Eric Ries: Incorruptible, and the Case for Long-Term Governance Reform

Welcome to the Bordroom Governance Podcast. I'm your host, Evan Epstein. Today's guest is Eric Rees, entrepreneur, author of the Lean Startup and founder of the Long Term Stock Exchange. Eric has spent his career rethinking how companies are built, governed and scaled. Now he turns his attention to one of the most fundamental challenges in business today, corruption and integrity in corporate governance. What is the subject of his new book, Incorruptible, Out on May 26th? You're getting this conversation early, before the book hits shelves. At the heart of our discussion is what Eric calls financial gravity. The web of incentives and norms that pulls companies toward short-termism, even when leaders generally aspire to do otherwise. We explore how this dynamic shapes the behavior of boards, executives and investors alike. We also dig into emerging ideas at the frontier of governance, AI governance, public benefit corporations, long-term benefit trusts and error concept of mission lock constellations. We examine real-world examples, including anthropic and novenor risk and ask whether new governance frameworks can better align purpose, performance and accountability. We close with Eric's case for governance reform, including a proposed directors oath and a renewed focus on integrity as the foundation of effective board leadership. If you enjoyed this episode, please subscribe, leave a review or share it with someone who cares about corporate governance. You can also support the show by subscribing to the Bordroom Governance newsletter at evanepstein.substac.com. The Bordroom Governance Podcast is sponsored by the American College of Governance Council. The ACGC is a professional association of lawyers and academics in the US and Canada, widely recognized for the expertise and achievements in the field of corporate governance. The ACGC was founded by some of the most prominent US corporate governance lawyers, and to the aid the organization includes over 150 practitioners and academics. The ACGC's mission is to promote a high level of professional standards among governance lawyers along with a better understanding and broader adoption of best practices within business organizations. You should check out their website at mgovcollege.org. It is so good to have you in the Bordroom Governance Podcast. We met years ago, maybe a decade or more in Colvalley, where both of us used to reside. And we were talking about the long-term stock exchange and you were doing those endeavors. Ever since you have a very deep appreciation for governance and we're going to talk about your new book, Incorruptible, which is at its core a book about governance. So thank you very much for taking the time and doing this with me. Oh, it's such a treat. I'm such a big fan of the newsletter of the podcast. I've learned so much from you over the years. So it is my pleasure to finally get to do it. All right. So let's get going. I usually start with the art and story of the guest. So give us a little bit of sense about you, where you're born, where you grew up and the many roles and then we can dig into different things you've done, which is a lot. But let's start from the beginning. Sure. Yeah. I am not a lawyer. I just play one on TV. So that's the first thing to understand. As compared to a lot of your guests, I come from a very different background. I was a computer programmer. So my interest in all this comes from a love of technology and making products and making things. So if you want to visualize me as a child, you have to picture me and my parents' basement. I grew up in San Diego, California. I come from a family, a long line of doctors. So what I do is consider quite disreputable by comparison. All my siblings and extended family, everyone has an advanced degree and a proper profession and then there's me. And I was, you know, from the moment my father brought home a beige IBM XT personal computer. I was just in love with the possibility of computer programming. It just, I find it captivating. I love doing it from a very early age. And I couldn't believe it was the kind of thing you could get paid to do. It could be a career, like incredible. So yeah, that's how I got into all this. And yeah, through my love of technology and writing, I got, you know, I got started to work in the technology industry versus an intern. And then when I was in college, you know, the dot com bubble hit and I got my first taste of entrepreneurship. And once you get a sense of the rush of that possibility of the ability to take an idea directly from your mind and see it realized in the world in such a, like such a primal way, I just found that that rush to be totally, totally captivating. So that's how I got into all this. And you have a very strong connection with the startup world. You wrote one of the leading books of the lean startup. Why don't you give us a little bit of sense of that and hold that movement and how that has shaped your career? Yeah, well, thank you for saying so. It was not, I was as surprised as anybody. So to pick up the story, you know, I did a dot com bubble era startup that was a total disaster. You know, we didn't know anything about how to build a company. I was just, I was just in charge of the technology. I figured the company building part would be the easy part. My job was to do the hard part and make the technology. And I learned the hard way that that is exactly backwards. The human issues are always more difficult than the technical issues. And so I came out to Silicon Valley my first job after college, you know, after going back to finish my degree when my startup failed was, you know, was at a post.com apocalypse era startup, really exciting startup here in Silicon Valley. And I learned the hard way again that even all these supposed experts about entrepreneurship also didn't know what they were doing. But their mistakes were a lot more expensive than what I had been able to cobble together in my dorm room. And so I started to feel like there was something wrong with the way we were teaching people to do entrepreneurship. And I was lucky enough, some of us who are refugees from that big failure did another company. This is IMVU. This is 2004 era, I think. And built this other company that, you know, still still a going concern, even as we speak right now. And my co-founders were willing, you know, which is kind of remarkable to me. I was pretty young at that point. But my co-founders who were all older and more accomplished than I was, they were willing to go along with me on this journey of changing the practices of how we built the company. Concepts that are now considered ubiquitous, but at the time were very unusual. We would now call minimum viable product. We would pivot. We would do continuous deployment. We would ship the production 50 times a day on average. We would build a measurement feedback loop. Now we have concepts and names for all these practices. But at that time, they were just air x crazy ideas about how technology should be built. And somehow they were willing to give it a try. And then we could see how well it worked. It was really like it was incredible what we were able to unlock. So I felt like that was not like a huge breakthrough to me. It all seemed very intuitive. But I had this problem. I couldn't explain to anybody why it worked. When it was so contrary to the conventional wisdom, we had all been taught about how technology is supposed to be built. I didn't know it at the time, but I would say now that it was contrary to the dominant management system thinking of people in Silicon Valley and beyond. So I started to become very curious in the question of why, if we're violating all the best practices, are we getting these excellent results? And I studied everything I could get my hands on, not planning to write about it, but just because I had a practical problem that I was the youngest person on the team. I was hiring all these people older than me and telling them that they needed to work in this bizarre and different way. And they would be like, but why? And I'm like, just trust me. It works. Just come see the evidence for yourself. And hopefully all your everyone listening will laugh at my funny joke. The idea that all these career professionals are going to look at the evidence. Of course, they're let it to the way that they were trained to do it. The thing that's given them success in their careers, how are we going to get them to believe? So that's actually where lean startup came from. I was desperate to build a vocabulary for these concepts pivot, and I'm well brought at all these concepts that now are standard practice. And when I left that company, you know, I was thinking about what to do next. And I started getting invited by VCs to come hang out with them. I didn't know that this is like standard practice in Silicon Valley at the time. I was like, well, I guess they think I'm really special. And they would ask me to meet with their portfolio companies. And I would come in and tell these meetings and people would yell at me. These meetings went so badly. They'd be like, you're lying. That doesn't work. What are you talking about? That would never