May 27, 2026 • 34 mins
What if the best practices taught in every business school are quietly destroying the organisations that follow them? Eric Ries — author of Incorruptible: Why Good Companies Go Bad and How Great Companies Stay Great and founder of the Long-Term Stock Exchange — joins Aidan McCullen to expose the hidden forces that corrupt mission-driven organisations, and to reveal the structural defences that keep outliers like Costco immune.
About Eric Ries Eric Ries is an entrepreneur and the bestselling author of The Lean Startup. His new book, Incorruptible, maps the structural forces that destroy company missions and lays out a blueprint for building organisations that resist them. He is also the founder of the Long-Term Stock Exchange (LTSE).
About Aidan McCullen Aidan McCullen is a Thinkers50-recognised host, keynote speaker, author of Undisruptable, and former professional athlete. He is the founder and host of The Innovation Show — the podcast where square pegs find their place in a world of round holes.
In this conversation, Eric reveals:
- Why mission drift and bureaucracy are really corruption — and why naming them that changes everything
- How financial gravity silently pulls every organisation toward value extraction unless actively resisted
- The professor story that launched the book — and the question that haunts every founder: is it even possible to build an incorruptible organisation?
- The LTSE ambush: how Eric's team chose potential bankruptcy over compromising their principles — and why that decision ultimately saved the company
- Why the founder hero story and the market story are the same story told backwards — and how that confusion destroys organisations from the inside
- The golden goose paradox: why Sol Price and Robert Owen kept losing control of the very organisations they built
- The Costco governance fortress — how Jim Sinegal created a structure that protects the fiduciary-to-the-customer ethos no matter how hard Wall Street pushes back
00:00 Sponsor Message
00:26 Naming Corruption
02:32 Why Best Practices Fail
05:08 Professor Story Wake Up Call
09:57 Financial Gravity And Strength
12:26 LTSE Ambush And Principles
19:14 Founder Hero Vs Market Story
23:56 Golden Goose And Case Studies
25:19 Sol Price And Robert Owen
30:46 Costco Governance Fortress
33:15 Wrap Up And Resources
34:26 Sponsor Outro
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
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You can find Kyndryl and the KyndrylInstitute at K-Y-N-D-R-Y-L, kyndryl.com
Our guest bets you have felt it yourselfin your own life and in your own career.
Maybe it was a day your favorite companykilled the product you and everyone else
loved, or when your own company canceledits innovation products to help make the
(00:41):
quarter, or when you watched helplessly asthe professional CEO brought in to replace
the founder drove the company into theground, or when leadership changed and the
mission became just words on a website.
We lack the vocabulary tocall it what it really is.
Mission drift?
That sounds like a navigation error.
Bureaucracy?
(01:01):
Sounds like paperwork.
Neither captures the gut punchof betrayal when someone precious
is corroded beyond recognition.
So our guest calls it by asimple old-fashioned name.
He calls it corruption.
He is with us to address thechallenge and offer solutions.
He is literally a man on a mission.
We welcome the author of "Incorruptible: Why Good Companies Go Bad and (01:21):
undefined
How Great Companies Stay Great."Eric Ries, welcome to the show.
Oh, such a pleasure to be here.
Thank you
It's great to have you on the show.
I have way less time with Eric thanI would like, and I was gonna do a
golden goose on him and try and getas much time out of him as possible.
It's just not possible with themission work that he's doing.
(01:44):
I thought I'd tee you up this way, Eric.
Clay Christensen, who you know well,used to speak of former classmates at
Harvard Business School, people likeJeffrey Skilling of Enron, Rhodes Scholars
too, that he was scholars with, andhow they ended up unhappy or in some
kind of financial or personal scandal.
And he wrote once, "I know for sure thatnone of these people graduated with a
(02:09):
deliberate strategy to get divorced orlose touch with their children, much less
to end up in jail, yet this is exactlythe strategy that too many of them ended
up implementing." And I thought thatwas a perfect setup to what you see,
'cause your work, you've brought it evenfurther and you're giving a system and
(02:30):
a blueprint for people to manage this.
But let's first chat, talkabout what the problem is
Oh, gosh.
And yeah, we all miss Clay so much.
Um, y- such a loss when, when he, he,passed away and, and, um, you know, the
torch of his work needs to be passedto a new generation to try to figure
out how can we help turn this around.
(02:52):
Because we are in the midst of an erawhere the dominant best practices that
we are teaching leadersh- uh, aboutleadership, about how companies should
be built, structured, and governed,a lot of them are value destroying.
And this is kind of hard for peopleto imagine, like how could it be
that they're the best practicesfor a reason, but the reason is
(03:14):
often not a good one.
I witnessed this myself.
I personally know quite a few people,as Clay did, who wound up incredibly
rich and totally miserable or worse.
And you see people sometimes ask me like,"Why are these billionaires having like
a public mental breakdown every day onsocial media? If they're so rich, why
don't they just go buy an island and likebe happy?" It's like, well, you know, you
(03:35):
might not have known, you might have heardfrom ancient wisdom that money does not
buy you happiness, and here we see that,uh, uh, evidence over and over again.
But I think there is something particularto the unhappiness that we're seeing
now, and, and Clay of course, had hisfinger right on the pulse of it, that
we are teaching people a strategy, aspecific way of making money via value
(03:56):
extraction, via value destruction.
That does work, that's why it's dangerous.
But although you can make money likethat, it's very hard to find satisfaction
with that, and it's very difficult evento just create any kind of sustainable
value creation with those tools.
Ultimately, they are short-term innature, and so they tend to plant
(04:17):
the seeds of their own destruction.
And that's how people wind up in jail.
That's how wh- people wind up withall kinds of moral compromises because
they're having to do more and more andmore and more like a drug addict chasing
the next high, chasing the next fix.
It's ultimately quite sad
You start with the story ofthe professor and it sets up
the challenge so brilliantly.
And to tee you up, I'm gonnajust quote a little piece here.
(04:38):
You say, "Like many builders,he was not interested in making
money by any means necessary.
He wanted his company to prosper bycreating a product that was useful,
trustworthy, and healing to customers.
In today's hyper-financializedeconomy, these simple aspirations
have become radical acts.
Every one of them has becomeexpendable, too often sacrificed on
(05:01):
the altar of growth, share price,and short-term returns." Apart from
how I love how you've written that,
Oh, thank you.
Yeah
love the story of the professor,and let's give the context 'cause
it really sets up the challenge.
Yeah.
Most people don't realize howrevolutionary their own ideas are
'cause they think, "Well, I'm just,I'm just making a company to make
(05:21):
money." And it's like, "Oh, really?
Money by any means necessary?
Sure.
That's what will give me leverageto let me do the other things I
wanna do." I was like, "Yeah, butwhat if somebody finds a way…"
Let's say you say you value quality, or inthis case, the professor, he was building
a health company that was doing researchthat would ultimately lead to incredible
breakthrough therapies using, using AI.
And, you know, he had been indoctrinatedinto the for-profit ideology like all
(05:46):
of us had, that, that all ways of makingmoney are basically just as good as any
other, even though in his heart, he feltwhat I call the builder's intuition,
that the best way to make money isactually to create more value than
you capture, and other ways of makingmoney are suspicious or maybe even bad.
So he would have investors who wouldsay to him, "Well, you know Why don't
(06:06):
you worry about that stuff later?
Just make the technology work.
Get to product market fit.
If you're like too worried about what's--how, how you're gonna make money or
the different… If you're worriedabout that stuff, like maybe you're not
very serious about being in business.
Maybe you should go back to academia.
But meanwhile, his employees, he'strying to like hire the most talented
researchers on the planet, and theyhave real questions for him about,
"Well, is this gonna be used to createlong-term value or something terrible?"
(06:29):
And he would say, "But don't worry,I have such good intentions." And
that was not getting the job done.
You know, they're like, "Well,what, what does that matter?
Aren't we a for-profit company?
Aren't we gonna have investors?
What if the investors pressure youto do something bad?" "Well, I'll
resist." "That's not very satisfying.
What if they fire you?" "Ohyeah, what about that?" So, so
he was feeling really trapped.
(06:49):
Now it happened to be, and of coursein the book I, I tell this in dramatic
fashion as best I can, that I was havingthis conversation with a professor
at the same time as I was going tocommemorate a founder who had-- who
was like 14 years into his journey.
He had had, tremendous success.
