Building an incorruptible company

Humans in the Loop

Eric Ries (00:00)

I’ve been at the front lines of a battle that most builders don’t even know is going on a battle for the soul of our economy. you see these companies that are like, look, we might say that we want you to like our food, but what we really want to know is how shitty can we make it and you’ll still eat it. If you say, I want to build a company whose goal is to make quality products, you’re lying. Is it even possible to build an incorruptible company?

The Core Thesis of Incorruptible

Seb (00:36)

Welcome back to Humans in the Loop. Today, I’m very excited to be joined by Eric Rees. Eric is the founder of multiple organizations, including the Long-Term Stock Exchange. He’s a consultant and advisor to many of the world’s top tech companies, and he’s a bestselling author. You might well know him best for his highly influential bestseller, The Lean Startup. And today we’re going to talk more about the themes in Eric’s latest book. incorruptible. Eric, welcome to show.

Eric Ries (01:02)

Thanks for having me.

Seb (01:03)

So let’s just jump straight into the book. What’s the core thesis of incorruptible?

Eric Ries (01:08)

Yeah, in the 15 years since the lean startup was published, I’ve seen some things, you know, I’ve been at the front lines of a battle that most builders don’t even know is going on a battle for the soul of our economy. And most people are founders or technologists, product people, people who share what I call the builders intuition that the best way to make money is to create more value than you capture. So you make something new. You, some of that value that you create in the world comes back to you. And when we do that, By definition, the world is better off because we created more value than we took in for ourselves. We are in a war with people who think that money is an end in itself and that all ways of making money are equally good. And we’re losing that war. I’m back from the front to say we’re getting our butts kicked. We live in the era of what’s called shareholder primacy where we are taught that the purpose of an organization is not to be a vital, beautiful, living thing that makes great products and serves customers. Nope, it is to mine and extract. value from customers for the benefit of shareholders. But the good news is it’s not too late. We actually know exactly what we need to do to build organizations that can resist this corruption. We can build organizations that are, as the book title is, incorruptible.

Seb (02:22)

I was lucky enough to pre-read the book and I guess alongside what seemed like a pretty significant number of other people provides some thoughts and feedback on it. And

Eric Ries (02:34)

I’m very grateful for that, by the way.

Why Write Incorruptible Now

Seb (02:36)

so, which is why I’m excited to have this conversation today. It’s a book that I think is very important here and now and of this moment. What compelled you to write it now? You 15 years, you’ve seen some things. So yeah, why now? Why did incorruptible?

Eric Ries (02:51)

Yeah, well, this is the moment. This is the most urgent moment right this minute. We have to get this right. We are entering into a very dangerous period for civilization. potential, we have tremendous potential, new technologies, new possibilities, new institutions to be built. But the choices we make in the next few years will be, will redound through the ages. So we got to get it right. I tell a story in the book about, you know, talking to a founder who’s working on just an absolutely revolutionary new AI product. You know, was in the AI and bioscience domain. And it’s just the transformative potential to save lives with this technology was unrivaled, but so were the dangers. So were the possibilities to use it for something extractive. And, you know, I was talking to him, trying to give him some advice. said, look, I was struggling with this because when I talk to investors, if I give even the tiniest hint that I’m worried about what the technology might be used for, they treat me like I’m not very serious about business. But when I’m trying to recruit employees, the top talent in the world who could work at any AI company they want or go into academia and be tenured professors, they have every choice available to them. They don’t want to work on it unless I give them assurances that I know what we’re going to do. What are we actually trying to make? They want to know what are we doing? And so I tell them, don’t worry. I have such good intentions. But that’s not getting it done. So then I tell them, well, don’t worry if we get pressure from the outside, I’ll resist it. But they say, couldn’t you be fired at any time? So he was really struggling with how to fix this problem, what to do. Meanwhile, at the same time, I was going to this event to commemorate a founder who was on the other end of his journey, someone who had actually built a tremendous amount of shareholder value, made a lot of money for himself and all his investors. And after doing that, his investors wanted more. So the fact that he didn’t give them even more, more money, they fired him for no particularly good reason. And so we were going to this event for him and I was telling the founder, new founder, listen, there’s people going into this event. got to go. could actually watch people streaming into the venue. I’m like, there’s like a thousand people here, including people who had been fired by this founder. Come back to celebrate him. How cool is that? And then I’m talking to the phone. It’s like, man, respect. That’s the kind of company I want to build. I’m like, dude, you’re not listening to me. He doesn’t work there anymore. This is

Seb (05:08)

Hmm.

Eric Ries (05:09)

not a party. It’s a wait. And he’s like, really? Did somebody die? No, nobody died. He said, well, did the company die? No, the company’s doing fine. He’s like, well, what’s the problem? I’m like, the problem is, and I explained to him, we who are here to celebrate, we kind of couldn’t even put it into words what’s going on here. Something is wrong, but we don’t know how to say it. We can no longer trust anything this company says, because who can make a promise if they can be removed at any time? So this loss of the special thing that made this company feel like a special place to work, to invest in, that has been lost. And he’s like, wait a minute, are you saying that’s gonna be me someday? Like, that’s what I’ve been trying to tell you. You are on a one-way ticket to this exact outcome unless you change course right now. And he asked me the question that is kind of the whole impetus for writing this book. Is it even possible to build an incorruptible company? And I was like, well, good news, bad news. Good news is yes, it is possible. I know how and I will help you. The bad news is you’ve already taken some steps in the wrong direction. You’ve already listened to the so-called best practices that we teach about how companies should be built, structured, and governed, which we have the evidence to say, many of which are value-destroying.

