could do as a production engineer doing a deployment.

28:49And they inadvertently deleted customer data. So just catastrophically bad. And they posted about it in company chat. So the first thing is they didn't try to cover it up. they instantly knew that the right thing to do was to come clean and let everybody know we have a customer issue we're gonna have to rally to fix this and the company live streamed the response so it wasn't just that they put out a blog post after it was remediated it wasn't like they didn't do that a lot of companies do this thing where it's like we are aware that we have an issue and we will provide more details soon it's like first of all if you're posting that you know more than what you just said right like the fact that you can tell me that you know there's an issue means like you're already withholding information from me why i can't trust you and it reminded me the reason I included it in the book is it really reminded me about a very famous story in Johnson and Johnson history where, and people who've gone to business school will certainly know this story.

29:37There was a time when there was an accusation of tainted Tylenol in drugstores and they thought it was maybe like, you know, someone I think had claimed that Johnson and Johnson was like, had batches of poisonous Tylenol. Now, in retrospect, as it turned out, it was just a crazy person had done this on purpose. They had like gone into a drugstore and contaminated like a bottle of Tylenol to create this scandal. But that took a long time before that was known. So during the initial days, the then CEO of Johnson & Johnson, a guy named James Burke, he went way above and beyond to be transparent about what was going on.

30:10He ordered every bottle of Tylenol pulled off every shelf in America, just on the possibility that there might be a problem with it. He invited the press into his office. His office was open to the press during the entire crisis. He had daily press conferences and he was just like, just, we're not hiding anything. Come watch every step of this response. It's just, it's considered to be the masterclass of crisis response because the transparency that he demonstrated caused people to trust the company more after the incident than before. Whereas other companies have obviously taken a much less transparent result.

30:43And sometimes the scandal really can overwhelm the whole company. So that's why I like that GitLab story so much. It's like, they're like, look, we're going to show you everything about what's going on until the issue is resolved. And that's really the ethos. It's just we are not going to hide anything from employees. We're not going to hide anything from customers. That's who we are through and through. And that's the reason they've been able to be so successful. So again, being open source, being transparent, like these extra financial values, people often say like, oh, I guess they're successful despite that.

31:10It's like, no, you got it backwards. This is the engine. The mission is the engine by which the product succeeds. Yeah, I absolutely love that example like when i was building my first company which did run for 10 years or still running now but a lot of our inspiration was always looking at these companies that did this kind of radical transparency and buffer is another company which is quite interesting you do completely open salaries so you can just go and look at a spreadsheet literally of every single employee and they're very clear about why they're paid to what they are and it just completely changes i've always had buffer on my mental map of like well you know if there are companies you're thinking of applying to or whatever you know a company like that is always there because you just think well that to me speaks volumes over a company where like you can't find any information or you that kind of thing so but it is a very different way of working and it's quite difficult to start which we'll get into shortly one thing i'd like to touch on before we're going to get into what can founders actually do to ensure they've like set things up correctly in in this way and like thinking ahead i wanted just to pull one more example what can happen effectively when things go wrong and it's with Twilio.

32:14And Twilio was a very interesting example. And the timing of this was also interesting. I happened to meet Jeff, I think a few months before he, because he was the founder and before he was removed, I happened to meet him at one of very large Twilio event. And, you know, I just remember sort of how so much energy and how like he was clearly absolutely loving it. And then within a few months, I read that he was no longer there. And so you have a bit more of the background on that one because to me it just didn't make any sense oh this is like such a classic story so let me give you the story from the investor's point of view okay that case closed so jeff built this company from nothing i knew him when company was very very very young a true developer's developer for the longest time you could find this billboard on the 101 driving in san francisco just said twilio ask your developer it was like i remember that yeah yeah remember that slogan yeah he came up with a slogan himself you know it wasn't some marketing focus group thing they replaced it with the total focus group billboard now that I can't remember because it's not memorable at all.

33:11Ask your developer. And he built this company to just an absolute behemoth. Now, I don't have the numbers in front of me, and I hate to misspeak, but the company had a very successful IPO, had steady growth for a long time. And then during the run-up in telecom stocks during the pandemic, remember that? How crazy things got in 2020, 2021 for tech companies? So the stock went up crazy amounts. I can't remember now, you know, the stock was trading at like$400 or forfeit. It's just like billions and billions of dollars have been marked. He was, he had created literally billions of dollars for his investors.