I mean, he had made more moneyfor his investors than they could
spend in five lifetimes, okay?
(07:10):
He'd really been a very successfulentrepreneur, and yet his board had
fired him at the earliest possibleopportunity because for all the
money he made them, it wasn't enough.
They wanted more.
So we were at this event andI'm explaining to the professor,
I'm going to this event.
Look, there's like a thousand people here.
We're all celebrating this founder.
People had flown in from allover the country to see him.
I saw people who had been laid off whocome-- who came back to celebrate him.
(07:35):
And the professor'slike, "Wow, what respect.
That's just the kind of companyI wanna build." I'm like, "Man,
you are not listening to me.
He doesn't work there anymore.
This is not a party.
It's a wake." And he's like, "Oh my God.
Did somebody die?" "No, nobody died.""Oh, did the company go bankrupt?"
"No, the company's not…" I waslike, "No, everything's fine, except
(07:55):
something really precious has beenlost and none of us quite know what to
call it." And I remember being at thatparty and everyone being like, "Yeah.
Do we trust this company anymore?
No." We-- and the new CEO,the new CEO's not a bad guy.
But what, what good are thenew CEO's promises when he
could be fired at any time?
So there's this loss, this corruptionthat is all over our economy.
(08:18):
And the professor was startingto get really worried.
He's like, "Wait a minute.
Are you saying that's gonna be mesomeday?" And I'm like, "That's
what I'm trying to tell you." Andhe, he asked me the question that
kinda launches the whole book.
He said, "Is it, is it even possible tobuild an incorruptible company or is this
corruption inevitable?" And I was like,"Well, the good news is, although most
(08:38):
people think it's impossible, I disagree.
I think it is possible to do this." Butthe bad news is you've already taken
steps in the wrong direction becauseyou have already bought in to these
so-called best practices, and you havenow incorporated and built a company
that is structurally weak to the sameforces that led to the demise of this
and so many other great companies.
(09:00):
So that's really the project ofthe book is to identify the why.
How do we get into this mess?
Why is it happening this way?
Where do these best practices comefrom and what's wrong with them?
We have a lot of really greatevidence, but far more important
to lay out the blueprint.
If you wanna build an organizationthat can resist this corruption for
the long term, that can actually createquality or health or whatever you care
about, whatever revolutionary idea youhave, we wanna protect and defend it.
(09:24):
We know how to do it.
We have the research, wehave the case studies.
But in order to do it, we're gonna haveto go on a journey where we reject so
many of the so-called best practices we'veall been indoctrinated to believe in.
Beautiful, man.
Beautiful job of the professor.
Nice setup as well, likeyou do inside the book.
I want to tell our audience, you got toread the book to really get a grasp of the
(09:47):
setup is br- beautiful in part one, theproblem, and then the solutions as well.
But you really have to settle down, andthere's an accompanying website I'm gonna
link to as well for people and QR codes.
Just to dive a little bit moreinto the challenge, I don't
know if you've ever been there.
I worked for a company once,and at one stage, , the owner
was quite malignant, this guy.
(10:08):
And He made me feel, I was being moraland I wanted to do right by my family, all
those things we talked about with the ClayChristensen message at the start, that he
made me think, "Well, maybe I just need toknuckle down and be more business-like."
And you bring this up.
(10:28):
You say when you talk to investors,they say to CEOs like this or founders
like this or builders like this, "Oh,well, you're just not very serious about
business because if you were, you'ddo what I tell you, because I know how
to build businesses." And in there,there's this moment of Dorian Gray where
you're like, "Do I put the portrait upin the attic here and knuckle down and
(10:50):
be business-like and give up on thatgut feeling of doing the right thing?"
So many people compromise in thesesituations and wind up with a company
that is undifferentiated and mediocrebecause they are being pulled down
by this financial gravity, I call it.
This force that unless you activelyresist it, will turn your company
(11:13):
the same as every other company.
The way we know that it's a forceis think about all the big companies
you know that are all the same.
You know, they put out thesame anodyne press releases.
They have the same-- They jumpon the same stupid bandwagons.
They're all, they're all sucking intothe same social contagion of, you know,
whatever the latest trendy thing?"
is.
They are weak.
And one of the goals of the bookis to introduce this idea that
(11:35):
organizations can be not just good orbad, not just, you know, evil or not
evil, not just growing fast or notfast, but they can be strong or weak.
That there's an idea of organizationalstrength that is required if you wanna
actually sustain some kind of missionor purpose, over longer periods of time.
And in order to do that, we have tobe willing to take our own beliefs and
(11:57):
values seriously so they don't justbecome paper on a wall, but they become
the, the true convictions, the ethos,the character of the whole organization
You're seeing this yourself.
So when you against the flow, when youintroduce a system that might replace
or threaten the existing systems,against huge resistance and, and the
(12:21):
status quo by its very nature canbe nasty and try to drag you down.
And you experienced this with yourbrilliant project, and I wanna
really share this one as well, theLTSE, the Long Term Stock Exchange,
Mm-hmm, mm-hmm.
and how that was welcomed the industry
Yeah, yeah.
I mean, I, I'm very proud of our workat, on the Long-Term Stock Exchange.
(12:43):
It, for those who don't know, it isthe first new national securities
exchange here in the US, the same,like, legal kind of thing as the
New York Stock Exchange or NASDAQ.
The first one of its kindsince the creation of the
NASDAQ, like, 50 years ago.
So it's, it's, um, it was quite theambitious and difficult undertaking.
Now, one of the-- And, and I don'twanna get into the arcana of exchange
stuff, unless people are interested.
(13:04):
We know we obviously could do awhole separate episode just on, on,
on how to bring long-term thinkingback into the public markets.
But what you have to know aboutthis is so many things in our
modern economy are all the same.
I said all these companiesall behave the same.
Whether it's, you know, everyone'sgot the same, like, dumb click-through
license agreement that nobody reads,or everyone's doing an extractive
business practice, or they're layingpeople off, or whatever the thing is.
(13:26):
When you see unanimity or consistency,you ask people, "Why, why is everything
the way that it is?" People say,"Well, that's the invisible hand of
the market." It must be, 'cause ifit wasn't, it-- competitive pressure
would force it to be something else.
Therefore, the market has spoken.
This must be the best.
That's where a lot of ourbest practices come from.
I thought so too, and I had wondered,"Huh, stock exchanges. All the US
(13:49):
stock exchanges all have the samelisting standards. I wonder why?"
Must be because that is the best?
I don't know.
Didn't all seem very good to me.
I think we could do better, so Ithought, let's build a new stock
exchange, hard though that is.
Let's get it approved by the SEC. Let'sgo compete, with new listing standards
compared to the incumbent exchanges.
Okay.
And we get to a certain point, Itell this story in the book, where
(14:10):
we were almost about to succeed.
Like, we had our first listings lined up.
We were about to get our regulatoryapproval, and all of a sudden, this
kind of group comes together to,to put a stop to what we're doing.
And they called me up, andthey're like: Look, we just
think what you're doing is bad.
It's inevitably gonna fail.
Like, we're not gonnaallow it to go forward.
And I, I was very naive.
I said (14:29):
Look, this is America.
If we're gonna fail, what's the big deal?
Let's fail.
We're a market economy.
Let's fail.
They said (14:35):
Well, your failure, you might be drawing attention away from other
things that we like even better thanyou, so we're not gonna let this happen.
And I was very overconfidentthat we could, that we could
overcome that, but I was so wrong.
Anyway, I won't, I won't belabor thewhole story, but they, they started to
put pressure on our vendors to abandon us.
So it wasn't just like opposeour government application.
(14:57):
They didn't do anything out in the open.
They would just call the CEO ofanybody we worked with and say:
Listen, if you partner with thiscompany, other things that you need
more than that, we're gonna deny you.
you.
need us for other things, so don't, don'twaste your political capital on this.
Anyway, it all came to a head.
I was actually in, in the UK, whenthis happened, so I was far away from
my team, thousands of miles away.
(15:19):
It's the middle of the night for me.
You know, you can't be mad at theambush because it was done effectively,
and they knew what they were doing.
And we get the word from our vendors thatthey're gonna capitulate and withdraw
our application, the whole thing.
It was all about to blow up.
And we get a last-minute phonecall, and they said: Listen, you
know Nice exchange you have here.
It'd be really a shame ifsomething happened to it."