Seb (06:24)

Yeah, yeah. To me, I think a really good book of this kind, names a thing, puts a language to a thing that everybody can kind of recognize and feel. And that was

Eric Ries (06:39)

Yeah.

Financial Gravity

Seb (06:40)

like the sense I had at various moments in reading this book. The reason it chimes is like, yeah, I’ve seen that happen in the real world. I know that situation. I’ve been next to those founders. One of the names that you identify in the book, you name this force, you call financial gravity. So I’m wondering if you can talk a little bit more about what it is we mean when we’re talking about kind of financial gravity.

Eric Ries (07:13)

Yeah, this is one of the new ideas in the book. And one of my goals with the book was to get our attention to go below the surface, not the things that everyone loves to talk about with organizations, culture, mission, values, business model, strategy. That’s so important. mean, really important. But beneath all that are fundamental forces that act on organizations and cause them to experience convergent evolution. Why are so many big companies today exactly the same? Even though they come from different cultures, different industries, were founded in different decades, the founders have different personalities, the companies are the same, why? There must be a force behind the scenes aligning everybody, like magnets, like iron filings in a magnet, you know? And so I call it financial gravity, because just like physical gravity, it’s not optional. You can say, I don’t believe in gravity, but boy, gravity sure believes in you as it proves every time you jump up into the air, you’re coming right back down to earth. So that same idea, there’s a force that is pulling organizations down into mediocrity unless they are specifically structured to resist it. Now in the book, I try to explain the fundamental laws of this gravity. It is a psychological phenomenon. And if you want to see what it looks like in micro, Just think about if you’ve ever been around a friend who’s meeting a huge celebrity for the first time, or I’ve seen this a lot when people to meet a billionaire for the first time, they go to jello. It’s sad, it’s weak. It’s just like, why is this person acting so obsequious? And if you ask them after wine afterwards, like, what were you doing, dude? They’ll be like, I don’t know. They didn’t plan to kiss the person’s butt. They just couldn’t help themselves. We is a deeply wired human instinct to align our behavior. with the values of those who have the resources we want. And the mechanism is you’re always, whether you intend to or not, you are always unconsciously calculating. I’m having this conversation with you. How could you help me someday in the future? If you are a lot richer than me, you’re a lot more powerful than me, you more status than me, I wonder, could you make, you could make or break my career. If you’re my boss, if you’re a board member, right, if you’re a rich investor, you see it all the time. With billionaires, people think to themselves, they can’t help it. If this, I say just the right thing to a billionaire and he’s like, man, you’re brilliant. He could endow me for life. He could just be like, here’s $75 million for your thing. And I’ll never have to work again. He wouldn’t miss it. It wouldn’t mean anything to him. So why not go for it? Right? That feeling to change your behavior in the presence of this power is something we all experience. We’ve all felt it. The problem is organizations are not made up of one person, but many. We all feel that allure, that pressure. And if you talk to, for example, talk to a CEO who’s just taken their company public and you ask them, what’s the biggest difference you notice before and after the IPO? They always say the same thing. After the IPO, everybody’s watching the ticker. And you start to hear things like this in meetings. You’re having a product management meeting. We’re thinking about shipping a new feature, raising prices, cutting, whatever. People start to say things like, well, the market might not like it. might not like it. And everyone’s and if you say that in a meeting, people are gonna go, yeah. Now, notice how much work might is doing in this sense, you see it was

Seb (10:36)

Mm.

Eric Ries (10:37)

startups being like, VCs might not like it nonprofits, donors might not like it might might might. Have you actually sat down with public market investors to interrogate what their preferences are? No, you haven’t. You’re just watching the ticker hypnotically and realizing, yeah, for example, we’re going through a trend right now where companies lay people off and say it’s because of AI. Whenever they do that, stock ticker jumps way up. Pretty soon, people start to feel like human beings are expendable. They don’t intend to feel that way. It’s just that we know from the psychology research that consistently performed behaviors eventually become internalized as values. And so the key idea of financial gravity, it is a value transmission machine that unconsciously sways the values, transmits the values from those who have resources to those who want resources. So if you’ve wondered why organizations… even led by incredibly wealthy people seem pathetically eager to get more, more, more, more, more. It’s because they have absorbed these values unconsciously. And this is a vector by which corruption enters all organizations, unless they are structured in such a way they are strong enough to resist this pressure, like a submarine or a spaceship, right? The submarine deep in the depths of the ocean. If it’s a weak thing, the water will rush in and push all the oxygen out. But if it’s strong, It can carry its own environment around with it. Well, the same is true for organization.

The Origins of Shareholder Primacy

Seb (12:04)

So financial gravity there is clearly this key concept that plays throughout the book. There’s another piece that you talked to, which I think is important to kind of touch on here, which is the idea of shareholder primacy. what is it we mean when we talk about shareholder primacy?

Eric Ries (12:22)