33:43Such an incredible success. And then the stock collapsed when that bubble burst. So the stock was down 80, 90%. I can't remember. It was down way, way, way down. And there was a lot of pressure to get the stock back up. And so people were like, look, stock is way down. That's obviously a reason to change CEOs. Now, what's interesting about this story is when I mentioned before that some people choose to be the mission guardian personally, like Zuckerberg or Sergey and Larry. That's what Twilio had done. At the time of their IPO, they had agreed to give Jeff super voting shares, dual class protection.

34:13And when I think about this now, it's like the ominous music plays, like in the movie, you know, it's like dun, dun, dun. He agreed for the sake of good governance, that the shares would sunset after seven years. Sunset meaning they would go away. So he had this protection. And, you know, companies encounter this all the time. It's very common belief. If We go read a lot of good governance documents. They advocate for this as a good compromise. And the way they sell it to founders is like, look, seven years is a long time. Who knows what the situation will be then? If you need to extend it, you can always extend it, whatever.

34:42But in practice, it doesn't get extended because you don't want to jeopardize your good governance rating. You want to take a guess. I always ask people, please guess how many days elapsed between the day that these super voting protections expired and the day that he was removed as CEO. For those that are following at home, it was 199 days. Not even a year. Because at the first possible opportunity to get him out, they did. And their point was, look, stock's way down. So you're out. But first of all, that's an absurd reason because he created all that value in the first place. But more importantly, if you measure the revenue growth from the time of the IPO, the company was up, like I can't remember how many thousand percent.

35:21It's not like the company had stopped growing just because the stock price had come down. Even if you measure revenue growth from the day of the peak of the stock price, they were still up, I think, 150%. So it's just like you have this, if you look at a chart of it, you can just see like this incredible rising revenue line. And the stock is just gyrating as it does. And so, yeah, sometimes it's up and he's a genius. Sometimes it's down and he's a villain. But I thought the whole thing was really sad. And it's just so common. A Harvard Law School study was done among all venture-backed companies.

35:53The founder will only be CEO three years after an IPO in 20 % of cases with standard governance. So standard governance is just a loaded gun. It's like just waiting for some investor to decide, hey, as much money as you made me, you know, we deserve more. And so I just feel like for companies that are trying to do something different, that have a distinctive and different ethos, you know, it's really difficult. It's really difficult. Now, GitLab and Cloudflare both are protected by permanent dual class shares. That's why both of them have been able to do this kind of thing. And if you think about other companies like Buffer or think about, I don't know, Oxide Computing, which has the same salary.

36:26All employees have the same salary, right? It's like such a countercultural thing to do. It's so great. And they wrote a great blog post, I think, last year about just all the many counterintuitive benefits they get from doing this. So you just go through all these companies that are doing something different, that it's like really working, making so much money for their investors. It's like the parable of the goose that laid the golden egg. We can't help ourselves, but we're like, but why not more? Why isn't it giving us more? and we tend to destroy those companies rather than support them. I think it's really sad.

36:54Yeah, and this is really interesting because it is this, I guess, counter to the narrative that these super voting shares are like evil and terrible and why does it give, you know, one person so much control and actually having these dual class structures can actually, when used appropriately, can help in such a big way. I mean, there's small parallels to like where I live, which is Singapore and people pseudo democracy, but the problem is it works very well. The people are served very well on it, but it only works because of the kind of the way that the system has been set up here in Singapore.

37:21But I think what would be very interesting to then look at is like, okay, I'm a founder. I'm a software engineer, thinking of becoming a founder. I think the pressure is pretty great. You know, when you're setting up your company, you're taking on some investment. Safes tend to be the first mechanism that people take on money. But then before they know it, they do have, obviously in many positive cases, they do have term sheets and they've got actual VCs. What's your advice around how can someone starting out today actually think about and protect against what we're talking about? Okay, well, first of all, I promise that all the details you need to actually do this are in the book, including obviously, there's a lot of details in the book itself.

38:00And then there's a couple of QR codes you can download implementation guides, which have sample term sheets, sample incorporation documents, all kinds of stuff prepared by my friends at Virgil, the startup law firm that I helped start. And the most important thing is not to view this as like a one-time thing you do. Obviously, the earlier you do it, the better. So if you're just, if you're thinking about becoming a startup, I have a whole package of things that you should just do. And I'm just going to give it to you in very, very, this is like the blueprint in extreme brief. But before I give you the list, I really want to warn you against the Leroy Jenkins thing.