(15:40):
I said, "What do you mean?
You're, you're, you're literally inthe process of destroying my whole
company." And they're like, "Well, youknow, it doesn't have to be this way.
If you'll just change your listingstandards to be the same as everybody
else, all this can be made to goaway." And that's when I finally
understood what was really going on,and I gathered my team and I said,
(16:00):
"Hey, everybody, here's the situation.
I think if we say no to this offer,we're probably going bankrupt.
But if we say yes, we'recompromising our principles.
So what should we do?" And one byone, every person on that Zoom,
I'll never forget this, it was solate at night, I was bleary and
delirious from this crazy situation.
I was so stressed.
Every person on my team, they just said,"No deal. We'd rather go bankrupt than
(16:24):
betray what we stand for." And I sayin the book, I wish I could say it was
my visionary leadership that got usthrough, but the truth is, I was the
one curled up on the bathroom floor.
Like, I could barelyfunction, I, was so upset.
I thought the company wasgonna die to save a principle.
Now, as it turned out, we did say no.
They did withdraw our application.
Our-- The whole thing fell apart, andwe had to start over from scratch.
(16:47):
But as is often the case when youstand on principle, in retrospect,
I can say this is one of the bestthings that ever happened to us.
And the reason why LTSC exists atall today, is because, , of the
learning and the pivots we wereable to get out of this ambush.
But in the moment, and this is so key,in the moment, we didn't know what
the consequence of sticking to ourprinciples would be, and so, we had
(17:10):
to take the leap into the unknown.
And I just think many, too many ofour leaders are taught to compromise
at the first sign of difficulty.
They don't stand for their principles,and therefore, they never get the
chance to unlock the incredible magneticalignment that happens when you take
the principled stand in business
I don't think anybody ever regrets that.
I'm sure there's probablyfinancial considerations, all
(17:33):
that kind of stuff, and cognitivedissonance kicks in to justify
Always.
Always.
Yes, of course
But one of the challenges is, and to callthis out, I'm sure you've had this where
I think when I thought, when I read aboutthis, I was thinking about great stories
where founders stuck to their principles.
Walt Disney, for example, wheneverybody said he was crazy making
(17:57):
Snow White, then he was crazy makingDisneyland, even though he'd succeeded
massively on the previous pivot toSnow White when a fe- doing a first
feature film ever as an animation.
H- had you experienced that wheresomebody you exper- you thought
would, would be there to supportyou actually wasn't and was like
(18:17):
going, "Eric, are you crazy, man?"
So many people, I can't even tell you.
And in fact, it's not just peoplewho, who abandoned us or who kind
of were like A very large numberof people would say to me, "I'm so
glad you're working on this problem.
It's the most importantproblem in the world.
You know, business has beenstruggling with quarterly reporting
(18:39):
and the short-termism for 50 years.
It's, it's just about like, Ireally admire what you're doing."
And I'd be like, "Oh, great.
I'm so glad.
Would you like to help us out?
Maybe you'd like to invest, maybeyou'd like-- We don't even, not,
don't need your money, but evenwould you publicly endorse it?
Even would you just, like, encourage,uh, your company to do it?"
"Oh, no.
Absolutely not.
Can't put my neck out.
Glad that you're the one doing it."So, so yeah, that I, I get that a lot.
(19:03):
And, and I've learned to becomesympathetic to this, although as
a founder, it's very frustrating.
And yeah, Walt's folly, the wholething, is such a common pattern.
And I tell a story like this in the book.
It stems from two very different storiesof what's happening with innovation that
somehow coexist in the same organization,which I think is really fascinating.
(19:25):
Story one is the founder hero story.
So like, what is a company?
Well, it begins with a founder, theirvision, the business model, the strategy
that they build a team, they raise money,they gather resources, they figure this
out, and the last step is they bringthis thing to the market, customers
buy it, validating their vision, andthat's what makes a company great.
(19:46):
But if you go to an economicsclass, you'll hear type story
two, which is totally different.
In story two, what makes a company?
Oh, well, a market need.
The market has a need for a new thing.
The customer demand summons anorganization and therefore its
attendant network of businessmodel and, supplier relationships.
(20:07):
That requires capital.
So that attracts investors toprovide the capital to do this thing.
And because there's capital andthere's this thing, we need, we need
employees to run it, and somebodyhas to be like the impresario who
puts the whole thing together.
But basically, the founder is like thelast, least important thing about what's
happened, because the founder is basicallyprivatizing gains that were created by
(20:30):
the social structure that they live in.
Now, what's so interesting to meabout these two stories is they're
the same story but told backwards.
One begins with founder, ends withcustomers, and the other begins with
customers and ends with founder.
So , in an organization, you willfind these both stories coexisting.
The founder obviously believes instory one, but many of their executives
(20:50):
believe in story two because theyweren't there when the company
was just a scrappy little thing.
They never saw thefounder acting heroically.
They just, they showed upto a company that has always
existed as far as they know.
And so these two stories coexistbecause they're surf-- they're
very, very, very similar.
But when push comes to shove, theyproduce very different outcomes.
(21:11):
If we have to take a bold bet onsomething new, the founders always tell
me, like I've said to so many founderswho'd be like, "I don't get it."
Like Walt Disney We're only here'cause of me in the first place.
Why do I have to re-prove myself?
Like, surely the fact that I was rightbefore should give you some level of
belief that I'm right again." But from thetype-- from story two, that's not true.
(21:32):
The founder was just in theright place at the right time.
They didn't really do anything.
They, they, were summoned by the market.
So the frustrating thing aboutthese two stories is that they are,
in a very large degree, both true.
And if you study the history of business,you will find that these stories actually
lay out a hierarchy of business concepts,business model, culture, strategy,
(21:57):
customer, like… And therefore, almostevery business theorist of the past has
picked one of these levels of the storyand made their whole career out of it.
You know?
If-when they define what is acompany, they'll be like, "A
company is a business model. Itdoes this thing." What is a company?
A company is a frictionless, way ofreducing the friction of internalizing,
(22:18):
the friction of contracts.
So, like, the contractinglayer is what a company is.
Other people will say, "Yeah, youknow, founder mode is what a company
is. It's all about the, the vision andpri-priority of the individual person."
It's like doctors who study a certainsubsystem of the human body who kind
of, like, unconsciously start to thinkthat their system is the most important.
Like, why?
If I study the heart, I'm like, "Thehuman being, I mean, human being is--
(22:41):
The heart is the main thing, guys.
How do I know?
Well, if you didn't have a heart, youwould die." But the guy who studies
the lungs is like, "Mm, if you takethe lungs out, you will also die."
And the person studying the nervoussystem, they'd be like, "Excuse me.
Excuse me.
I actually command all thesethings, including the heart." And
the guy who studies the brain islike, "Mm, actually, guys," right?
And then, you know, like, we allhave a natural tendency to think
(23:01):
our piece of the whole is the whole.
And the same thing is true for business.
Most of us as leaders, mostof us as business authors for
that matter, are focused on oursystem, our part, our piece.
We don't see the whole.
So as a result, we have thisincomprehension, this, this confusion
about what to do next, about where tobet, who to trust, that kind of stuff.
(23:23):
And one of my goals with writing thisbook is to lay out a more comprehensive
theory of what an organization actuallyis that encompasses both stories and
all of these levels so that we canstart to see and develop techniques that
address the holistic thing, the wholeenterprise, whatever that thing is.
And actually, the more you study what itis, the more wild it is, the more I think
(23:48):
it's actually really utterly fascinatinghow many people are confused about what
is the thing that they themselves operate.
Love it, man.
Absolutely love it.
And you reminded me of an Aesopfable, which is just, you set me
up so beautifully for a nice segue.
There's an Aesop fable called The Body andthe Members, and it's about how the rest
of the body turn on the stomach and thinkthe stomach's not worth anything and get
(24:10):
rid of it, and then the whole system dies.
But it's a segue to the brilliantgolden goose challenge that
you set up in the, in the book.
And I'm gonna share on the screenfor those people watching us on
YouTube, diagram I made, and itincludes your quote there, if you can
see, which I just absolutely love.
"Everything worth protecting willeventually need protection," a
(24:33):
brilliant line that I'm gonna, I'mgonna definitely stick it on one of
those quote sites, man, to last forever.
But for those people who are onlylistening to us, what it is, it's
a boardroom and it's a, load ofboard members looking at the golden
goose, and they're carving knives.