scale. And I'd be like, oh, whoa, whoa, whoa. I'm just telling you my lived experience. I'm telling you what I witnessed with my own eyes. Take it or leave it. And they would get mad. I said, listen, at the end of the lot of these meetings, I have to end them by saying, listen, you called me. You asked me to come have this meeting with you. It was a favor. Why are you yelling at me? Understand what was happening. And of course, now I understand it really well that I was coming in giving them this very inconvenient news that the way that they had been taught to build their company was wrong. So I started to write about it almost as a form of therapy and also a form of self-defense. I would send people these essays and be like, look, if you don't like it, if you think I'm crazy, can we not have the meeting? Can we skip the yelling part? Is that possible? And those essays took over my life. I called it lean startup because we were borrowing ideas from lean manufacturing. And from the moment I started writing about it, it became this tornado that has engulfed me ever since. And as you say, it really became a movement of people who were like, this is around the time of the great financial crisis, the great recession, people were very hungry for new ideas about entrepreneurship. And they latched onto this one. And I mentioned, I wrote the book. It became this monster bestseller. And kind of my life ever since has been wrapped up in these questions of like, what is the best way to build government and run organizations? And what I like about it is that you took management and startup management. Then you thought about big ideas. What else can be reformed? And you had the long-term stock exchange. idea and now you into governance. But let's let's go into the long-term stock exchange before we move into governance. Why the long-term stock exchange? And maybe you should explain to some of our listeners, remember a lot of people listening are board members, directors, or governance professionals. So maybe you should explain the concept of the long-term stock. Sure, sure. Yeah. They should be asking their companies why they're not listening on long-term stock exchange. That's a great idea. So this is how it started. In the last chapter of the Lean startup, practically the last thing I wrote for the whole book were like big picture reflections on the overall ecosystem of entrepreneurship. It was kind of like big picture changes I thought needed to happen. And it was fun. I love that as an author. That was really fun. I was like, oh, I get to say things that other people should do. It's as much easier than being an entrepreneur. So I was like, look, we should reform business education. We should change how we measure and how we do venture investing. Actually, a bunch of ideas about how the world could be improved if we were more scientific, more humanistic in our decision-making. And the very last idea in the book was like a little throw away that I added. Just was like, you know, and also it seems to me that if company, if we have the evidence, which we do, that companies that have a philosophy of long-term thinking outperform and that investors who are thinking in long-term in a long-term way, they get better returns. Seems to me that although people complain about Wall Street and Boards and everybody being short-term, like this basic fact should allow us in a capitalist system to make more money if we could bring together long-term investors and long-term renting companies for mutual benefit. It seemed like a very straightforward idea. And I was like searching around for just from first principles. If I wanted to change the rules that change both the behavior of managers and investors at the same time, what kind of institution is that? And I thought, oh, a stock exchange, a long-term stock exchange. That just seemed very obvious to me. Now, I didn't know anything about governance, you know, anything about financial markets, but I was very ignorant when I wrote those sentences, but I just sketched out how I thought it should work. And I thought this would be somebody else's problem. And I published that book, the book became, sold all these copies. And so for many, many, many years, this was my cocktail party conversation. Because when you're the innovation guy and you go around talking about innovation, people always say, oh, yeah, hot shot. What other crazy ideas you got? And so I would be like, oh, I think someone should go to the long-term stock exchange and people would go nuts. Again, either yelling at me, I had so many meetings. People were like, called me un-American. They called it anti-capitalist. They called it crazy. I mean, I even called a lot of names in my life. But I also would have rooms where people would break out into spontaneous applause. And they heard the idea. So it was like very polarizing. Which is really polarizing strong reactions. Super polar, which as an entrepreneur, polarizing is always a good sign. It means that people care about what you're talking about. So and meanwhile, that that book has been picked over every every single idea in that book, good or bad, someone stride it, except for this one. So over time, I started to wonder, well, how come no one's doing this? If it's such a good idea, how come we'll know, we'll do it. And so I just spent, I mean, honestly, years of my life just asking people, do you know anybody who works in the public markets, any board members, any, but who could I talk to just asking people, and everyone asks me a question, how do you start a news doc exchange? And most people would give me an answer kind of like if I'd asked, how do I add a second moon to Earth's orbit? It's like category error, kind of question. Like first of all, we already got one. Second of all, that's not a human enterprise to like create a new celestial object. Like, what are you talking about? They just looked at me like I was completely crazy, but I don't mind in mind. I'm an entrepreneur. I'm in called crazy a lot of times. It's okay. So I just, I became really curious about it. And over time, what I discovered was I said, I said, well, I would put one foot in front of the other. I'll just try to figure out why it's a bad idea so that then the idea will leave me alone. But the more I looked into it, the more it seemed to me like a good idea. And the reasons people told me about why it could never work, they were frankly bad. They didn't make sense. They weren't logically coherent. And so I just started to get really interested in it. And I said, all right, well, let me, let me give it a try. And this was gosh, 10 years ago, I don't know how long it's been now, quite a number of years ago. I said, well, just see, just try to make it happen and see what happens. And you know, you know, started a company, raised money. And we did two impossible things. We were able to get the SEC to approve the exchange. And we were able to get companies to list on the exchange. So, you know, and I don't run the exchange anymore. You know, I've turned over to a professional management team, people who are suited to running a financial services company, not me. But to say like, so when I say we, I mean, they really have done this incredible work. And the company's not making money in it, you know, trades all the stocks on the national market system. Like it's a full on has three listings at the moment, which is more than anyone else has ever gotten since the creation of the NASDAQ, NYC, do obli. So we're pretty, pretty proud. And because the national market system, we trade all 5,000 symbols of the public markets. So I can't say that it has already succeeded in changing the world. But I feel like we were able to prove that this kind of civic infrastructure can be built. Because that was really the main thing most people told me, even who liked the idea is that they'll never let you do this. The age where we build stuff like this is past. We have inherited the civic infrastructure of our grandparents and our job is at best to preserve or pilot it as best we can. But we don't make new ones of it. Like if you imagine if we didn't have libraries and someone's like, I've got an idea of free books and everyone, it's just we don't do stuff like that anymore. That's that's that's a that's ideas from a different age. I just I fundamentally reject that line of thinking. I thought, you know, we have to become the age it does things like that again. And so what are the features of this stock exchange that makes it long term? Maybe that there's a few principles that you can explain that makes it different to, you know, NASDAQ and your stock exchange. Sure. Yeah. And to be clear, we are although we are a full member of the national market system, and we compete with NYC and NASDAQ, we also support dual listing. So for everyone who's freaking out like, oh my god, I can't risk the liquidity. It's okay. It's okay. You can listen to LTSC and still have access to 100% the same level of liquidity you have today. And in fact, we have really good evidence of the companies that have listed with us have seen tremendous benefits in terms of access to additional capital and more important, the shift of investment to long term investors, which is so correlated as you well know