sure. Okay. So for those that don’t know, shareholder primacy is the idea that the purpose of a corporation is to enrich its shareholders. Like that’s what it’s for. This is a very new idea in the grand scheme of things. Like most of the key laws that enacted shareholder primacy in the U S date to the 1980s. And when I say laws, that’s actually a little bit misleading. They’re not laws. They were just court cases. This was a very influential idea that was decided upon by a very small cadre of, directors. lawyers, judges, academics. It was never voted on by any legislature or popular referendum. And yet it absolutely dominates discourse of corporate governance today. To give you a sense of how strong this fiduciary duty is, remember when Elon bought Twitter? The fiduciary duty to shareholders was so strong that the directors of Twitter were forced to sue Elon to make him consummate the transaction, even though they apparently didn’t want to. But that’s how strong it is. Most founders are very naive about this. So where did this come from? The critical thing you have to understand is that for the vast majority of the time, there have been joint stock corporations on this earth. It was seen as completely obvious by everybody that corporations should be incorporated to do a specific thing, like to dig a canal or run a railroad or provide insurance. The idea that corporations were just about enriching shareholders, like our grandparents and great grandparents would have been like, what are you talking about? That doesn’t make sense at all. In fact, in the 19th century in America, if you wanted to form a corporation, you had to ask permission from the state legislature and you had to make a petition where you said, here is why it’s in the public interest for us to run this railroad from point A to point B. We would call that in modern language that corporations were required to have a defined public benefit. Now there was a problem with this system. which was state legislatures are not the place you really want to have this debate. So something had to give, but just again, to emphasize how purposeful companies were. If you were the world’s richest man in the 19th century and you borrowed enough money to buy out any company you wanted and you picked a company, said, I’m going to buy this company out. The law would have been that the directors of the company were perfectly authorized to fight you tooth and nail. They were not, they did not have a fiduciary duty to say yes to this transaction, unlike modern directors. And secondly, if you did succeed and you took the company over and you wanted to change its charter from make a railroad to just enrich my shareholders, that would have been seen as a crime. The courts would void your charter as having gone beyond the bounds of what was authorized. It would have been seen as a breach. of the trust the public had placed in you to do this. So this only changed with the advent of what was called general incorporation, which was a big fight, state house by state house over the course of the 19th century. The key date for our purposes, the adoption of the modern corporation statute by the state of Delaware in 1899. It’s very recent, but even after they adopted general incorporation, even though anybody was allowed to build a company for whatever reason they wanted, they still had to state the reason. And the reason had to be something tangible, something specific.

Seb (15:42)

Mm.

Eric Ries (15:42)

Only later that people started to write into their charter that the Acme Corporation is hereby incorporated to pursue any lawful act or activity. So we kind of built these more generic structures and that moved the decision making about what this company is for from the board to the courts. Because what happened is when you just say we’re going to do any lawful actor activity, people start suing each other left and right over is this, you want to do this thing, is that authorized? The courts were forced to intervene. And really it’s those controversies eventually, like I said in the 1980s, culminated in a much simpler rule. just said it’s to be simpler and easier for everybody if we just make shareholder value the primary goal. Most people who build things for a living thinks this is nuts. Because like think about this. If you say, I want to build a company whose goal is to make quality products, you’re lying. You think that’s what your company’s mission is. You say we’re about quality, but actually no you’re about enriching shareholders. If you say, I’m going to make food to nourish and delight the people that eat it, you’re lying. They literally write in the governance literature that a company is only permitted to pursue, consider externalities, meaning It’s customers health and welfare in so far as that enriches shareholders. And in fact, they write that managers not only can, but should break the rules if it is profitable to do so. Put these ideas together and you see these companies that are like, look, we might say that we want you to like our food, but what we really want to know is how shitty can we make it and you’ll still eat it. We’re required to think like that. If there’s a regulation in our way, we’re required to lobby to get the regulation removed. These are not companies. These are monsters. And I think most people that start companies, this is not what they want for their company’s future. They get tricked into this without realizing what the own documents they’ve signed actually mean.

The ‘Most Evil Company’ Thought Experiment

Seb (17:39)

And for those people who hear this and think, well, is this just not the inevitable conclusion of a capitalist economy? Right? This is just capitalism doing its thing. What would you say to that?

Eric Ries (17:54)

That is how capitalism is taught in schools today. So I understand it’s a very common misconception. It’s very real. But Adam Smith would be like, what are you smoking? He understood very clearly there was a difference between investment and speculation and he was not pro speculation. And this is true for almost all ancient wisdom going back, you know, many, many thousands of years. Aristotle made a clear distinction between the making of money by the making of things. versus the making of money by other means. So the idea that there are better and worse ways to make money is a pillar of our civilization and certainly a critical capitalist idea that only very recently been erased. people also, when I say this stuff, they accuse me of exaggerating. So I wanna really like, let’s get into a concrete situation, okay? I’m gonna tell you a specific story that I think is very important to understand. Most founders, if I ask them, what does your governing documents say? They don’t know. They’re like, just got the best practice documents from my guy. I’m like, okay, tell me real quick who you think the most evil company in the world is.

Seb (18:54)

is that a question for me or is that a question for the founders?

Eric Ries (18:55)

Yeah, tell me, yeah, who do you think? Who’s the most evil company in the world? The company that no matter how much money they pay you, you would never want to work there.

Seb (19:01)

Yeah, I mean, at this point, I spent a good few years working on a product helping people with substance addiction. So I’d probably have to go for like a Purdue Pharma or a kind of, you know, one of the big opioid perpetrators.

Eric Ries (19:14)

Yeah, yeah, that’s a good choice. My father’s a pulmonologist, so I always pick Philip Morris for the same reason.

Seb (19:18)

Yep.

Eric Ries (19:20)