They're getting ready for more and moreand more, and they're about to butcher the
(24:56):
Oh
my God.
God, that cartoon is painful to look at
Yeah, it's horrible.
And, you talk about the two storiesthat companies tell themselves or are
told, there's two brilliant stories,contrasting stories, tragedies that
you open up in chapter one, the storyof the legend who is Sol Price, and
then the tragedy that is Robert Owen.
I'd love you to juxtapose these
(25:18):
Okay.
Yeah, yeah.
Happy, happy to do it.
Yeah, so let, let us begin with thelegend of Sol Price, because Sol
Price is a giant of entrepreneurship.
I mean, and, and not thatwell-known today, but in his
day was, was very famous.
He's really widely considered tobe the father of modern retail.
So, um, to give you a sense of howinfluential his ideas were, when a guy
named Sam Walton was thinking aboutgetting into retail and was trying to
(25:40):
decide what to name his company, hecalled it Walmart as an intentional
tribute to Sol's company, Fedmart.
Fedmart was the originalAmerican discount retailer.
It was started by SolPrice in 1954 in San Diego.
And Sol, before he becamea retailer, was a lawyer.
So he, when he was a lawyer,he was trained that he had-- he
(26:01):
was a fiduciary to his client.
What does that mean?
Well, the lawyer is trained thatyou have to put the client's
interest before your own.
When he became a retailer,he asked himself this simple
question (26:10):
Who's my client?
And he thought it was really obviousthat the customer is his client.
So when he would, uh, uh, operate, hesaid, "Everything we do has to be set
to, to be a fiduciary to the customer."So for example, if competitors would,
um, sell products below Fedmart's cost,Sol would put up signs saying, "Listen,
(26:30):
you shouldn't buy this product from me.
You can get it cheaper." And hewould show exactly where you could
get the com-- where you could getthe product cheaper. "I don't know
how they're doing it below our cost,but you shouldn't buy it from me.
Buy it from them." He's like, "My jobis to put your interests ahead." So
as a result, people really trustedFedmart, and they liked shopping there.
The company grew and thrived.
He became a wealthy Man,Company went public.
(26:51):
But as a public company, he justfelt this pressure all the time.
He believed in low prices and high wages.
He believed in hiring andpromoting from within and a kind
of an organic kind of growth.
What did Wall Street want?
Well, you can imagine.
The opposite.
High prices and low wages, allthe things you can get away with.
If people trust you, you know,the investor's perspective was
(27:13):
you can betray them for money.
They won't even notice becausethe trust is worth stealing.
So Sol was a uncompromising person, and sothis eventually came to a massive battle.
One day in 1975, his board fired him.
He literally came to work one day, andhe couldn't get into his office 'cause
they had changed the locks on his doors.
(27:33):
And this is the pattern we see overand over and over again with companies
that rediscover the principle thatI call enlightened capitalism.
We treat it-- Uh, founders tend to treatenlightened capitalism like a technology.
Like a, like they're like, "Oh my God,I just invented something amazing.
Did you know if you treat people withrespect, if you pay good wages, if you
(27:54):
invest in quality and R&D, if you aretransparent and trustworthy with your
customers, things go really well for you.
You make a fort, you make all thismoney." And they say to people, "Look,
because the market rewards value creation,because we live in a competitive system
the market will protect and not onlyprotect, ex- uh, share what I have
(28:17):
created and others will adopt it.
And then something different happens.
This has been going on a really long timeI tell , what I call the tragedy of Robert
Owen, , the famous Scottish industrialist.
He took over something calledthe New Lanark Mill in 1800.
1800. But he was so ahead of his time.
He ended child labor.
(28:38):
He created on-site housing.
He had a social insurance scheme.
He provided healthcare for his workers.
Like, all this stuff that by our modernstandards we say is basically table
stakes, he figured it out in 1800.
He had very ahead-of-his-time,feedback practices for the workers.
He ended corporal punishment.
I mean, he had these very exceptionalideas, and it really worked.
He took this bankrupt mill toworld-leading profitability and, , and
(29:00):
quality and all this good stuff.
And his investors kept trying to fire him.
He had to bring in new investors tobuy out the old investors three times.
One of the syndicates involved the greatutilitarian philosopher Jeremy Bentham.
Okay?
This is, like, not stupid peoplehe was bringing in as investors.
But every time, the sameproblem would happen.
The investors would fight with himabout the right way to proceed, get
(29:22):
into a conflict, and eventually,they would try to oust him.
The, on the third try,they ultimately did.
So when people hear the story of SolPrice or Robert Owen, they say to me,
like, "Why?" It's a kind of a mystery.
Why would investors wanna kill theirown goose that laid the golden egg?
Isn't the market supposedto be about value creation?
Should- wouldn't investors wannamake as much money as possible?
(29:45):
This is one of the biggestfallacies of all time in business.
The market does not reward value creation.
For the record, you could create amarket that rewarded value creation.
We could live in that world if you want,but that's not the world we actually
live in, nor has it been since 1800.
And because of the rise offinancialization, this problem
is obviously getting a lot worse.
But let me go back to Sol Price becausethis book is not meant to be depressing.
(30:09):
It's actually a double mystery.
Mystery number one is (30:11):
why are we killing the golden goose?
Why is this happening all overour economy left and right?
But if you ask most people about it, theywill say, "Well," you know, once you get
past the denial, "This doesn't happen.
Invest-- The marketsare perfectly rational.
Investors don't do this." But we layout hundreds of years of case studies.
People are like, "Okay, it doeshappen." You say, "Why?" "Well,
(30:31):
I guess it's inevitable whencompanies get big, when there's money
involved, human nature," whatever.
We have a lot of just so storiesabout why this is inevitable.
But if it's inevitable, this is thesecond mystery: why are there exceptions?
Let's go back to Sol Price one more time.
Sol Price, after he got fired, youknow, remember, he was a late-in-life
entrepreneur, and he was rich now,so he could easily have just retired
(30:54):
and been like… That's basicallywhat happened to Robert Owen.
He gave up on business as atool for change, but not Sol.
Sol was very stubborn.
He took two weeks off, andthen he was back at work.
He leased the office upstairs fromFedmart And started a new company.
Now, today, that company, which he calledthe Price Company, is not that well-known.
(31:15):
But like when I was a kid, thePrice Club was like the store
that my family shopped at.
I didn't even know thatPrice was a guy's name.
I just thought it's thestore with the low prices.
That's where you go.
So but today, Price Club is not thatwell-known because of something else
that happened right around the same time.
See, Sol was a big believerin promoting from within.
So there was a guy who had startedwith him as a stock boy at FedMart
(31:37):
and then had risen through theranks all the way to an executive.
His name was Jim Sinegal, and he quitFedMart in protest when Sol was fired,
went to help Sol build Price Club up, andthen he decided to start his own company.
That company, some years later, mergedwith Price Club to form a company
that they called PriceCostco, but ofcourse, we just call Costco, the four
(32:00):
hundred billion dollar public company.
That is, for whatever reason, theexception to every business rule.
So if this is inevitable, likeif what happened to FedMart and
New Lantern is inevitable, whyhasn't it happened to Costco?
People say, "Well, I guess Costco'sjust too big. Wall Street wouldn't dare
mess with them." Are you kidding me?
No way.
Wall Street is constantly trying to getCostco to abandon the ethos that it has.
(32:24):
It still practices that fiduciaryto the customer mindset, the
capped margins of Sol Price.
But Jim Sinegal added a secondreally important element.
Costco is protected by a governancefortress that prevents its board from
betraying the mission and preventsoutsiders from forcing the board to do so.
(32:45):
And Costco is not alone.
There are these outlier companies all overour economy that seem to defy this rule.
And in fact, if you study thosecompanies as a set, you will
notice something very striking.
Every single one of them basicallycompletely defies every single one of
the so-called best practices we areteaching everybody about how they're
(33:07):
supposed to build their companies.
So that's the, that's thebook, a double mystery.
Why does this happen, and how can wecreate exceptions that prove the rule?
Man, I got through that much of my notes.
Yeah, yeah.
All right, We have more to discuss.
I look forward to it
I know you're under time pressure.
I want to just tell our audience,in chapter one, for those of
you who like innovation, Ericgives a list of unusual failures.
(33:29):
There's a link to the book whereyou can sign up to the website.