38:29Okay. You can't just be like, okay, I did one thing. Now I'm invincible. Leroy Jenkins, like right out into battle. Like, no, one thing's not going to get it done. In the book, I joke, it's like you have the plus two pauldrons of invincibility. So yeah, if someone tries to stab you in the shoulder, you are impenetrable. But if the rest of your body is naked, you're going to get stabbed somewhere else, you're still going to die. So it's really important to see this as like a lifetime discipline, not as a one-time thing that you do. That said, here's the blueprint in the short version. Okay. The first thing we need to do is three dimensions, purpose, coherence, integrity.

39:01Okay. That's it. Purpose, coherence, integrity, purpose. We have to establish what is this company? What is his legal purpose? Why does it exist? Today, we live in the era of what's called shareholder primacy, meaning that companies exist only to enrich their shareholders. If that's what you want to do, okay, I can't help you. But if you want to do anything else at all, you tell me you care about quality, you care about beauty, you care about engineering efficiency, you care about your customers, you care about your employees, you care about the environment, you care about inequality, I don't care what it is.

39:26You tell me you care about it, you need to write it down. And that means encoding it into the legal charter of the company through what's called a public benefit corp or PPC filing. This is a really easy thing to do. You do it in Delaware. You can do it at time of your incorporation or later, highly recommend PPC. And you need to operationally decide what are you committed to. I ask people to really think about who would you rather die than betray? Who's on that list? Your employees? Great. Write it down. Is it your customers? Whoever it is, let's write it down. Let's figure it out. Let's write it down.

39:57Okay. Then the second dimension of the blueprint is coherence. This is the leadership style of running a company according to this harder is easier principle, just like Cloudflare. You say, okay, we're going to commit ourselves to defend these values and this purpose, even when it's difficult. And the book has a lot of details about exactly how to do this, how to take your company from mission hopeful to mission driven. And then the third thing is integrity. So purpose, coherence, integrity. Integrity means structural integrity. Like how are you going to prevent your board from betraying you? How are you going to prevent investors from attacking you?

40:29That's things like the anthropic LTBT, things like having your directors sign an oath, like the equivalent of the Hippocratic oath that doctors have to take, boards of directors should take a similar oath to defend the mission. So in each of these things, like, you know, if you're just starting out, I would just pick some of the lighter weight things to do, and then add that to your incorporation. It's just like a really, it's a really simple and easy way to get started. And the nice thing about the legal stuff, the operational stuff, I think is very natural for product people. Most of the things, most people listening to this will read the book and be like, yeah, of course, this is like a helpful encapsulation of things I knew I wanted to do already.

41:02The legal stuff can sound really daunting, but one of the really powerful things about a legal charter is you don't actually have to do all the things. You just write in the charter that you will do it. And that becomes legally binding on yourself to do it. So it's actually a lot of things that if you just write it down early enough, it's just so much easier than having to jury rig or retrofit it later. Yeah. One thing I've been thinking about, especially reading the book, is founders still want to think, any business owner wants to think that they have like an exit strategy effectively and this idea of selling the company on for example does that sit at complete odds with this incorruptibility or you know how can founders think ahead on that one and i guess what i'm thinking about things like berkshire hathaway they're very clear about you know sure we give you a contract to sign but it's not really about that it's literally it's pretty much about a handshake and saying like we think we're the best for you and there's another company out there called tiny capital and i think that's interesting like because that's where someone can also make a choice when it comes to like how they're thinking of taking their company forwards but not always having to be exactly involved like how do you think about that one the critical thing to understand is just how valuable trustworthiness is so i just think that we dramatically underrate this asset in business today and and really in product in engineering it's just like it's not it's considered something vague or intangible but it's not.

42:24It's actually super specific and a very valuable asset. So yeah, Berkshire literally can pay lower amounts for their transactions. They buy assets cheaper and they don't have to pay nearly as much contractual cost because people trust them. The ability to work on a handshake is a well-documented asset. It causes more employee retention. It causes better customer loyalty. It causes better fundraising results. You have lower cost of capital. You have lower partnership costs. You have higher alignment of employees. The list of benefits goes on and on and on. The book is loaded with studies to demonstrate that this is not my personal opinion.