Selling an addictive product intentionally that you know is harmful to your customer’s health, that to me is just the very definition of evil. But for those listening along, I do this with founders all the time, you don’t have to pick my values. You choose your own values. You tell me, you don’t have to tell anybody. Just think to yourself, the company that I consider to be the most evil company in the world, what if that company showed up and offered to buy your company from you for $1 more per share than it’s You want to sell it? Anyone, anyone excited to sell their company to Purdue Pharma or Philip Morris? No. Most founders like start cursing at me at that point. You know, they’re like, absolutely over my dead body, blah, blah, blah, blah, blah. Like, okay, but do you realize that according to your own legal documents, you have a fiduciary duty to say yes? And they’re like, no, no, no, you’re exaggerating. Like call your lawyer and call me back. And they’re like, I feel so betrayed. He said what you’re saying is true. I’m like, He said he was doing me a favor. He gave me the best practice documents. I’m like, I know. but even still some people are like, yeah, but that’s not gonna happen to me. Okay, okay, what was Philip Morris gonna call me up and buy me one day? So let me tell you a story of a time the actual Philip Morris tried to buy a company. Okay, there’s a company called Vectura in the UK. They were a tech spin out from the University of Bath. They made inhaler therapeutics like for asthma or CPD. Yeah. They were public company on the London Stock Exchange and one day some consultant convinced Philip Morris that they should diversify beyond nicotine and healthcare companies would be a good choice. So they showed up and said, we would like to buy this company for 165 pence per share. At the same time, a private equity firm showed up and said, well, we’ll pay 155 pence per share. So the board of directors of Vectora was faced with this very simple choice, three choices actually. Endor number one, do nothing. Company’s doing fine, there’s no need, it doesn’t need to be sold, just do nothing. Door number two, private equity firm, 155 pence. Philip Morris in door number three, 165 pence. The board was unanimous that they had no choice. They had to sell the company to Philip Morris because of their fiduciary duty to shareholders. What happened as a result, Philip Morris paid 1.1 billion pounds for Vectora. Three years later, they’d already taken a $650 million right down. and sold the remains of it for peace parts. It was a tremendous act of value destruction. So yeah, when people accuse me of exaggerating, now I’m like, yes, it was an exaggeration. It wasn’t a dollar per share. It was closer to 15 cents. If you think this isn’t gonna happen to you, you are deluding yourself. And in fact, it doesn’t have to be private equity or Philip Morris. The data shows, like Harvard Law School has a data set that shows that among venture-backed founders with standard governance, only 20 % will still be CEO. even three years after an IPO.

Seb (22:09)

Mm.

Eric Ries (22:10)

So this is not a hypothetical thing that you don’t need to worry about. This is a really urgent question for almost every organization.

Novo Nordisk: The Incorruptible Blueprint

Seb (22:17)

Yeah. So, you know, we’re touching on these various forces at play and dynamics that, ultimately corrupt organizations, even the best intention founders end up being fired by the board or yeah, maybe you get bought by the Philip Morris and sort of gutted for parts. So for those who are starting to lose heart here, I guess don’t. Don’t lose heart. Eric has some answers for you. I’d be interested to focus maybe on, know Novo Nordisk as one example comes up within the book. Obviously a huge, very successful company has made a lot of money and has some interesting structures in place to try and resist some of these forces. I wonder if we talk a little bit about Novo Nordisk and what is it that they and companies like them are doing that

Eric Ries (23:13)

Yeah, yeah, yeah. Yeah, no one is an exemplar

Seb (23:13)

ultimately help them resist.

Eric Ries (23:15)

of a class of companies that resist this force. And I want to really emphasize this for people because people hear me talk about this. And look, this is dark stuff. I don’t want to be I’m not going to sugarcoat anything. I promise. Part one of the book is literally called The Shape of the Abyss. So I was trying to be very clear. This is bad. But we have hope. We actually know what to do because there are these companies. People say that this is inevitable. It’s just capitalism. It’s just old companies, it’s just public companies, it’s just rich companies, it’s just evil billionaires or whatever, it’s inevitable. I always say, if it’s inevitable, why are there exceptions? If it was inevitable, there shouldn’t be any exceptions, and yet we have these outlier companies that we can study. And if you look at them collectively as a data set, you will find that they basically always violate basically every single one of our modern best practices about how companies should be built, structured, and governed. Let’s do Nova Nordisk. The order started in the 1920s when a woman named Marie Kroll got diabetes. Now she was a doctor, one of the first female doctors in Denmark, but today she’s mostly remembered because of her husband August who had just won the Nobel Prize. And he asked her despite her fatal diagnosis, this was at a time when there was no known cure to diabetes, would she nonetheless accompany him to North America for a lecture tour related to his Nobel Prize? She said, yes. So they go to North America. While they’re there meeting with scientists, one night one of the scientists tells them about a researcher in Canada who has figured out how to isolate insulin for the first time, a potential cure for diabetes. So August and Marie travel to Canada, they extend their trip, this is all Marie’s idea, they go see this technology for themselves as scientists, they put it through a rigorous evaluation, realize its potential, and they ask the Canadians if they can license the technology and bring it back to Denmark with them. But they have a concern, a worry. See, imagine that you make a life-saving medicine. that I need to live. I would want you to charge me a fair price for this medicine. Of course I would. I want you to be in business. I want you, of course, I want you to have every incentive possible to keep me alive. But I would also live in fear every day of my life. What if you woke up one morning and said, wait a minute, Eric needs this medicine to live. Why should I charge him a fair price? Why don’t I just ask him for everything he owns? Because he will die otherwise. Years, decades before Martin Screlli, they foresaw this danger. Now, since they believed in science as a public trust, they built a different structure for their company. The Nordisk Insulin Laboratory was constructed as a nonprofit foundation with a for-profit subsidiary. This is called the industrial foundation structure in the academic literature. This structure is very stable. It’s been used many, many times. The German optics company Zeiss, who makes my lenses and not just about everybody’s, had this structure in the 1880s. So it’s not actually new. But what’s powerful about it is you have these trustees who have oversight over the for-profit board. But other than that, it’s just a normal for-profit company. You can raise money. Today, Nova Nordisk has thousands of shareholders. It is a publicly traded company. I think I looked it up. They trade a million shares a day on the New York Stock Exchange. This is not some niche company doing something weird. This is a global giant. And in fact, I tell a story in the book about a time, this is gonna sound like another exaggeration, but I promise this is true. It’s documented. You can actually watch a whole acquired podcast episode just on this story about a time when the nonprofit trustees of Nova Nordisk intervened in the for-profit subsidiary in such a way that they created for the shareholders, not for themselves, for the shareholders. more than $500 billion of shareholder value. So what’s really interesting to me about this structure is how well-studied it is. We know, for example, companies with this structure are dramatically more likely to live to year 50 compared to conventional structures. It’s a big difference. And we know that they also are more likely to have financial outperformance, more investment in R &D. Lots of good things happen when you have this structure. The structure is not that obscure. If you’ve ever eaten a Hershey’s chocolate or shopped at IKEA or have a Patagonia fleece, like… These companies exist in almost every sector of the economy. So when people are starting a company now, I always ask them, you cause they, they talk to their lawyers and bankers and VCs and whoever else they have all kinds of advice from a lot of smart people. And I always ask them, look, I’m sure those people are very well credentialed. I’m sure they’re really smart, but the best practices they’re pushing at you are younger than the trees in your local park. Meanwhile, August and Marie worked this out over a hundred years ago. So are you sure? You’re gonna bet your life. Are you sure you’re smarter than Nobel laureate? Maybe, maybe they were onto something that we should learn.