I'm gonna link you to that soyou can go and download that.
You'll get emails oncethe book is released.
There's a plethora of contentto go along with this.
Really interesting.
I loved your taxonomy of the mechanismsof those failures, which is really
useful language I found in my work in
innovation as well.
Love that.
That's all in chapter one.
(33:50):
But Eric, I love your mission.
I love how you're reinventing yourself.
I love what you've done.
You've gone from being the animator todeveloping the Disneyland and going for
a bigger mission, just like Walt did.
I'm sure people said it was Ries'Folly, and I'm really behind
you with this mission.
There's a beautiful saying I'm gonnaleave you with, a Greek proverb, and
(34:10):
it's that , "Societies grow great whenold men plant trees under whose shade
they'll never sit." I know you're notold, but thank you for planting trees.
Eric Rees, thank you for joining us
that is awesome.
Thank you very much.
I appreciate your kind words and what agreat, what a great note to end it on.
Thank you
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Our guest bets you have felt it yourselfin your own life and in your own career.
Maybe it was a day your favorite companykilled the product you and everyone else
loved, or when your own company canceledits innovation products to help make the
(00:41):
quarter, or when you watched helplessly asthe professional CEO brought in to replace
the founder drove the company into theground, or when leadership changed and the
mission became just words on a website.
We lack the vocabulary tocall it what it really is.
Mission drift?
That sounds like a navigation error.
Bureaucracy?
(01:01):
Sounds like paperwork.
Neither captures the gut punchof betrayal when someone precious
is corroded beyond recognition.
So our guest calls it by asimple old-fashioned name.
He calls it corruption.
He is with us to address thechallenge and offer solutions.
He is literally a man on a mission.
We welcome the author of "Incorruptible: Why Good Companies Go Bad and (01:21):
undefined
How Great Companies Stay Great."Eric Ries, welcome to the show.
Oh, such a pleasure to be here.
Thank you
It's great to have you on the show.
I have way less time with Eric thanI would like, and I was gonna do a
golden goose on him and try and getas much time out of him as possible.
It's just not possible with themission work that he's doing.
(01:44):
I thought I'd tee you up this way, Eric.
Clay Christensen, who you know well,used to speak of former classmates at
Harvard Business School, people likeJeffrey Skilling of Enron, Rhodes Scholars
too, that he was scholars with, andhow they ended up unhappy or in some
kind of financial or personal scandal.
And he wrote once, "I know for sure thatnone of these people graduated with a
(02:09):
deliberate strategy to get divorced orlose touch with their children, much less
to end up in jail, yet this is exactlythe strategy that too many of them ended
up implementing." And I thought thatwas a perfect setup to what you see,
'cause your work, you've brought it evenfurther and you're giving a system and
(02:30):
a blueprint for people to manage this.
But let's first chat, talkabout what the problem is
Oh, gosh.
And yeah, we all miss Clay so much.
Um, y- such a loss when, when he, he,passed away and, and, um, you know, the
torch of his work needs to be passedto a new generation to try to figure
out how can we help turn this around.
(02:52):
Because we are in the midst of an erawhere the dominant best practices that
we are teaching leadersh- uh, aboutleadership, about how companies should
be built, structured, and governed,a lot of them are value destroying.
And this is kind of hard for peopleto imagine, like how could it be
that they're the best practicesfor a reason, but the reason is
(03:14):
often not a good one.
I witnessed this myself.
I personally know quite a few people,as Clay did, who wound up incredibly
rich and totally miserable or worse.
And you see people sometimes ask me like,"Why are these billionaires having like
a public mental breakdown every day onsocial media? If they're so rich, why
don't they just go buy an island and likebe happy?" It's like, well, you know, you
(03:35):
might not have known, you might have heardfrom ancient wisdom that money does not
buy you happiness, and here we see that,uh, uh, evidence over and over again.
But I think there is something particularto the unhappiness that we're seeing
now, and, and Clay of course, had hisfinger right on the pulse of it, that
we are teaching people a strategy, aspecific way of making money via value
(03:56):
extraction, via value destruction.
That does work, that's why it's dangerous.
But although you can make money likethat, it's very hard to find satisfaction
with that, and it's very difficult evento just create any kind of sustainable
value creation with those tools.
Ultimately, they are short-term innature, and so they tend to plant
(04:17):
the seeds of their own destruction.
And that's how people wind up in jail.
That's how wh- people wind up withall kinds of moral compromises because
they're having to do more and more andmore and more like a drug addict chasing
the next high, chasing the next fix.
It's ultimately quite sad
You start with the story ofthe professor and it sets up
the challenge so brilliantly.
And to tee you up, I'm gonnajust quote a little piece here.
(04:38):
You say, "Like many builders,he was not interested in making
money by any means necessary.
He wanted his company to prosper bycreating a product that was useful,
trustworthy, and healing to customers.
In today's hyper-financializedeconomy, these simple aspirations
have become radical acts.
Every one of them has becomeexpendable, too often sacrificed on
(05:01):
the altar of growth, share price,and short-term returns." Apart from
how I love how you've written that,
Oh, thank you.
Yeah
love the story of the professor,and let's give the context 'cause
it really sets up the challenge.
Yeah.
Most people don't realize howrevolutionary their own ideas are
'cause they think, "Well, I'm just,I'm just making a company to make
(05:21):
money." And it's like, "Oh, really?
Money by any means necessary?
Sure.
That's what will give me leverageto let me do the other things I
wanna do." I was like, "Yeah, butwhat if somebody finds a way…"
Let's say you say you value quality, or inthis case, the professor, he was building
a health company that was doing researchthat would ultimately lead to incredible
breakthrough therapies using, using AI.
And, you know, he had been indoctrinatedinto the for-profit ideology like all
(05:46):
of us had, that, that all ways of makingmoney are basically just as good as any
other, even though in his heart, he feltwhat I call the builder's intuition,
that the best way to make money isactually to create more value than
you capture, and other ways of makingmoney are suspicious or maybe even bad.
So he would have investors who wouldsay to him, "Well, you know Why don't
(06:06):
you worry about that stuff later?
Just make the technology work.
Get to product market fit.
If you're like too worried about what's--how, how you're gonna make money or
the different… If you're worriedabout that stuff, like maybe you're not
very serious about being in business.
Maybe you should go back to academia.
But meanwhile, his employees, he'strying to like hire the most talented
researchers on the planet, and theyhave real questions for him about,
"Well, is this gonna be used to createlong-term value or something terrible?"
(06:29):
And he would say, "But don't worry,I have such good intentions." And
that was not getting the job done.
You know, they're like, "Well,what, what does that matter?
Aren't we a for-profit company?
Aren't we gonna have investors?
What if the investors pressure youto do something bad?" "Well, I'll
resist." "That's not very satisfying.
What if they fire you?" "Ohyeah, what about that?" So, so
he was feeling really trapped.
(06:49):
Now it happened to be, and of coursein the book I, I tell this in dramatic
fashion as best I can, that I was havingthis conversation with a professor
at the same time as I was going tocommemorate a founder who had-- who
was like 14 years into his journey.
He had had, tremendous success.
I mean, he had made more moneyfor his investors than they could
spend in five lifetimes, okay?
(07:10):
He'd really been a very successfulentrepreneur, and yet his board had
fired him at the earliest possibleopportunity because for all the
money he made them, it wasn't enough.
They wanted more.
So we were at this event andI'm explaining to the professor,
I'm going to this event.
Look, there's like a thousand people here.
We're all celebrating this founder.
People had flown in from allover the country to see him.
I saw people who had been laid off whocome-- who came back to celebrate him.
(07:35):
And the professor'slike, "Wow, what respect.
That's just the kind of companyI wanna build." I'm like, "Man,
you are not listening to me.
He doesn't work there anymore.
This is not a party.
It's a wake." And he's like, "Oh my God.
Did somebody die?" "No, nobody died.""Oh, did the company go bankrupt?"
"No, the company's not…" I waslike, "No, everything's fine, except
(07:55):
something really precious has beenlost and none of us quite know what to
call it." And I remember being at thatparty and everyone being like, "Yeah.
Do we trust this company anymore?
No." We-- and the new CEO,the new CEO's not a bad guy.
But what, what good are thenew CEO's promises when he
could be fired at any time?
So there's this loss, this corruptionthat is all over our economy.