43:01This is a well-established scientific fact. And so when we think about what are the elements that create trust, that's really the positive framing of this resisting corruption. There's like resisting corruption is the same as intentionally generating trust. And so right now, as a founder, as a leader, if we're looking to quote unquote exit the business we don't have a lot of high trust options but we do have a few and it's not just Berkshire Hathaway you could do what's called an employee ownership trust or an ESOP conversion you can convert to a purpose trust you can do what's called a seller finance transaction there's actually like quite a few of these alternatives out there and not all the case studies made it into the book but they're in the supplemental materials like you know Taylor Guitars for example is one of my favorite examples they did an ESOP conversion there's a company called Common Trust that helps people do an employee ownership conversion.

43:47So the exit options are there if you look for them, if you want them. And obviously, maybe the most famous example of such a conversion is what happened at Patagonia. And I just think like, this is not like an unprecedented thing. We don't know what to do. We do know what to do. We have the data, we have the evidence, we have the options. And so part of this is just making people aware that these things exist, because the kind of the lawyers and the lobbyists and the bankers and all the people that advise our current generation of leaders, like, they all make their money from transaction volume and have absolutely no incentive whatsoever to tell you about this other stuff.

44:17As a result, it's quite invisible to most leaders. Yeah, just touching briefly, I know this isn't software, but Patagonia is that great example. I read that book, the Let My People Go Surfing. Yeah. And it was just such an eye-opening. I was running a company at that stage and it was just so eye-opening to keep seeing, well, they're so successful, they're so profitable, but it doesn't have to sit at odds with kind of doing good as well. And I think that was just a really powerful example to have as I was building things. Yeah, I'm glad to hear that. So looking at what else can people do, I'm not a founder, but I am a software engineer.

44:50And human traffic is one of the final chapters in the book. And I think that's a really powerful way to help explain, we're all part of the ecosystem, we're all part of this, you know, and yeah, like, I think he gives some just very nice examples of other things that people can be doing to feed to this way of supporting incorruptible companies, I guess. Yeah. Okay. So gosh, there's a lot to unpack there. And I know we're coming up in the end here. So first thing is, there are a bunch of companies in the book that have a mission that is not what you'd expect it to be. I think the best example you mentioned human trafficking, Tony's Chocolonely is some of the best tasting chocolate in the world.

45:28It's delicious. But the mission of the company is to end child slavery and cocoa production. So that's the mission. Like in order to do that, they have to produce the best chocolate in the world at the best possible price. And they have to make sure that the money is used to create an ethical supply chain. They've done an incredible job evangelizing for that mission. So it's like one of these classic cases where you don't have to make this tradeoff between mission and money. The mission drives their commercial results. And if people don't know that story, it's pretty wild. It begins with the founder attempting to get himself arrested for eating chocolate.

45:57So I'll just leave that as a teaser. But it's also really important that this book is read and used by people who are not founders, who are not board members, who are not investors, who do not see themselves as especially important or powerful in our society today. It's important for two reasons. One, because many of those people actually will go on to positions of power influence later in their lives. And it's very important that they go into that experience with a preexisting ethos. So you may be a future builder without even realizing it. So please do read even on that basis. But it's also important because every one of us has agency to shape the gravitational field around us by the choices we make as a consumer, as an employee, as an investor.

46:35Where are your retirement savings invested? So many people I know have their retirement savings invested with companies who take their governance guidance from a company called ISS whose values are inimical to yours. Why are you giving support to someone whose values you don't support? What's up with that? I'll give you another simple example. This came from an actual reader who came to me after reading the book. And he said, look, I really, really want to do this thing that you're describing, but I'm not a powerful person. In fact, I need a job. Okay? So they're like, can you please give me some advice on how to use the ideas in this book to help me get a job?

47:08And they were like, but caveat, I'm not courageous. Okay? So please give me a no courage way. I was like, no problem. No problem. Easy, actually. Here's what you're going to do. You're going to go have a job interview. Okay? At the end of the interview, they're going to say, any questions for me? For those that don't know, you should always ask. Never, ever, ever say no. Always ask a question. Okay. Your question is going to be, is this a mission-driven company? And you know what they're going to say? They're going to say yes. They're going to say yes? Of course they're going to say yes. What are they going to say?