How AI Labs Are Governed: OpenAI vs. Anthropic

Seb (28:07)

Yeah. Yeah. for those whose ears are sort of pricking up at this idea of having a nonprofit and kind of profit structure in tandem, you know, conscious that as we’re having this conversation, there’s this very public court case going on between Elon Musk and OpenAI and OpenAI, I don’t know that it’s the same structure, but OpenAI.

Eric Ries (28:33)

No, no, no, no, no, it’s a common misconception. Open AI never had the Nova Nordis structure. And yeah, it’s it’s a difference, way to think about it is a difference between an absolute monarchy or a democratic system with checks and balances. What matters is how many branches of government are there that can check each other. Open AI has only ever had one board, one locus of power. This structure, Novo structure involves having two locus, two loci.

Seb (28:59)

Gotcha. Let’s talk for a minute if we can about the big AI companies. I believe I’m right in saying, but correct me if I’m wrong, that you’ve done a bit of work with OpenAI and Anthropic in the past. And it seems like all the big AI companies seem to have some level of acknowledgement that are kind of traditional corporate structure that gets buffeted by all the forces that we’ve been talking about

Eric Ries (29:34)

Yeah.

Seb (29:35)

may not be an appropriate thing for this particular technology. yeah, what can you say about what is going on amongst the big AI companies right now?

Eric Ries (29:42)

Sure. Yeah, no, I listen, I am a very bit player in all this. So I don’t take credit for anybody’s success. And I know the players and I’ve been asked to counsel them from time to time, but, I’m not, I’m not the, I’m not the source of their success, nor am I responsible for their actions just for the record. Okay. But I, really was driven home to me. did, I did a conference last year. It was a surreal conference at the Vatican of all places. conference on AI governance hosted by the Vatican and there I was I was like what am I doing at record scratch moment you know what am I doing in the Vatican like 100 meters from the last supper like what am I anyway it was it was a cool conference and I was on this panel classic Italian panel with like eight people on it it’s always me little old me and then representatives from every major AI company I mean literally sitting next to me was like anthropic open AI cohere Palantir Google meta everybody’s on this one panel I looked down the row and I realized There’s not a single company on this panel that has standard governance. Everyone agrees that for such a transformational technology, there must be some mechanism. I call it a mission guardian, some mechanism to prevent the technology from being captured by the highest bidder. In fact, that is one of the issues in the, in the open AI trial came up is that the allegation that at some point open AI considered auctioning off the technology of the highest bidder. And they almost had a revolt on their hands because the people working on this technology. instinctively understand that that would be far too dangerous. Now, different companies take different approaches. Some just have founder control like Google or Zuckerberg. Obviously, people know those stories very well. I happen to think the two-tier structure is a lot better. That’s why when I play a very small role in counseling Anthropic about their structure, urge them to do this. And in fact, Anthropic is governed by an outside trust, outside trustees who have the ability to appoint directors to the for-profit board. It’s called the Long-Term Benefit Trust. And I think it is one of the reasons why people perceive Anthropic as the more high integrity, more principled player in this space is because they have this more resilient structure.

Seb (31:44)

And that long-term benefit trust, you know, anthropic, we all know the story is clearly thriving financially, you know, no money troubles in terms of revenue growth there right now. But if we were to imagine some future circumstance in which either there’s some mammoth that surpasses them and wants to buy them, or there’s some high stakes money related, or mission related stakes or questions and issues that come up. Like what could that board do? What are they incentivized to do? Like how can they intervene?

Eric Ries (32:27)

Yeah, they are not financially incentivized for Anthropic to make money. They are simply guardians of the mission. That’s their exclusive responsibility. So they have an effective, I don’t remember exactly the way, the details are complicated. Every time you set one of these things up, you have to enumerate certain powers that the trustees have. I don’t want to misspeak because I remember. I know many, many, many versions of this proposal as it was, as it went through the rounds of editing and negotiation. And I’m like, well, I don’t want to misspeak about which powers exactly they have. know for sure that the way it was set up, the thing I remembered clearly made it through every version was that as the company has more and more success, the trustees are given the ability to appoint more directors to the for-profit board. That’s really the most important power of a perpetual purpose trust or industrial foundation that you want to have somebody that the board is accountable to who has a mission orientation. In practice, this doesn’t matter most of the time. Like board governance dynamics are weird to normal people. It’s like very strange. have all this because ultimately governance is a study of power relations between people. At the end of the day, and you saw this with the open AI crisis, at the end of the day, who has the power to decide? The open AI board thought it was them because that’s what it said on the piece of paper. But in practice, no, they did not have the power to fire Sam. He got himself unfired because he actually in practice had the control. These things only tend to come up in a crisis when there’s a civil war and we have a conflict and we can’t resolve it, you know, who has to to rule. So far as I know, there is not in anthropics life ever been a crisis big enough that the trustees have had to do anything in particular. The point is because everybody knows that when push comes to shove, the investors cannot force the trustees to, for example, sell the company. Then that gives management and the directors a lot more cover. a lot more courage to say, we know where this, there’s ever a conflict, we know where this is gonna wind up. So we don’t have to capitulate. We don’t have to compromise. And of course, Anthropics is not hypothetical. They’ve already faced multiple of these tests where they’ve had to give up huge amounts of money in defense of a principle. And I think the fact that they’ve been willing to do that makes them extremely rare among their peers and has been part of reason why their products are so well received by not just consumers, but by enterprises too.