(08:18):
And the professor was startingto get really worried.
He's like, "Wait a minute.
Are you saying that's gonna be mesomeday?" And I'm like, "That's
what I'm trying to tell you." Andhe, he asked me the question that
kinda launches the whole book.
He said, "Is it, is it even possible tobuild an incorruptible company or is this
corruption inevitable?" And I was like,"Well, the good news is, although most
(08:38):
people think it's impossible, I disagree.
I think it is possible to do this." Butthe bad news is you've already taken
steps in the wrong direction becauseyou have already bought in to these
so-called best practices, and you havenow incorporated and built a company
that is structurally weak to the sameforces that led to the demise of this
and so many other great companies.
(09:00):
So that's really the project ofthe book is to identify the why.
How do we get into this mess?
Why is it happening this way?
Where do these best practices comefrom and what's wrong with them?
We have a lot of really greatevidence, but far more important
to lay out the blueprint.
If you wanna build an organizationthat can resist this corruption for
the long term, that can actually createquality or health or whatever you care
about, whatever revolutionary idea youhave, we wanna protect and defend it.
(09:24):
We know how to do it.
We have the research, wehave the case studies.
But in order to do it, we're gonna haveto go on a journey where we reject so
many of the so-called best practices we'veall been indoctrinated to believe in.
Beautiful, man.
Beautiful job of the professor.
Nice setup as well, likeyou do inside the book.
I want to tell our audience, you got toread the book to really get a grasp of the
(09:47):
setup is br- beautiful in part one, theproblem, and then the solutions as well.
But you really have to settle down, andthere's an accompanying website I'm gonna
link to as well for people and QR codes.
Just to dive a little bit moreinto the challenge, I don't
know if you've ever been there.
I worked for a company once,and at one stage, , the owner
was quite malignant, this guy.
(10:08):
And He made me feel, I was being moraland I wanted to do right by my family, all
those things we talked about with the ClayChristensen message at the start, that he
made me think, "Well, maybe I just need toknuckle down and be more business-like."
And you bring this up.
(10:28):
You say when you talk to investors,they say to CEOs like this or founders
like this or builders like this, "Oh,well, you're just not very serious about
business because if you were, you'ddo what I tell you, because I know how
to build businesses." And in there,there's this moment of Dorian Gray where
you're like, "Do I put the portrait upin the attic here and knuckle down and
(10:50):
be business-like and give up on thatgut feeling of doing the right thing?"
So many people compromise in thesesituations and wind up with a company
that is undifferentiated and mediocrebecause they are being pulled down
by this financial gravity, I call it.
This force that unless you activelyresist it, will turn your company
(11:13):
the same as every other company.
The way we know that it's a forceis think about all the big companies
you know that are all the same.
You know, they put out thesame anodyne press releases.
They have the same-- They jumpon the same stupid bandwagons.
They're all, they're all sucking intothe same social contagion of, you know,
whatever the latest trendy thing?"
is.
They are weak.
And one of the goals of the bookis to introduce this idea that
(11:35):
organizations can be not just good orbad, not just, you know, evil or not
evil, not just growing fast or notfast, but they can be strong or weak.
That there's an idea of organizationalstrength that is required if you wanna
actually sustain some kind of missionor purpose, over longer periods of time.
And in order to do that, we have tobe willing to take our own beliefs and
(11:57):
values seriously so they don't justbecome paper on a wall, but they become
the, the true convictions, the ethos,the character of the whole organization
You're seeing this yourself.
So when you against the flow, when youintroduce a system that might replace
or threaten the existing systems,against huge resistance and, and the
(12:21):
status quo by its very nature canbe nasty and try to drag you down.
And you experienced this with yourbrilliant project, and I wanna
really share this one as well, theLTSE, the Long Term Stock Exchange,
Mm-hmm, mm-hmm.
and how that was welcomed the industry
Yeah, yeah.
I mean, I, I'm very proud of our workat, on the Long-Term Stock Exchange.
(12:43):
It, for those who don't know, it isthe first new national securities
exchange here in the US, the same,like, legal kind of thing as the
New York Stock Exchange or NASDAQ.
The first one of its kindsince the creation of the
NASDAQ, like, 50 years ago.
So it's, it's, um, it was quite theambitious and difficult undertaking.
Now, one of the-- And, and I don'twanna get into the arcana of exchange
stuff, unless people are interested.
(13:04):
We know we obviously could do awhole separate episode just on, on,
on how to bring long-term thinkingback into the public markets.
But what you have to know aboutthis is so many things in our
modern economy are all the same.
I said all these companiesall behave the same.
Whether it's, you know, everyone'sgot the same, like, dumb click-through
license agreement that nobody reads,or everyone's doing an extractive
business practice, or they're layingpeople off, or whatever the thing is.
(13:26):
When you see unanimity or consistency,you ask people, "Why, why is everything
the way that it is?" People say,"Well, that's the invisible hand of
the market." It must be, 'cause ifit wasn't, it-- competitive pressure
would force it to be something else.
Therefore, the market has spoken.
This must be the best.
That's where a lot of ourbest practices come from.
I thought so too, and I had wondered,"Huh, stock exchanges. All the US
(13:49):
stock exchanges all have the samelisting standards. I wonder why?"
Must be because that is the best?
I don't know.
Didn't all seem very good to me.
I think we could do better, so Ithought, let's build a new stock
exchange, hard though that is.
Let's get it approved by the SEC. Let'sgo compete, with new listing standards
compared to the incumbent exchanges.
Okay.
And we get to a certain point, Itell this story in the book, where
(14:10):
we were almost about to succeed.
Like, we had our first listings lined up.
We were about to get our regulatoryapproval, and all of a sudden, this
kind of group comes together to,to put a stop to what we're doing.
And they called me up, andthey're like: Look, we just
think what you're doing is bad.
It's inevitably gonna fail.
Like, we're not gonnaallow it to go forward.
And I, I was very naive.
I said (14:29):
Look, this is America.
If we're gonna fail, what's the big deal?
Let's fail.
We're a market economy.
Let's fail.
They said (14:35):
Well, your failure, you might be drawing attention away from other
things that we like even better thanyou, so we're not gonna let this happen.
And I was very overconfidentthat we could, that we could
overcome that, but I was so wrong.
Anyway, I won't, I won't belabor thewhole story, but they, they started to
put pressure on our vendors to abandon us.
So it wasn't just like opposeour government application.
(14:57):
They didn't do anything out in the open.
They would just call the CEO ofanybody we worked with and say:
Listen, if you partner with thiscompany, other things that you need
more than that, we're gonna deny you.
you.
need us for other things, so don't, don'twaste your political capital on this.
Anyway, it all came to a head.
I was actually in, in the UK, whenthis happened, so I was far away from
my team, thousands of miles away.
(15:19):
It's the middle of the night for me.
You know, you can't be mad at theambush because it was done effectively,
and they knew what they were doing.
And we get the word from our vendors thatthey're gonna capitulate and withdraw
our application, the whole thing.
It was all about to blow up.
And we get a last-minute phonecall, and they said: Listen, you
know Nice exchange you have here.
It'd be really a shame ifsomething happened to it."
(15:40):
I said, "What do you mean?
You're, you're, you're literally inthe process of destroying my whole
company." And they're like, "Well, youknow, it doesn't have to be this way.
If you'll just change your listingstandards to be the same as everybody
else, all this can be made to goaway." And that's when I finally
understood what was really going on,and I gathered my team and I said,
(16:00):
"Hey, everybody, here's the situation.
I think if we say no to this offer,we're probably going bankrupt.
But if we say yes, we'recompromising our principles.
So what should we do?" And one byone, every person on that Zoom,
I'll never forget this, it was solate at night, I was bleary and
delirious from this crazy situation.
I was so stressed.
Every person on my team, they just said,"No deal. We'd rather go bankrupt than
(16:24):
betray what we stand for." And I sayin the book, I wish I could say it was
my visionary leadership that got usthrough, but the truth is, I was the
one curled up on the bathroom floor.
Like, I could barelyfunction, I, was so upset.
I thought the company wasgonna die to save a principle.
Now, as it turned out, we did say no.
They did withdraw our application.
Our-- The whole thing fell apart, andwe had to start over from scratch.
(16:47):
But as is often the case when youstand on principle, in retrospect,
I can say this is one of the bestthings that ever happened to us.