in the research with so many good elements of corporate performance. So what we do, people I think have forgotten in the broader world that although stock exchanges today are mostly thought of this trading venues, their historic purpose was for liquidity provision, but also for governance standards. The listing standards of the exchange, that's like the most important place where we as a society embody what are the highest standards we think companies should be held to. And sadly, I think those listing standards have become super bureaucratic and very like not very inspiring anymore. I hear that from a lot of investors who feel like, you know, those standards of behavior in corporate America have been lowered, not raised. So our idea is very simple. We just have a stock exchange where the listing standards require adherence to long term principles, principles around compensation, around board design, around how investors are treated. You know, it's relatively straightforward stuff, compensation, board compensation, things that investors and CEOs have been calling for for years. We just wrote it down. I mean, just look, if you want to list with us, you have to comply with these standards. You have to demonstrate through your commitment that you in fact have a long term operating philosophy. So we don't your intentions don't matter. Your press release doesn't matter. Your mission statement doesn't matter. All it matters is externally verifiable commitments that adhere to these principles. All right. So let's jump into governance because you mentioned this was a core element of the long term stock exchange and of every exchange. And you've written a new book, Incorruptible. Give us a sense of what inspired you. How did the idea take shape? So I've been working on this book now pretty much full time for gosh more than two years. So like I said, I stepped aside from my operating job so I could really be focused on this because what happened was because of my work on the exchange and just because of what's been happening in the world, I became like a quirky collector of obscure governance ideas. I love it. Yeah. You know, so it was just like because I'm with people and I would be like, this doesn't seem like so many of our governance best practices seem to me to be value destroying. And so I would just ask people, is that right? Do we do it that way for a good reason? And it's funny like the same people who would tell me that everything has to be the way that it is. Our current system is the best and only option. If you press them, are there any exceptions? They'll be like, oh yeah, everyone knows about that. And I started to collect these interesting things. You know, Ali Baba is governed by an employee voting trust. That's interesting. You know, I learned about dual class shares and founded preferred shares. And but then I started to learn about industrial foundations. Right? Nova Nordisk is a for-profit public list of companies owned by a non-profit foundation. What? And I learned about perpetual purpose trust and the extensive evidence we have about trust, foundation and employee governed companies. And I started to assemble this body of techniques and both operational and governance ideas that did not conform to any of our current best practices and yet have all this research saying that they actually outperform our best practices. And I started trying to put the ideas into practice with the companies that would come to see me for advice. Because my life, because of me start up, basically every single day of my life, somebody comes to me and asks for help starting a company or revitalizing an existing company. So when they would talk to me about things, if I felt that the technology they were building was something that had significant externalities or required like people to trust them with their data, with their livelihoods, with their lives, I started to ask these questions, well, how is it that you will be able to be trusted by your key stakeholders? Why should customers trust you with their life and things like that. And founders would say things like, "Well, I have such good intentions." And I'd be like, "Oh, is that good enough?" Because it seems to me that you've incorporated a company in the era of shareholder primacy, where you're disposable. So why should I trust that you'll be there to keep this promise? And it was like asking these questions became completely transformational for me. Even before I had any answers or solutions, just asking the question, I remember very vividly having a founder just break down in tears. I actually started crying on the phone with me because they were like, "No one's willing to talk to me about these issues. We're all pretending that this problem doesn't exist." So I started to get very interested in it. And I got to the point where I was getting pretty good at convincing founders to give these ideas a try, but then they would end every conversation with, that sounds really interesting, but is there anything I can read on this topic? And believe me, when you're being an advocate, you really don't wanna say no. It makes you sound so crazy. Like, wait a minute, this is such a good idea. There should be a hundred books about it, but there really aren't. Like there are very few books about governance as it relates to startups, but even as it relates to big companies, the vast majority of the discourse about governance, as you well know is really about compliance. And I mean to say compliance is not important. Obviously it's super important, but these bigger questions about what is the purpose of a corporation? What are the, where does operations meet governance to ensure that the whole organization is coherently pursuing a singular purpose? And most importantly, how do we make promises that people can believe? How do we build organizations that actually are characterized by integrity? There's not that much about that, or where there is, it tends to be in the form of manifestos, encouraging people to think that way. But when I'm advising companies as a consultant, as an advisor, as an investor, I need to be very practical with them. I have to be able to say here is a specific technique you can use that will have a transformational effect. Here's the evidence that I know it's gonna work here at the stories. And so once I started to assemble that set of best practices, I thought, oh, I'm gonna have to write a book again. Oh no, you know, oh boy, okay. And it was a very, it was a daunting undertaking. And, you know, especially because most people think that governance is boring. Okay, just, I'm just gonna have to tell you, like my poor publisher, they were like, please don't tell anybody it's a book about governance. Right, yeah, tell them it's about anything else 'cause they're worried no one will read it because it's considered so boring. So most founders, treat governance as like one step up from a building permit and one step below an end-usual license agreement. And yet, to me, it's one of the most creative, one of the most essential design questions that confronts any organization. It's like you're being a logiver. What's the constitution? It's really important stuff. So I've been like on this quest to try to make the boring exciting. You know, I wrote a book about management. I wrote a book about accounting. And I read a book about governance. You know, that's at the heart of it. But yeah, then trying to cloak it in a more interesting way of talking about it. Yeah. And obviously I love it. You know, I started this podcast six years ago. It's called "Boardroom Governance" and people say, "Well, like, boredroom." And they look at me. But so I'm in a niche world. So when I read your book, I'm like, "Man, this is incredible. This is really the same theme and how to think creatively about a lot of these structures." And I also enjoyed a lot your criticism towards best practices. You always use this term. Here, the lawyers are going to tell you this. The investment bankers are telling you that, the investors. But these best practices, governance, you've got to rethink them again. And you have, as you said, compiled a ton of cases in both public and private. So it's a really interesting read because of that. And certainly, you know, one thing that I've been focusing in the last few years is governance and startups and venture-back companies, which is very different to public. And if there is some level of focus on public companies, there's very little on startup and governance and startup world. So can you tell us a little bit about when you started looking into this? Because you have a broad section of cases on both ends. But how was it that you divided, at least internally, your startup cases and private company cases versus public company cases? Sure. Yeah, I was astonished. I guess that I've always been reflectively suspicious of best practices. But when I first started writing this book, I thought I would be writing a book about explaining to people why the best practices are good, even though they may not seem that way. But the research on this topic is overwhelmingly negative. And I kept meeting with all these academics who I would ask them about some best practice. And they would be like, oh, yeah, everybody