Seb (34:41)

And when you say they’ve had to give up huge amounts of money, are you referring to standing up to the US government on like defense contracts and yeah.

Eric Ries (34:49)

That was certainly a very notable example of it and something that, you know, again, I don’t want to say that Anthropic is the main character of that drama. That was a story of government overreach and just outrageous abuse of power. And against what is ultimately still a relatively small startup, an American startup, too. It was an outrageous episode and it put them in a no-win situation. was kind of, you say like, what were they supposed to do? Every option was bad. So that’s really the reality of it. But given those bad options, I think it’s widely perceived that they took the most principled one available. And you can disagree with their choice, but even people that I know that disagree with what they did admire them for doing it. Because for a corporation doing the quote unquote right thing doesn’t mean absolutely right in a moral sense. It means did you do the thing that was consistent with your own values, which they clearly, clearly did. I think that’s why they’ve earned respect, but it’s not the first time they’ve had to do this. mean, going all the way back to Chad GPT. Anthropic had the technology to make chat GPT at the same time or even before open AI had it. But their perception was it was too early to the release of technology. didn’t think it was safe to do so. So the reason why they’re perceived widely as playing catch up to open AI, although I think a lot of people now believe they have caught them was because they made what they consider to be a more principal choice not to release again. Was that right or wrong? can debate, but can’t argue that it was principal to themselves. You saw them do it again with the release of Claude mythos. They could have released that model and they decided it was irresponsible to do so. Now, again, people interpret that there’s a lot of ways you can interpret it. You could of course read all of these choices as cynical, but at a certain point they start to add up and you say, gosh, there’s a lot of cynicism. When the more parsimonious, the explanation, the simplest explanation is just that they sincerely believe what they’re doing and they’re highly aligned to those principles. They’re them and their investors, their governance, their board, everybody is aligned thinking that this is what they’re trying to do.

Integrity, Language, and the Silicon Valley Bank Collapse

Seb (36:42)

we’re talking about, various governance structures here. And I guess question that comes up for me is almost how watertight you can make these things. Because I guess we all have experience of, whatever words are put down on paper, it’s like

Eric Ries (36:56)

Doesn’t matter.

Seb (36:57)

one person’s interpretation versus another person’s interpretation. That’s kind of the basis of the law you see in the US. Supreme Court constantly debating like, does the minutia of this word mean versus that word? And so I’m sure it’s not hard to imagine circumstances where if you put different people within the same structure, the outcomes are going to be very different. know, one person’s definition of acting in the interest of the long term mission is going to look very different to another person. I guess how do you Factor in ultimately what feels to me like a question of integrity of the people involved.

Eric Ries (37:35)