And the reason why LTSC exists atall today, is because, , of the
learning and the pivots we wereable to get out of this ambush.
But in the moment, and this is so key,in the moment, we didn't know what
the consequence of sticking to ourprinciples would be, and so, we had
(17:10):
to take the leap into the unknown.
And I just think many, too many ofour leaders are taught to compromise
at the first sign of difficulty.
They don't stand for their principles,and therefore, they never get the
chance to unlock the incredible magneticalignment that happens when you take
the principled stand in business
I don't think anybody ever regrets that.
I'm sure there's probablyfinancial considerations, all
(17:33):
that kind of stuff, and cognitivedissonance kicks in to justify
Always.
Always.
Yes, of course
But one of the challenges is, and to callthis out, I'm sure you've had this where
I think when I thought, when I read aboutthis, I was thinking about great stories
where founders stuck to their principles.
Walt Disney, for example, wheneverybody said he was crazy making
(17:57):
Snow White, then he was crazy makingDisneyland, even though he'd succeeded
massively on the previous pivot toSnow White when a fe- doing a first
feature film ever as an animation.
H- had you experienced that wheresomebody you exper- you thought
would, would be there to supportyou actually wasn't and was like
(18:17):
going, "Eric, are you crazy, man?"
So many people, I can't even tell you.
And in fact, it's not just peoplewho, who abandoned us or who kind
of were like A very large numberof people would say to me, "I'm so
glad you're working on this problem.
It's the most importantproblem in the world.
You know, business has beenstruggling with quarterly reporting
(18:39):
and the short-termism for 50 years.
It's, it's just about like, Ireally admire what you're doing."
And I'd be like, "Oh, great.
I'm so glad.
Would you like to help us out?
Maybe you'd like to invest, maybeyou'd like-- We don't even, not,
don't need your money, but evenwould you publicly endorse it?
Even would you just, like, encourage,uh, your company to do it?"
"Oh, no.
Absolutely not.
Can't put my neck out.
Glad that you're the one doing it."So, so yeah, that I, I get that a lot.
(19:03):
And, and I've learned to becomesympathetic to this, although as
a founder, it's very frustrating.
And yeah, Walt's folly, the wholething, is such a common pattern.
And I tell a story like this in the book.
It stems from two very different storiesof what's happening with innovation that
somehow coexist in the same organization,which I think is really fascinating.
(19:25):
Story one is the founder hero story.
So like, what is a company?
Well, it begins with a founder, theirvision, the business model, the strategy
that they build a team, they raise money,they gather resources, they figure this
out, and the last step is they bringthis thing to the market, customers
buy it, validating their vision, andthat's what makes a company great.
(19:46):
But if you go to an economicsclass, you'll hear type story
two, which is totally different.
In story two, what makes a company?
Oh, well, a market need.
The market has a need for a new thing.
The customer demand summons anorganization and therefore its
attendant network of businessmodel and, supplier relationships.
(20:07):
That requires capital.
So that attracts investors toprovide the capital to do this thing.
And because there's capital andthere's this thing, we need, we need
employees to run it, and somebodyhas to be like the impresario who
puts the whole thing together.
But basically, the founder is like thelast, least important thing about what's
happened, because the founder is basicallyprivatizing gains that were created by
(20:30):
the social structure that they live in.
Now, what's so interesting to meabout these two stories is they're
the same story but told backwards.
One begins with founder, ends withcustomers, and the other begins with
customers and ends with founder.
So , in an organization, you willfind these both stories coexisting.
The founder obviously believes instory one, but many of their executives
(20:50):
believe in story two because theyweren't there when the company
was just a scrappy little thing.
They never saw thefounder acting heroically.
They just, they showed upto a company that has always
existed as far as they know.
And so these two stories coexistbecause they're surf-- they're
very, very, very similar.
But when push comes to shove, theyproduce very different outcomes.
(21:11):
If we have to take a bold bet onsomething new, the founders always tell
me, like I've said to so many founderswho'd be like, "I don't get it."
Like Walt Disney We're only here'cause of me in the first place.
Why do I have to re-prove myself?
Like, surely the fact that I was rightbefore should give you some level of
belief that I'm right again." But from thetype-- from story two, that's not true.
(21:32):
The founder was just in theright place at the right time.
They didn't really do anything.
They, they, were summoned by the market.
So the frustrating thing aboutthese two stories is that they are,
in a very large degree, both true.
And if you study the history of business,you will find that these stories actually
lay out a hierarchy of business concepts,business model, culture, strategy,
(21:57):
customer, like… And therefore, almostevery business theorist of the past has
picked one of these levels of the storyand made their whole career out of it.
You know?
If-when they define what is acompany, they'll be like, "A
company is a business model. Itdoes this thing." What is a company?
A company is a frictionless, way ofreducing the friction of internalizing,
(22:18):
the friction of contracts.
So, like, the contractinglayer is what a company is.
Other people will say, "Yeah, youknow, founder mode is what a company
is. It's all about the, the vision andpri-priority of the individual person."
It's like doctors who study a certainsubsystem of the human body who kind
of, like, unconsciously start to thinkthat their system is the most important.
Like, why?
If I study the heart, I'm like, "Thehuman being, I mean, human being is--
(22:41):
The heart is the main thing, guys.
How do I know?
Well, if you didn't have a heart, youwould die." But the guy who studies
the lungs is like, "Mm, if you takethe lungs out, you will also die."
And the person studying the nervoussystem, they'd be like, "Excuse me.
Excuse me.
I actually command all thesethings, including the heart." And
the guy who studies the brain islike, "Mm, actually, guys," right?
And then, you know, like, we allhave a natural tendency to think
(23:01):
our piece of the whole is the whole.
And the same thing is true for business.
Most of us as leaders, mostof us as business authors for
that matter, are focused on oursystem, our part, our piece.
We don't see the whole.
So as a result, we have thisincomprehension, this, this confusion
about what to do next, about where tobet, who to trust, that kind of stuff.
(23:23):
And one of my goals with writing thisbook is to lay out a more comprehensive
theory of what an organization actuallyis that encompasses both stories and
all of these levels so that we canstart to see and develop techniques that
address the holistic thing, the wholeenterprise, whatever that thing is.
And actually, the more you study what itis, the more wild it is, the more I think
(23:48):
it's actually really utterly fascinatinghow many people are confused about what
is the thing that they themselves operate.
Love it, man.
Absolutely love it.
And you reminded me of an Aesopfable, which is just, you set me
up so beautifully for a nice segue.
There's an Aesop fable called The Body andthe Members, and it's about how the rest
of the body turn on the stomach and thinkthe stomach's not worth anything and get
(24:10):
rid of it, and then the whole system dies.
But it's a segue to the brilliantgolden goose challenge that
you set up in the, in the book.
And I'm gonna share on the screenfor those people watching us on
YouTube, diagram I made, and itincludes your quote there, if you can
see, which I just absolutely love.
"Everything worth protecting willeventually need protection," a
(24:33):
brilliant line that I'm gonna, I'mgonna definitely stick it on one of
those quote sites, man, to last forever.
But for those people who are onlylistening to us, what it is, it's
a boardroom and it's a, load ofboard members looking at the golden
goose, and they're carving knives.
They're getting ready for more and moreand more, and they're about to butcher the
(24:56):
Oh
my God.
God, that cartoon is painful to look at
Yeah, it's horrible.
And, you talk about the two storiesthat companies tell themselves or are
told, there's two brilliant stories,contrasting stories, tragedies that
you open up in chapter one, the storyof the legend who is Sol Price, and
then the tragedy that is Robert Owen.
I'd love you to juxtapose these
(25:18):
Okay.
Yeah, yeah.
Happy, happy to do it.
Yeah, so let, let us begin with thelegend of Sol Price, because Sol
Price is a giant of entrepreneurship.
I mean, and, and not thatwell-known today, but in his
day was, was very famous.
He's really widely considered tobe the father of modern retail.
So, um, to give you a sense of howinfluential his ideas were, when a guy
named Sam Walton was thinking aboutgetting into retail and was trying to
(25:40):
decide what to name his company, hecalled it Walmart as an intentional
tribute to Sol's company, Fedmart.
Fedmart was the originalAmerican discount retailer.
It was started by SolPrice in 1954 in San Diego.
And Sol, before he becamea retailer, was a lawyer.
So he, when he was a lawyer,he was trained that he had-- he
(26:01):
was a fiduciary to his client.