knows that that's enormously destructive. And I'd be like, well, if everyone knows it, how come it's still the best practice? They'd be like, yeah, I don't know. But anyway, I'm like, does it bother you that you've been researching this for 25 years and people still don't do it? And they'd be like, I guess, kind of. And I'm like, oh my God, how is it that you know all this information? And as a practitioner, it's completely invisible to me and all my friends. It does not seem right. So yeah, one of my favorite stats in the book is this incredible study that shows that companies since 2008, companies that are rated to have bad governance and outperform those that have good governance. It's like, what are we doing here? Like, is this the ISS and different metrics of governance? Yeah, yeah, totally. Like they do ratings and the ratings are negatively correlated. Yet there's like trillions of dollars of institutional capital that votes with those recommendations 99% of the time. It's just the research is really wild. And you know, trying to calculate it, like probably if you add up all the different research, the US stock market is probably at least $5 trillion of loss of value just from following these best practices. It's like, it's a staggering amount of loss doing these best practices. And that's before we get to their social economic, moral consequences, the human costs, you know, think about like, you know, our colleague Jeff Feffer is research about the social contagion of layoffs and all these irrational behaviors that result in these. Which is restarting, right? Like now in this AI area, we're about to go through it. We'll go through it with a huge thing. And so in the book, I felt like my job in this book was to explain the history of how we got here, name the phenomena and like really give each of the mechanisms by which this happens a name, create like a new conceptual vocabulary so we can talk about it and reason about it. But then not just to complain about best practices or write a manifesto about how we should all do better, but to really lay out a blueprint of specific practices that I think should replace each of these, you know, discredited best practices. And so it's been really interesting. That's where, and that's really where the cases came from. I did not draw a distinction in my work on this book between public and private. Because I've been at this long enough that most of my public company clients and friends, my private company clients, friends have become, are now public. So I've actually watched people go through this transition and what's interesting of one of the key ideas in the book is that it's always too early until it's too late. Right. This drives me crazy. So people, because we study private and public practices and governance, we have separate, and separate silos. And in fact, remember, investors are even segmented by stage. So you take investment from investment company X at stage X in stage Y. When you graduate to a new stage, the investors change. It's the same firm, but all of a sudden, the person on your board is different. It might even be the same person on your board, but now they're being informed by a different set of bosses. What they have to do, it's very confusing. So I see people make mistakes at the private company level, really at the time of incorporation as early, that really come back to bite them years later, because when you're starting out, when you're a startup, it's hard to imagine your life as a public company. You kind of feel like, well, that's, I should be so lucky to have those problems. I'll worry about that when I get there. And I know a lot of people who are incredibly rich and miserable, because this thing happened to them instead of them being in the driver's seat of it. And I just, I feel like we're making these compromises for the sake of making all this money. And then the money makes us miserable. Who's it for? What is the purpose of it? - You know what I'm saying? - So yeah, I think it's time for a rethinking of all these practices. - I mean, there's so many issues that you've spot in your book, that it's gonna be hard to fit everything in one hour. I feel like every chapter could be a full discussion, but we should start by the title. How do you define corruption? Why is it incorruptible? And I like it because you avoided governance, but we gotta explain the incorruptible and what's the linkage? - Yeah, yeah, I struggled with this title a long time, actually, like the creative challenge of this book was immense. Partly, and the book, I sold this in my publisher, if you look at the trade press, it just says untitled book on governance. That's how it was sold. They didn't know what to call it even at the beginning. I didn't know either. And I eventually settled on incorruptible because I think one of the issues we're having in our society is we've lost the moral clarity, and it's necessary to call things by their proper name. That's like a general purpose issue we're having in a lot of areas because we just become so used to using euphemisms. And this one is one that I think is super clear. So many ways of making money today, that we celebrate our grandparents and great grandparents would have seen as extremely dubious or in fact outright crimes, right? It's not that long ago that stock buybacks would have been illegal. I mean, it wasn't that long ago that starting a company for the purpose of only enriching your shareholders would have been seen as a crime. Okay, like this is not some, it's some like, you know, new fangled idea. These are old ideas that have kind of been forgotten. And one of the things that really struck me, when you talk to people who are boosters of the current system and defenders of the current best practices, you say, why is this system good? They will point to the good things that the system does. You know, like we have lifted billions of people out of poverty. and we've created all this and these incredible supply chain. Like there's a lot of good that is encoded in our world today. And if you ask them, how does that good happen? They will retreat to this very simple, what I call the moral bedrock of capitalism. And people, hundreds of years, people have been retreating to the same safe ground, which is when two people voluntarily transact. As long as they are fully informed and non-coerced, then both parties are better off. Which are every one of your listeners has not only heard, but made this argument themselves many times. But those same people, you say, okay, but let me show you an example of a company that is engaged in a deceptive practice, where their transactions are non-concentual or non-fully informed. Why are those allowed? Then they're like obfuscation central. It's like, well, but how can you really say and who's to decide and blah, blah, blah, blah, blah, blah? And I just feel like our grandparents were much clearer about the fact that when you break one of these preconditions, it's a corrupt act. And today, corruption only, but people wanna say corruption is only about bribery or embezzlement or whatever. And like we're getting the point now, we're inside our trading and there are many, many outright illegal forms of corruption are now not even being enforced at all. So I feel like we're on a slippery slope, didn't just not being able to say that there are better and worse ways to make money. There are ways of making money that do not create value. And although those may be legal at any given time, they nonetheless break the logic of capitalism itself. In fact, the Latin root of corruption is the word to break completely, that's what it means. So once I had that insight, I just thought, okay, let us just call these modern day scams, corrupt acts. And then you can start to ask, what would it take to build an organization that is committed to not behave in a corrupt way? And so I remember talking to a founder, I said, I just did this off the cuff one day, I just said, if you do what I'm recommending, you'll become an incorruptible force for good in the world. And it was like, thank you for saying that because just naming that aspiration felt so taboo to him, that he felt like he couldn't, he had to pretend that he thinks all these other ways of making money are fine. And every one of us who have the, what I call the builders intuition, the idea that the right way to make money is to create net new value and then capture some of it for yourself. We have all been bamboozled into thinking we have to pretend that these other people who are making money by just moving value around or basically stealing value from one time horizon to another or from one stakeholder to another, that that's equally good. And the number of times I've been told about some very corrupt figure in our world, well, you got to hand it to him, at least it works. I'm just like, no, you know what? We don't got to hand it to him. Our grandparents, the ancient wisdom we inherited was like, demagoguery is not wrong because it doesn't work. The fact that it works is wrong, a Ponzi scheme works, that's why it's dangerous. So I'm tired of being like, this guy's doing a Ponzi scheme, but you got to hand it to him, it's like, no, actually, and I feel like, you know, I'll let the listeners