Yeah, is ultimate question of having high integrity people like people who are willing to make bad faith arguments are corrupt and corrosive to any human process. It doesn’t matter if they’re on the Supreme Court or in your on your board or just you hire employees like that, like your life sucks because they are talented at coming up with principled sounding reasons to do whatever they want. People like that are very dangerous and don’t ever be around those people and find someone doing that run for the hills. But that said, the idea that the fact that there’s ambiguity in language means that it doesn’t matter what we write down is not true. We have really good evidence that intentions do matter, principles do matter, and people are shamed when they act contrary to their stated principles. That’s why integrity oaths are surprisingly effective. I call for us having a director’s oath that boards it like basically a Hippocratic oath. Why do we have a Hippocratic oath for doctors and nurses and nothing for directors? Like give me a break. Directors should have to be held to at least. the level of accountability to human health as nurses, come on. But it’s work because most people have a sense of integrity. Now, if you’re hiring people that don’t, you hire a sociopath, you’re in trouble, that’s true. But again, that’s why it’s important to see governance as a system, it’s a system for apportioning power. It’s actually a political philosophy. What is the right relationship of human beings to each other? And every organization is different. There are places that are very hierarchical. There are places that are more egalitarian. There are places that are more ruthless. There are places that are more soft, they’re more nurturing. There are places that care about quality. There are some places that care about health. There are some people that care about efficiency or beauty. Like those are all different values. But I think there’s tremendous value, no pun intended, in having some specific ethos that we are attempting to defend. And I think part of the challenge in our very cynical age is that We’ve kind of given up on the project of having principles at all because we’re so surrounded by so many hypocrites. But just to give you one concrete example where language really matters. If you have a Delaware C Corp and you have as your corporate purpose to pursue any lawful actor activity as Silicon Valley Bank did very famously. So Silicon Valley Bank had a cool mission statement. They were my bank. That’s why I know a lot about this because when they blew up, I wanted to know why did my bank blow up? Their mission was, mission statement was to advance the innovation economy or something like that, move the innovation economy forward. I it just made me feel like, yeah, they’re for me. I’m an innovator, they’re my bank. That’s what it makes sense. But I looked up their charter afterwards and it actually says the Silicon Valley Bank is hereby incorporated to pursue any lawful actor activity. And I always wondered like if they had gone to their lawyers and said, hey, know, when you say any lawful actor activities, does that include anything at all? including like turning my customers into Soylent Green and eating them. You think that the lawyer would say, no, no, no, not including that. Of course, we should write except for doing this terrible thing. But no, lawyers will say, you never know what you might need to do. Maximum optionality is the path to maximum valuation. If someone talks to you about maximum optionality, run for the hills. Because if you embrace that idea, you can’t later be like, why does nobody trust me? You won’t even promise not to turn me into Soylent Green. So let’s go back to Silicon Valley Bank. Silicon Valley Bank spent its own money and its own effort five years before the blow up to go to Washington, D.C. and lobby to have the banking laws changed so that Silicon Valley Bank would have permission to take these risky bets that ultimately destroyed the company. This was done in the name of making profit that ultimately destroyed the whole bank. What’s crazy about this is that even if the bets had paid off, let’s imagine that they had made a bunch of money by basically they’re just mining customer deposits for making more money off the deposits. Would that have advanced the innovation economy? Not even one ounce. It would have just meant more money for the shareholders. So this, these subtle distinctions matter. Now, if they had been what’s called a public benefit corp or a PBC, PBC is a restoration of the historical idea that companies should be, should exist to do something specific. So imagine if the legal charter had said, we exist to advance the innovation economy. Then like, it would have been much easier for someone at the board to say, wait a minute, why are we doing this? This lobbying is contrary to our mission. Now, wouldn’t it have worked? don’t know. Maybe everybody was so enthralled and so in love with the shareholder value, shareholder primacy theory that it wouldn’t have made a difference. But now imagine this scenario where it really would make a difference. Imagine that the board has a conflict. And some directors think we should sell out the customers and others think we should not. the people, an investor gets wind of this and decides to sue the company and said, listen, you are forced through your fiduciary duty to do this thing because it’s maximizing my returns. If the charter says that the goal is to maximize shareholder returns, that lawsuit could work. But if it says something different, that lawsuit will not work. So there are these moments where it matters. It has a real power consequence. for people whether you choose the right words or not. So I would encourage people to be principled about this and try to attract people around them as investors, as board members, as employees who share that principled ethos.

Reconciling Lean Startup with Incorruptible

Seb (42:53)

And how do we sort of square the circle here? You know, if, if, if I think about the lean startup, which was published, believe 2011, you know, lot of the principles of the lean startup as, as I recall it here was about, fast experimentation, iteration, customer feedback

Eric Ries (43:17)

Yes.

Seb (43:18)

loops. And I guess some people might hear this and think, yeah, well, this sounds like it has a lot of upfront. investment, lot of upfront effort, a lot of upfront foresight to kind of know where I’m going. yet, you know, lean startup is like, no, lightweight, start small, learn, iterate, go. So yeah, how do you, how do you kind of mesh these two things?

Eric Ries (43:42)

Yeah. Yeah. Well, first of all, can do everything I’m describing can be done in a lightweight iterative way, like Anthropic did it. Okay. So, so I don’t mean to make it sound heavyweight, but I do think this is a common issue. And I, I feel bad. I must not have been very clear in lean startup because in order to have rapid experimentation, scientific decision-making, high consensus, coherence inside the organization. Yes, you have to go fast. Yes. You have to do the experiments, but these experiments exist within a container. You have to build a container. have to have a commitment to long-term principles in order to enable the speed. said so very clearly, thought in the lean startup, but maybe not as clearly as I should have. So for example,

Seb (44:22)

I to be clear, have not read, I’ve read your latest book very recently, Lean Startup. been a few years. It’s been a few years. Yeah.

Eric Ries (44:28)

long time, right? So this is what sticks with people. for example, just to give one concrete example that comes up in the book is if you want to follow the scientific method, is the scientific method itself subject to experimentation? No. When you say I’m going to follow the scientific method, you’re saying that if I conduct an experiment, if I have a hypothesis and I collect the data that shows me that hypothesis is wrong, it doesn’t mean that therefore like scientific method doesn’t tell you what to do. Okay, what you do with this information is still a matter of judgment. But the side of it says that we’re not gonna dispute the facts once we know the truth. So if I come in and say, listen, I’ve done the split test experiment, customers like this product better than they like that product. You can’t say, no, they don’t. You’re like, excuse me, what? I say, well, how do you know? Well, I consulted my astrological sign and it said that they do like it better. It’s like, no, sorry. We’re not going to use astrology. We’re going to use science if the person says well hold on I thought you said we should run experiments Shouldn’t we run an experiment to see if astrology is better than science? No No, it’s a prior commitment. You have to have some principles that are not themselves Contingent on some ROI based calculation. So I don’t think you should have a lot of them I think we should be very parsimonious in defining a mission which we parsimonious in choosing values, but we should choose good ones It does matter what we choose and those choices having a long-term commitment to them. This is in the Lean Startup because it’s an old idea from Lean Manufacturing even. Having a philosophy of long-term thinking is the foundation that allows rapid action to take place.

It’s Always Too Early Until It’s Too Late

Seb (46:06)

With that in mind, you know, to the early stage founder who might listen to this and, maybe they think this all sounds like a problem to deal with like later down the road when we’re a big company

Eric Ries (46:19)

Yeah.

Seb (46:19)

or maybe the later stage founder who thinks that ship has sailed, like I should have made these decisions, you know, years ago when the company was like not this big behemoth. you touch there that some of this stuff can be done incrementally. So guess when is the right time? what do you advise?