What does that mean?
Well, the lawyer is trained thatyou have to put the client's
interest before your own.
When he became a retailer,he asked himself this simple
question (26:10):
Who's my client?
And he thought it was really obviousthat the customer is his client.
So when he would, uh, uh, operate, hesaid, "Everything we do has to be set
to, to be a fiduciary to the customer."So for example, if competitors would,
um, sell products below Fedmart's cost,Sol would put up signs saying, "Listen,
(26:30):
you shouldn't buy this product from me.
You can get it cheaper." And hewould show exactly where you could
get the com-- where you could getthe product cheaper. "I don't know
how they're doing it below our cost,but you shouldn't buy it from me.
Buy it from them." He's like, "My jobis to put your interests ahead." So
as a result, people really trustedFedmart, and they liked shopping there.
The company grew and thrived.
He became a wealthy Man,Company went public.
(26:51):
But as a public company, he justfelt this pressure all the time.
He believed in low prices and high wages.
He believed in hiring andpromoting from within and a kind
of an organic kind of growth.
What did Wall Street want?
Well, you can imagine.
The opposite.
High prices and low wages, allthe things you can get away with.
If people trust you, you know,the investor's perspective was
(27:13):
you can betray them for money.
They won't even notice becausethe trust is worth stealing.
So Sol was a uncompromising person, and sothis eventually came to a massive battle.
One day in 1975, his board fired him.
He literally came to work one day, andhe couldn't get into his office 'cause
they had changed the locks on his doors.
(27:33):
And this is the pattern we see overand over and over again with companies
that rediscover the principle thatI call enlightened capitalism.
We treat it-- Uh, founders tend to treatenlightened capitalism like a technology.
Like a, like they're like, "Oh my God,I just invented something amazing.
Did you know if you treat people withrespect, if you pay good wages, if you
(27:54):
invest in quality and R&D, if you aretransparent and trustworthy with your
customers, things go really well for you.
You make a fort, you make all thismoney." And they say to people, "Look,
because the market rewards value creation,because we live in a competitive system
the market will protect and not onlyprotect, ex- uh, share what I have
(28:17):
created and others will adopt it.
And then something different happens.
This has been going on a really long timeI tell , what I call the tragedy of Robert
Owen, , the famous Scottish industrialist.
He took over something calledthe New Lanark Mill in 1800.
1800. But he was so ahead of his time.
He ended child labor.
(28:38):
He created on-site housing.
He had a social insurance scheme.
He provided healthcare for his workers.
Like, all this stuff that by our modernstandards we say is basically table
stakes, he figured it out in 1800.
He had very ahead-of-his-time,feedback practices for the workers.
He ended corporal punishment.
I mean, he had these very exceptionalideas, and it really worked.
He took this bankrupt mill toworld-leading profitability and, , and
(29:00):
quality and all this good stuff.
And his investors kept trying to fire him.
He had to bring in new investors tobuy out the old investors three times.
One of the syndicates involved the greatutilitarian philosopher Jeremy Bentham.
Okay?
This is, like, not stupid peoplehe was bringing in as investors.
But every time, the sameproblem would happen.
The investors would fight with himabout the right way to proceed, get
(29:22):
into a conflict, and eventually,they would try to oust him.
The, on the third try,they ultimately did.
So when people hear the story of SolPrice or Robert Owen, they say to me,
like, "Why?" It's a kind of a mystery.
Why would investors wanna kill theirown goose that laid the golden egg?
Isn't the market supposedto be about value creation?
Should- wouldn't investors wannamake as much money as possible?
(29:45):
This is one of the biggestfallacies of all time in business.
The market does not reward value creation.
For the record, you could create amarket that rewarded value creation.
We could live in that world if you want,but that's not the world we actually
live in, nor has it been since 1800.
And because of the rise offinancialization, this problem
is obviously getting a lot worse.
But let me go back to Sol Price becausethis book is not meant to be depressing.
(30:09):
It's actually a double mystery.
Mystery number one is (30:11):
why are we killing the golden goose?
Why is this happening all overour economy left and right?
But if you ask most people about it, theywill say, "Well," you know, once you get
past the denial, "This doesn't happen.
Invest-- The marketsare perfectly rational.
Investors don't do this." But we layout hundreds of years of case studies.
People are like, "Okay, it doeshappen." You say, "Why?" "Well,
(30:31):
I guess it's inevitable whencompanies get big, when there's money
involved, human nature," whatever.
We have a lot of just so storiesabout why this is inevitable.
But if it's inevitable, this is thesecond mystery: why are there exceptions?
Let's go back to Sol Price one more time.
Sol Price, after he got fired, youknow, remember, he was a late-in-life
entrepreneur, and he was rich now,so he could easily have just retired
(30:54):
and been like… That's basicallywhat happened to Robert Owen.
He gave up on business as atool for change, but not Sol.
Sol was very stubborn.
He took two weeks off, andthen he was back at work.
He leased the office upstairs fromFedmart And started a new company.
Now, today, that company, which he calledthe Price Company, is not that well-known.
(31:15):
But like when I was a kid, thePrice Club was like the store
that my family shopped at.
I didn't even know thatPrice was a guy's name.
I just thought it's thestore with the low prices.
That's where you go.
So but today, Price Club is not thatwell-known because of something else
that happened right around the same time.
See, Sol was a big believerin promoting from within.
So there was a guy who had startedwith him as a stock boy at FedMart
(31:37):
and then had risen through theranks all the way to an executive.
His name was Jim Sinegal, and he quitFedMart in protest when Sol was fired,
went to help Sol build Price Club up, andthen he decided to start his own company.
That company, some years later, mergedwith Price Club to form a company
that they called PriceCostco, but ofcourse, we just call Costco, the four
(32:00):
hundred billion dollar public company.
That is, for whatever reason, theexception to every business rule.
So if this is inevitable, likeif what happened to FedMart and
New Lantern is inevitable, whyhasn't it happened to Costco?
People say, "Well, I guess Costco'sjust too big. Wall Street wouldn't dare
mess with them." Are you kidding me?
No way.
Wall Street is constantly trying to getCostco to abandon the ethos that it has.
(32:24):
It still practices that fiduciaryto the customer mindset, the
capped margins of Sol Price.
But Jim Sinegal added a secondreally important element.
Costco is protected by a governancefortress that prevents its board from
betraying the mission and preventsoutsiders from forcing the board to do so.
(32:45):
And Costco is not alone.
There are these outlier companies all overour economy that seem to defy this rule.
And in fact, if you study thosecompanies as a set, you will
notice something very striking.
Every single one of them basicallycompletely defies every single one of
the so-called best practices we areteaching everybody about how they're
(33:07):
supposed to build their companies.
So that's the, that's thebook, a double mystery.
Why does this happen, and how can wecreate exceptions that prove the rule?
Man, I got through that much of my notes.
Yeah, yeah.
All right, We have more to discuss.
I look forward to it
I know you're under time pressure.
I want to just tell our audience,in chapter one, for those of
you who like innovation, Ericgives a list of unusual failures.
(33:29):
There's a link to the book whereyou can sign up to the website.
I'm gonna link you to that soyou can go and download that.
You'll get emails oncethe book is released.
There's a plethora of contentto go along with this.
Really interesting.
I loved your taxonomy of the mechanismsof those failures, which is really
useful language I found in my work in
innovation as well.
Love that.
That's all in chapter one.
(33:50):
But Eric, I love your mission.
I love how you're reinventing yourself.
I love what you've done.
You've gone from being the animator todeveloping the Disneyland and going for
a bigger mission, just like Walt did.
I'm sure people said it was Ries'Folly, and I'm really behind
you with this mission.
There's a beautiful saying I'm gonnaleave you with, a Greek proverb, and
(34:10):
it's that , "Societies grow great whenold men plant trees under whose shade
they'll never sit." I know you're notold, but thank you for planting trees.
Eric Rees, thank you for joining us
that is awesome.
Thank you very much.
I appreciate your kind words and what agreat, what a great note to end it on.
Thank you
With a unique blend of AI-poweredconsulting built on unmatched managed
service capability, Kyndryl helps leadersharness the power of technology for
(34:34):
smarter decisions, faster innovation,and a lasting competitive edge.
You can find Kyndryl and the KyndrylInstitute at K-Y-N-D-R-Y-L, kyndryl.com
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