fill in all the business practices they're already aware of, where you just ask, like, why is that allowed? Why are we celebrating this behavior? I just think it's time to call it by its proper name. So those kinds of practices are corrupt. And whether they're legal or not, we should be building organizations, and especially as you have so many board members who are on, listen to this. We as board members have a sacred obligation. As important to me as the obligations that doctors and nurses have when they take the hypocritical, I call on the book for a direct result. We have a sacred obligation to say that the organization that we steward is not just going to be, quote, unquote, compliant with the law, but it is going to hold itself to a far higher standard of only making money by doing things that are value creating. Yeah, and now we get into the meat of the issue because the standard, right, in Delaware, which is the leading state that all these companies are incorporated. Now, there's been a little bit pushback, but if you got to Texas Nevada, it's kind of the same. Where you have your Disha duty is really to maximize value for shareholders, and this is the shareholders supremacy that you mentioned. But I want you to explain your concept of financial gravity because you do a very good job of explaining, you know, here's the standard story. You raise money from venture capital. You expect it to sell the company, go public. Without any, like a standard C corp governance, you have your board. What is the financial gravity? What is career equity that you also mentioned? Why is this a path that you think is corruptible as opposed to what you are proposing? Sure. So financial gravity is one of the most important concepts in the book, and we need a name for it. It's this phenomenon. I call it the force that no one controls, but everyone obeys. And it goes like this, when I want something from you, because you're a super rich, or you're really famous, or you're a gatekeeper, you control something that I want. I can't help it. It seems as far as I can tell, to be a completely unconscious, involuntary reflex that I subtly change my behavior to do things that I think will make you more likely to give me what I want in the future. And it's critical to understand that this kicks in, I cite all the evolutionary psychology about this. This has been well studied. This is a reflex. You can't turn it off any more than you can stop your pupils from dilating in the dark. It's a reflex that kicks in whenever we have status or power disparities. It's why it's why status and power and financial inequality is so dangerous. Humans are very susceptible to this. And what happens is we start to change our behavior. So for example, if you talk to companies who've gone public, you talk to the CEO, you say, what is the number one thing you notice before and after the IPO? Every CEO, I've had this conversation with a lot of CEOs you can imagine. They also the exact same thing. Before and after the difference is every employee's looking at the stock ticker every day. I can't stop. I keep telling them not to do it. They keep doing it. Now why is this dangerous? You're like, what's wrong with that? People are being well informed about what's going on. But the problem is, and I've seen this, I've been in the inside of these companies in product meetings. You start to have people say things like, I hear you want to add that feature or do that thing. I have to market might not like it. What's going on? People are internalizing this sense of what the market wants or will reward. It goes back to the social contagion we were talking about before. We just saw this in the news very recently. Company does a huge layoff. Stock price goes up. Everyone learns an important lesson at that company. And anyone else paying attention is like, oh, the market quote unquote wants people to get screwed. If we screw people over, we're going to get all extra reward. And I remember talking to somebody about serving on an advisory committee to one of the incumbent stock exchanges. And they were saying they'd done this analysis looking over the whole. They'd been on the committee for a long time, like 10 years or something like that. And they were like, I finally quit because I was so frustrated any proposal that anyone makes to reform the markets. If it raises fees, lower standards, or increases volume, it's just on this glide path to approval. It's like everything about it is easy, every internal need, everything's just easy. If you suggest raising standards or anything that might not will, but even might reduce volume. It's not, no one ever says no, it's not a good idea. It's just like everything's just difficult. And people are just a little bit, it's just you can feel that you're up against this force that is resisting you. Even though no person will say they're against it, I learned this the hard way. When we, the very first application we made for LTSC, you can go look at it's all online. I was just talking to it to someone who had, he had read our public comment file, SC does a public comment for all rulemaking. We have the most positive public comment file you'll ever read. Like everybody from startup founders to pension CEOs, CIOs, academics, we had just every kind of person you can imagine writing into say how valuable this is. And yet our application was approved and then denied. It was like a total bureaucratic mess where they just like no one really wanted to say no. It was not a single negative comment anywhere in the file. And yet somehow the people who were opposed to what were able to get their way. And if you look at the people who made the decision to do that, they're all doing great now. They went back into industry and they're having a grand old time. And that's what happens. I call it career equity. When people are thinking about what to do, they might have a bonus. You see this in innovation stuff all the time. This is where I first learned it. You give people a bonus to say if you do innovation this year, I'll pay you a $10,000 bonus, you know, big salary bonus. Or whatever I'll give you stock. I'll give you all kinds of rewards. Incentives. People say, oh, yeah, that's an incentive. Okay, that's interesting. But hold on. My career is like a tournament system. So I think about what actions can I take today that will increase the odds that one day I'll have the dream job that I want, right? The career that I want. If my perception, it doesn't mean it has to be accurate. But if my perception is doing the thing you're asking me to do, put my reputation at risk, I don't care how big your bonus is. Your equity you give me is much lower than the career equity I feel. To do this. So like in the book I have these data about CFOs, right? The famous study about CFOs, canceling productive projects to hit the targets. Why does that happen? Even in companies where the board and the CEO tell the CFO, I want you to invest in R&D. I want you to invest for the long term. I've talked to a lot of CFOs. We'll just say very candidly, that might be good for this company. But if I have that reputation on Wall Street, my career is over. So it's like the gravity, this gravitational pressure, it overrides the direct authority of the hierarchies we build in organizations. At the last point about that, behavior consistently enacted becomes internalized as values. So the reason why this is pernicious is that over time we start to change our underlying beliefs and values without even realizing it. So people. who just, you notice this, if you start to notice that people who just pledge fealty to investor returns and shareholder primacy, those people just get a certain kind of career boost. They're allowed to make mistakes, you know, they get to fail forward, they can be on 12 terrible boards in a row and they still get to, like, whereas a people that stand up for what's right, everything's a little bit more difficult for them. Well, after a while, you observe that and then you start to subtly justify it to yourself, you know, like, well, I actually think the investors aren't bad people, they actually turn to do the right thing and actually I could do a lot of good with the money that I make by just like the rationalizations kick in and you ask people, did you change your values over the course of your career? They'll say absolutely not because they're not aware that this effect is happening. So that gravitational pressure, I think it's very important when we build organizations and we think about governance. In some ways, that reality of that pressure is more important even than the formal powers that are delegated in a corporate charter for determining what's going to happen in the future of that organization. Yeah, and if you think about it, the way that VCs or private equity investors are measured, it's all about, you know, your returns and how much value and value is stock market or equity value have you created. And whenever you see a CEO leave a company and then you spend in Walser General New York Times, they'll always say, well, his impact on the company was the price of the company was X when he started and why when he left, he created value, right? So as you say, the gravity, the financial gravity is