47:34Yeah. And you're like, great. How do you know? And they're going to blah, blah, blah, tell you some reasons why they're mission-driven. Whatever they say, don't be judgmental. Don't be critical. Just with curiosity, just say, oh, that's so cool. Is that mission also in the legal charter? Is that our company's legal purpose? and I guarantee you for the majority of people who have this conversation, the answer is going to be, oh, I don't know. Now, it's a perfectly legit question. If you don't know, you deserve to know the answer to this question before you take a job because if it is not the legal purpose, odds are they're going to betray you one day.

48:03So you deserve to know. In any event, whether or not you ever get an answer to this question, you have done your job. Why? Because every modern company has a hiring process. The hiring process involves managers whose job it is to make sure the process goes well, which means I guarantee you whatever company you ask this question to it is somebody's job to find out the answer to any question a candidate might ask so just by asking the question now it's her job she's going to be like oh I don't know the answer to this question either I better ask my boss and she's going to have to ask her boss and she's going to have to I've actually been in the room where this comes up at board meetings where people will say something like we're starting to get this odd question from candidates what is our answer to this question?

48:44now look sometimes nothing will happen But sometimes that will be just the excuse the CEO needed to be like, actually, I've been wanting to do this for a while and I've been looking for an excuse. How do I convince all these financially oriented board members to do the right thing for the wrong reasons? Perfect. Ah, it's coming up in an hour. Sorry, we got to do it because, right? That's all from if one person asked. What if two people asked? What if 10 people asked? See, you have no idea how much power you have because you can't imagine the extent to which these companies, they seem indomitable.

49:14They seem so powerful. We all feel so helpless. And yet they are desperate for your approval. You can't imagine how addicted they are to the question of what will you do? You think any decision you make, I mean, no matter how trivial a decision it is, and whether you tell anybody or not is irrelevant. Every decision you make is some middle manager's OKR to make sure you do that thing. And it's probably some other middle manager's OKR to make sure you don't do it. So in the age of surveillance capitalism, every decision you make reverberates in gravitational waves through the whole economy, which means these companies are sitting there being like, hey, can we make the product a little bit worse?

49:54Will they still buy it? How about now? How about now? How about now? Will they still buy it? Can we shitify it a little bit more? To use Cory Doctorow's term. Can we treat our employees a little worse? Will they still work here? How about now? How about now? How about now? Like they are addicts. They are desperately seeking your approval. So choose wisely who to give it to. Yeah, that's an amazing place to leave it. You know, we have so many software engineers who, quite frankly, will be having so many offers thrown at them these days for jobs in this AI era. And this is exactly the kind of thing that they can be asking and making.

50:25Voting with their feet in their hands, I guess. Yeah, exactly. Like, I think people often misunderstand this. I'm not saying you have to vote with your wallet, with your feet for my values. I'm saying defend your own values. Have some self-respect. Yeah, for sure. So we are coming up in time. Just where is the best place for someone to grab a copy of Incorruptible? Well, of course, the best place is at your local independent bookstore. If you would be so kind, if you want to do me a favor, you walk into your local independent bookstore and you'd be like, do you have every single book by Eric Ries?

50:55Do you have Incorruptible? Why not? What's wrong with you? I thought you're a great bookstore. That's always super helpful. If you go to incorruptible.co, of course, you can get it at every major retailer on the planet. Their links are all there. You can get it in audio form, in e-book, or in print hardcover. If you want to see all the different media and accolades and bestseller lists and all that stuff, you can find that at howisincorruptiblegoing.com. There's another place to follow. And either way, if you want to follow me, you want to get a whole bunch of cool bonuses, you can just join my email list.

51:23Just type in your email address. We promise not to spam you, but to give you as much value as we could humanly come up with for those who choose to be part of the community. So thanks for that for those who want to follow along. There we go. Well, Eric, thank you so much. And not just for this episode, but for everything you've contributed. So nice of you to say. Lean Startup, obviously, is such an inspiration and has guided so many companies. And I think you put it very well that you set up all these companies in a good path from the building stage. and now you're here to kind of help them also figure out the keep going and make sure that they carve the sort of the best path of themselves as they succeed so i think there's you know there's that quote in the book around i think it was brian chesky airbnb saying you know that steve jobs the best product he actually made was the company it wasn't one of the products and i think that's a an amazing quote and a great place to leave it so again thank you so much thanks so much really appreciate it

52:18Thank you.