Eric Ries (46:35)

Yeah, yeah. So the same, you know, the old proverb about the best time to plant a tree is 40 years ago, but the second best time is today. The most important idea in the whole book is not what techniques you need to do, but when you need to do them. And the principle is called it’s always too early until it’s too late. Now, when people hear this, they’re like, I guess it’s too late for me. I don’t know. Until you try, you can’t find out if it’s too late. But the analogy I would use is like, imagine you meet an Olympic athlete and you’re like, man, Give me some advice. I want to be an Olympic athlete like you. How do I do it? And they’re like, well, first you got to learn fencing or, got study the sport, of course, that I’m good at. But before any of that, first steps is you got to eat right and be in the gym all the time. And you’re like, got it. When I become an Olympic athlete, then I have to start eating right and going to the gym. He’s going to be like, no, you have to do that right now. Your whole life. no. But I ate Doritos yesterday. Is it too late for me? Can’t go to the gym now because I didn’t go. It’s like, no. Whatever situation you’re in, if you start eating right and going to the gym, it will increase your odds of becoming an Olympic athlete. like, I went to the gym yesterday. Am I guaranteed to become an Olympic athlete now? No, man. That’s not how it

Seb (47:44)

You

Eric Ries (47:45)

works. There are no guarantees. Is it too late for me? I don’t know. Until you go to the gym, you cannot find out how strong you can become. So we don’t know. This is the same thing. These outlier companies that we love, these leaders that we idolize, they are Olympic athletes of business. And the two things we got to do ethos and integrity are the equivalent of eating right going to the gym. I don’t know if it’s too late for you, but probably not. know a lot of stories of companies that very late in their life adopted these ideas. And then, yeah, like if you can’t run a marathon yet, I’m not going to tell you to run a marathon every day, but what can you do? And I think this is the key. This is what Anthropic did. They, they focus on like what, what is in our control. And the same founders who are like, I don’t have time for this still manage somehow to incorporate their company. It’s like, well, you had time to do the crappy version of incorporation. it really that much extra time to do it? Right. If you choose the right vendors, of course, life is a much easier. I actually got so frustrated by the law profession that I built my own law firm for this. So early stage founders can call companies called Virgil. will do all this for you for a low cost. They’ll do it the way that I think it should be. The way that I think is right, of course. But whether you use my law firm or another, like, don’t forget, you’re the client. The law firm works for you. I have whole section in the book on how to talk to your lawyer. If you just ask

Seb (49:04)

Yes.

Eric Ries (49:05)

for the right things, generally speaking, this is not hard, but it is a lifetime practice. If you take this seriously, then you’re going to have to defend it all the time. And you know, you don’t want to be an Olympic athlete. It’s fine. But don’t tell me you do and then say, but it sounds like it’s going to be too hard. Yeah, sorry. It is going to be hard. That’s part of what. or if it does, but I promise the principle in the book is called harder is easier. If you make these commitments, they do pay off in the.

An Optimistic Vision for the Future

Seb (49:34)

Last question here, Eric. What’s your optimistic vision for the future here?

Eric Ries (49:41)

I’m very optimistic, which is weird, because we live in dark times. I mean, dark time. And when I think about how are we gonna get out of this mess, I don’t know. I don’t know. But I remember that our grandparents saw much darker times. Much darker times. My parents, my grandparents were in the war. They saw the worst of humanity up close. And I remember that that generation kept the faith. Somehow, despite the advance of fascism all over the world, despite the advent of nuclear weapons, despite the advent of horrific weapons of war and atrocities by man against man, they kept the faith. They believed that it was their personal responsibility to do their part, to try and make it better. And when the war was won, when the darkness passed, they engaged on a spree of institution building. Most of the institutions that govern our modern life to this day were founded in that era or reinvigorated in that era. And yet we, as their grandchildren, we don’t know how to do that anymore. We don’t know how to operate the institutions they have given us. We live in a time of institutional collapse across the board. And when you suggest building a new institution, people look at you like, what? We already got one. What are you talking about? I know from having tried to build a stock exchange, believe me. But I have every confidence that we as a generation can endure through this darkness. And if we start to build the kinds of institutions, the kind of organizations, companies, everything that are committed to human flourishing that I write about in the book, like I think that could be an unimaginably different economy than the crap we put up with today. And when people say it sounds too hard, how do you know it’s gonna happen? I don’t know anything. There’s no guarantees. You do what you can, but remember. Our grandparents economy was almost unrecognizably different than the one we have today. So too our grandchildren’s economy could be unrecognizably different than what we have today. And who says it has to be worse? It could be better, especially those of us who are builders. Builders have the final say. We prop this whole system up because it is value destroying. needs a steady supply of fresh meat, which we provide. If we insist, we can have any economy we want. That’s why I’m optimistic.

Seb (52:08)

What a great message to end on here. And I would wholeheartedly, you I’m someone who thinks most kind of quote unquote business books just deserved to be thrown in the word chipper.

Eric Ries (52:19)

Terrible. Absolutely terrible.

Seb (52:22)

You know, the reason I am so delighted to have you on is this is probably one of about three books that I would genuinely recommend everybody read. I think it’s really important now. It’s really important on this theme of how we build, how we restore high integrity organizations that serve people. So thank you for writing it. I know coming on podcasts and sort of boiling these things down into like bite-sized chunks, there’s a lot of juicy stuff here, but really this is all breadcrumbs for the main course, which is people should go buy the book, read the book, and put into practice the advice that you’re sharing.

Eric Ries (53:01)

thank you so much. That’s really nice of you to say. Listen, I tried to write something that is only superficially looks like a business book, has a deeper heart to it. So I hope people will have that experience when they read it.

Seb (53:12)

I’m sure they will. Thanks so much for coming on, Eric.

Eric Ries (53:15)

My pleasure. Thanks for having me.