really the main driver of the market and you're going to do everything, at least the status is there. Having said that, I think we are now living through a very interesting period because the latest batch of startup, the hottest startups in the country are AI companies and they have restructured their governance. So it's the first time that we see innovation in governance. So famously, you have one which is very debated and there's going to be a trial upcoming here in Oakland next month, which is OpenAI started as a nonprofit, did a cat profit company now restructured as a public benefit corporation. But then you have a lot, many others entropic and even XAI and inflection AI, many others with a public benefit corporation. Now there's a new layer where they changed their charter and they say, look, it's not about maximizing shareholder value. It's also about a public interest. And I asked this question to everybody. They all say our public interest is to humanity. Now that's a new thing. I always say this in this country, we can't agree between Republicans and Democrats on the budget, but now you're going to solve humanity. But here we own a new era. We've seen creations that are new, the long-term benefit trust with Anthropic. You write about it. You had a discussion about it. So let's talk about that. Like what do you think are pushed these new entrepreneurs? And obviously these companies now worth, you know, 830 billion. Oh yeah. I know the answer to your question because I was in the room when it was done. I know these founders very well. I know them personally. And I advise some of them in setting up these structures. So yeah, I understand it well. In fact, I tell the story in the book. I was at a panel that was organized at the Vatican by our mutual friend David Berger. David Berger. And I was on this panel with all these AI companies. It was Anthropic, Open AI, Cohear, Palantir, Google, and Metta. I think we're all on my panel. Something like that. And I looked down the road. I realized there's not a single company on this panel with standard governance. Not one. Right. And I know why. Because not one of these companies thinks that standard governance is compatible with with being a positive steward of a transformational technology. It's just for one second. Because maybe the Google side of the story is dual-class shares maybe made that different. And so that was one iteration where a lot of founders have taken that and very criticized in the investor community. But we I think these are two different levels. Right. You have that era say post 2004 with Google's I think. Yeah. Yeah. And now you have the PBC era. Yeah. Yeah. Yeah. And I think you're going to see more LTPT type things. I think that's actually the future. What's interesting about each of these ideas is they're all a new old idea. So what's interesting to me like like so many people when they wrote about the Open AI disaster, they wrote as if Open AI had invented the idea of a non-profit foundation owning a for-profit subsidiary. Even though the optical lens manufacturer calls Zeiss adopted that structure in 1885. So like how new is it? And the PBC although listen we can talk about PBC pros and cons and all that if you want. But in some ways the PBC is just a restoration of the idea of general incorporation from the 19th century. It was not that long ago or Delaware only adopted general incorporation in 1899. Right. So the idea that companies should exist to pursue some publicly beneficial purpose and name defined purpose. That has been the rule for the vast majority of the time we have had joint stock corporations in the world period. And what I found really fascinating about that is we had this very brief interregnum between the 1899 adoption by Delaware of general incorporation and the rise of shareholder primacy in the 60s, which happens to be the most prosperous decades in our nation's history. I don't think this is a coincidence because basically seeing corporations as nothing more than a financial instrument to enrich shareholders is like a really degrading idea. Like it's humiliating to the people that practice it. It is empirically speaking like not been a very successful idea in terms of value creation and has caused these massive and really devastating externalities. And although the people who build these AI companies don't know this history, I'm usually the one who tells them about it. They nonetheless lived through the social media era. And they all did this thought experiment. I know I sat with them to be like, what if the same psychotic sociopathic, repacious behavior that is characterized social media was applied to gender to Bay. And they're all horrified by that possibility. Now, Anthropic has been the most safety forward of them. And I think that's why they have the most robust governance structure. I mean, I think so. I helped set it up. You know, so, you know, of course, I think it's a good one. I tell that story in the book. People can judge for themselves. But again, you see like why did open AI go through all those shenanigans in the first place is because they were worried about what this could mean. And I think we, although we live in the era of shareholder primacy, we don't really take the idea seriously enough. When I talk to normal people and I tell them that this is the world we live in, they think I'm lying. They think I make it up. I have to quote from them. There's a bunch of quotes in the book from just regular old governance textbooks. Just to be like, hey, I'm not making, just like I have to put I did like this is such a bad idea that most people think I'm hallucinating it. It can't possibly be right. Like, like, and take, I'll just give a couple simple examples. One of my favorites is should companies be allowed to consider externalities in their decision-making? Like governance best practices only in so far as it enriches shareholders. So literally, if the penalty for killing somebody is not high enough, you're supposed to break the rules. Like, that's not I didn't make that up. Like, it's too crazy of an idea for I don't have the creativity with made that idea up when people hear that. They are absolutely stunned that anyone could say that out loud. It seems super evil to them. Similarly, I used to do this hypothetical exercise. By the way, the fiduciary technique is that you can't break the law to maximize shareholder value. Well, but you can pay the penalty, the fine. And, I mean, I know people disagree about whether you should ever intentionally pay a fine. But there's like quite a lot of people who have written that if the fines are not high enough, but here's a problem. This way of thinking about governance treats the policy environment as an external variable to the governance choice. But of course, this is backwards. Companies, especially today, have immense influence over their own regulatory environment. So here's the problem. I've lectured in many business schools or in the country. And I always see this pattern. In the morning, you take a class that says, it is not the company's place to make moral judgments on behalf of society. You should let the government do that. And you just maximize profits within the current rules, whatever they are. And therefore you, and if so, if you ask a question, so that's a mil-in-the-clat version, right? Like maximize, 100%. Yeah. Okay. Cheryl, the social responsibility business is to maximize profits. And, you know, Judge Strine has a great article that's like our enduring, what's it, enduring discomfort with the idea that for-profit companies seek profit. And it's like very, this is like, guys, that's what we've decided. Okay? So if you don't like the consequences of that, you need to do something about it. And yet, we don't really want to grapple with these consequences. So when you ask if you're a student, you say, but hold on, I'm worried about some social consequence of our choices that they'll say, you don't have to worry about that. You are morally absolved because that's the government's responsibility. Oh, good. But then in the afternoon, you will take a class with a title like government relations, where you are taught that is your fiduciary duty to lobby the government as much as possible to get the rules changed. The apotheosis of this stupid idea is the collapse of Silicon Valley bank, which I, you know, that was my bank that this happened to. So I was, I could follow this story very closely. Everyone remembers that crisis. Everyone in my world was rocked by that collapse. It was like, I was unbelievable. It's like a bank run out of Mary Poppins. Like, I can't believe that could happen. Anyway, if you study what happened there, you know, five years before, the CEO of the bank went to Congress and lobbied to loosen the rules to allow them to make these ridiculous risky bets. They, he did that successfully and that those bets, you know, destroyed the bank. So here's the question that I want everyone to really grapple with at the moment that they did that lobbying. Was that lobbying good governance or bad governance? I think if you accept shareholder primacy as the intellectual premise, you have to say it was good governance. They were doing something to enrich their shareholders because the thing that they wanted to do, the risky bets they wanted to take, they did not serve the mission of SVB at all. If you look at the documents, at the time that this happened, SVB had this really lofty, awesome mission statement that was like to, can't remember now, it's like to enhance the innovation economy and support the people that do it. It was an incredible mission statement. It was like so great, but they're a bank. So all their documents are public. And if you go read their SEC filings, it says the purpose of the SVB corporation is to pursue any lawful purpose. So like any lawful purpose could be like entering our customers into soyland green. You know, it's like, well, we got a maintainer optionality who knows what we might want to do in the, you're saying to me, if it becomes legal in the future to murder your customers, you're not willing to take that off the table. What if it, what if it maximizes shareholder returns? There's a very good New York or cartoon, right, where people are like in a fire and the world is destroyed, but hey, you know, we had great, we created great shareholder value didn't we? Yeah, that's exactly what that's exactly what happened. And so what's interesting to me is because any lawful purpose is routinely interpreted to mean maximize shareholder values. You have this disconnect between the company stated purpose and its actual purpose. And as that disconnect grows, the company becomes increasingly untrustworthy. Because the key thing got to understand is if the risky bets had paid off, it still would have helped the mission at all. It would only have enriched shareholder's has really its only point. And of course in the, in the book, I tell a lot of stories like this. You know, famously tell the story of Costco. Costco makes Wall Street crazy, even though it keeps it's like it's very performance confounds the people that criticize it. And so you'll see these Wall Street analysts who will say stuff like this like Costco is taking money that rightfully belongs to shareholders and investing it in improving the customer experience. As a criticism, that's a career. I have to explain the founders. They're criticizing and like, you know, you have you guys, I'm sure your listeners know well the Harvard shareholder rights project and all these different projects that I tried to declassify. Costco's board and take it's take dismantle the elements of its governance fortress. And what's fascinating if you read the briefs for those challenges, they'll say stuff like by insulating management from investor pressure. This leads to entrenchment and we all know entrenchment leads to poor performance. And you're like, you're criticizing Costco for poor performance like that's one of the highest performing stocks in the entire stock market since they went public in 1986. So I actually think in some ways the shareholder primacy debate has become completely divorced from the actual material interests of shareholders who are not being served by this governance orthodoxy at all. So, you know, you make me think that I've typically framed this in terms at a high level that the investors, let's take the investor class New York Wall Street. Want to maximize the have a preference to any measure that is favorable. Silicon Valley has this ethos of founder building, right? And I think the first friction that happened was dual-class share structures. So when Google and everybody's like, this is terrible. And you talk about entrenchment there. Most people and this is the best practice. The governance will this is really bad. Right? You don't want entrench, but in your view, this is, well, you got a visionary or somebody who wants to do the right thing now. It depends on who has the power with great power comes great responsibility. But in your view, that's a good thing. Well, okay, first of all, I just let's just just pointing out the data that dual-class controlled companies have outperformed standard governance companies over a pretty long period of time now. So again, once again, it's like, well, who's really on the investor side here? But in the book, I'm very critical of dual class. Okay, I don't, I don't think emperor for life is a great political system. Whether we're talking about companies or governments or anything. The fact that founders feel the need to adopt such a despotic governance structure, I think is the biggest indictment of standard governance there is. And you see this in the ESG movement, ESG ratings are contradictory because we want the socially responsible outcome without creating the power mechanisms to achieve that outcome. So we often have company, the companies that are making the most progress on those issues are often have the worst governance ratings. It's crazy. So on the book, I spent a lot of time advocating for what I call constitutional governance. Yeah, you know, this is the corporate equivalent of a nation of laws, not men. I really think we can do better than dual class, but standard governance is so bad that dual, like it has to be really bad for dictator for life to be an improvement. So, I'm happy to talk about the problems with with founder control, but the like the big picture problem with it is that it's not actually that long term of a solution because the human life spans not that long. So this is a book when I talk about being incorruptible, I don't I'm not talking about building organizations that are like slightly less corrupt or that you know less likely to become corrupted. I'm interested in trying to create what I call the architecture of institutional longevity. What would it take to create organizations that can endure for decades or even centuries. In order to do that by definition, we have to find ways to encode the ethos word ethos is the critical one in the book. We have to be able to encode the ethos and protect it in such a way that it can endure beyond the lifespan of whoever set it up. I think that's a way more dynamic and fun way of looking at governance by the way than maximizing general returns, which I could you've been to a gel that primacy style board meeting there just incredibly boring apart on top of all the other problems that they cause. It's just not that interesting compared to the like this really vital question of how could we keep a mission going. You know in such a way that what are great grandkids will still be admiring what we did instead of cursing our names for having ruined the world that they're going to inherit. So let's take that because I think that's really important. So you've identified here is the problem with financial gravity that it's almost impossible to overcome and we live in this reality. And let's recognize this and here are solutions to a new governance structure that's going to help you foster whatever you believe is more important with the employees with the customers and you talk about spiritual holding companies you've identified. You know a lot of the European foundation of an or disk and all of different formats. What is the end game and is there a structure whether it's a long term stock. Sorry well long term stock exchange is part of it but do they will help you. Yeah, yeah, but a long term benefit trust and other structures. Tell us where you've landed in terms of your favorite. Okay, this one makes sense. Yeah, yeah, yeah, I had to invent new terminology for this because and I'm just being really honest with you here. The advocates for all these different reforms all hate each other because they themselves are locked in the zero sum struggle for attention. You know, like if if so like the people who do employee ownership and employee owners even the people that do e-sops don't like the people that do employee ownership trust. They don't like the employee voting trust people they don't like the industrial foundation is like they all have their separate conferences separate book every separate everything and I've been trying to get them all together and I know I'm a book I'm like very generous with my praise of every different variation of this. Because I don't want to create more factionalism but also I understand like we have been in this like siloed minority for a long time. Everyone doing this is like completely crazy and I'm so grateful to all the researchers especially they'll be well to the legal research on this. That have proven that these structures outperform and I'll give you some of my favorite studies just up the top of my head. Like the big one for industrial foundations. I think steam Thompson did this shows that companies that have the industrial foundation structure are six times more likely to last 50 years. Like we're not talking about a marginal advantage we're talking about 10% versus 60% so they have incredible longevity. They and pick whatever financial metric you pick and think about this for a second if I told you I'm going to start a new nonprofit to run my for-profit company and you're your job with if you're if there's any lawyers listening to this to like you understand like you so you're a founder said this to you. You you understand your job is to talk them out of it. Okay, you'd be like come on man get serious right and what like why is it not good like what we all like come on you without the discipline of the markets. You're not going to be efficient you're not going to be competitive you're going to be consumed in virtue signaling you're not blah blah blah not going to raise money not going to go probably not. Yet like every single one of those things is just not true. We have the evidence that these companies outperform in all different dimensions including Tobin's Q if you know what that is so like really financial outperform it's not just moral outperformance. Although now it's not considered a good measure in the academic world. It's all listen. Yeah, whatever whatever you pick people like that one doesn't count. Okay fine. I'm just saying there's a lot of study. You can return and invest to capital. It's been to study like they invest counters cyclically they have more stable earnings. They invest more in R&D just every behavior you want companies to do these companies do it more. No apparent cost or downside that's what's so crazy about it. There's doesn't seem to be an apparent trade off. So so anyway I bring that up because the same thing is true if employee ownership. There's this incredible meta analysis of all the different studies of employee owner employed on companies they grow faster they're more resilient and downturns are less likely to lay people off they make more profit. They hire employee morale obviously they're much more likely to say mission driven and they have higher longevity. I should say something there because Silicon Valley also historically because we had stock options. We do have 30% of employees owning stock which wasn't the case. Yeah many cases right. No, no, yeah, and there's a reason why I was going to say that we have this meta analysis that study 54,000 firms. It was a huge data set and found that employee ownership exhibits dose response. The more employed whatever the benefit you study the more employee ownership you have the more benefit you can. So anyway, I do invent new terminology. I call these mission locked constellations, structures that involve many different entities that are locked together to act as a bit of an immune system against corruption. Mondragon in Spain, for those of us, like a series of 90 work-or-own cooperatives with billions of euros in revenue. If I told you I was gonna start that business today, you tell me it wasn't possible. That can't possibly work. But also, there's a lot of more humble examples, think about Hershey Chocolate, obviously Patagonia is well known, but also Vanguard. Everyone here has a Vanguard, mutual fund, or ETF in their portfolio. Vanguard has a totally bizarre governance structure. So the best of those is clearly to me what I call the spiritual holding company, a constellation of multiple entities where some entity has the responsibility of being at the center to provide basically mission protection as a service to the for-profit entities under its purview. And I'd give a lot of examples of this in the book. You know, I think Novanortis, 'cause it's probably the most famous. And let me just, for those who don't know the Novanortis story, I think it's really cool. So can I tell it? - Yeah, of course. - There's two aspects of the story that I think are amazing. First thing is whenever people, whenever I talked to founders who are setting up a company, they always talked to their lawyers, they talked to bankers, they talked to investors, they get advice about what the best practices are. And those people seem like they're very smart and very well credentialed. And they always tell them the same thing. It's too early to worry about that. Don't, you know, just follow the standard practice. All these VCs who are like bold contrarians, are like, don't, you don't want to be too different from everybody else. Investors might not like it. Anyway, so investors get taught. And I always say, look, those people, I'm sure are very smart. But are you sure, before you listen to them, you got to ask yourself this one question. Are you sure you were smarter than a Nobel laureate? Because a Nobel laureate and his wife set up this structure in the 1920s for Novanortis that has just endured for a century without having the problems that everybody else seems to have. And it was a very simple idea. They got the license to produce insulin in Denmark. And they were like, look, it doesn't seem right to us that anyone should ever hold someone hostage for a life-saving medicine because they can't afford it. So we're going to put scientific research and the public interest at the center of this for-profit company. So they put a nonprofit foundation that acts as the spiritual holding company. It's not literally a holding company because it's not the, the, the, the Nobel laureates has not a wholly owned subsidiary. It is investor owned. But the foundation has this responsibility. Anyway, fast forward, almost a hundred years. And in the 90s and early 2000s, everyone remembers Farma went through this wave of mass consolidation. Now in Farma, in Farma, we have this phenomenon that is studied called killer acquisitions where companies acquire each other in order basically to shut down their R&D. I know again, it's one of these things when I tell the public about this, they're like, that can't pot. You're being so unfair. And I'm like, no, go read the studies. The studies are very clear about this. - Let's use the tech too. It's like a big tech. - All the time. - All over our economy, everywhere. So the subsidiary, the NOVO Nordisk subsidiary, the insulin maker wanted to do one of these acquisitions with what was then like the third largest Farma company in the world called Serrano. And they literally, like they brought in the bankers, they did the deal, they negotiated, they had a signed merger agreement to sell, sell NOVO Nordisk at a really high premium. I can't remember what it was, like 20, 50% premium. It was a really high premium. It was a great deal. And they had like a one last due diligence checklist item, which they clearly viewed was as an administrative effort to go to the foundation board and say, hey, we just need your approval to do this. And if you wanted to know the story, my favorite source for the story is the acquired podcast. They did a really funny episode about this episode, about this event. You can actually hear them like tell the story in a more colorful way than I can. And it's kind of like, and the board says basically, why are we doing this merger? And everyone looks at each other and they're like, we're about to make so much money. They're like, but what is the purpose of it? And they're like, do you see the bags and bags of money? Like dump trucks full of money. And the board was like, no, our job is to make sure that the purpose of this enterprise endures. So no, I remember this, my favorite part of the story is they come back a second time. See, I was like, I must not have explained it properly. Can we have a second meeting? And they bring the bankers and they do it again. Second meeting again, the board was like, what is the purpose of this? Anyway, they just said no. The merger didn't happen. Everyone was super pissed. Now, the timing of the story is incredible because at that exact same moment, the woman who invented Ozempic was two years away from fruition from her, like fruitless 13 year research journey. And so two years later, Ozempic becomes the most, you know, Ozempic wasn't first, but that the GLP one breakthrough happens. And that drug has made no of an artist, one of the largest companies in the world. Now here's a really critical part of the story. We know for sure that if Serrano had acquired Novanoires at that time, the research would have been canceled because we ran a very important natural experiment. Serrano itself was acquired two years later by Merck. And what do they do? They fired all the people, they shut down all the R&D, like we know for sure that this happened. So I like to imagine it from the point of view, Novanoires market cap crossed, you know, $600 billion before it's come down recently. But like at the moment, when it was bigger, it had a market cap bigger than the GDP of Denmark. Okay, so just at that, make a snapshot of that moment in time, how valuable to shareholders were these nonprofit trustees? They created by saying no to this merger, they created for investors $500 billion of shareholder value. The biggest lie in our modern world is that shareholder privacy benefits shareholders. It doesn't. And so we have these examples because again, and it's important people say, we just cherry picking the examples. But again, I'm just giving illustrative examples from a huge body of research, which you can go check companies with these alternative structures control, depending on you ask, like about 5% of world GDP. So we're not talking about something like a niche concern. Okay, these are like significant enterprises. But the most important thing is the current theory that we operate under our business orthodoxy says that this is impossible. They doesn't just say that having a nonprofit foundation on your company is like not as good. We would say that such companies would be out competed and therefore would go bankrupt. So the fact that there are so many of these exceptions, basically one in every industry, I think, it clues us into the fact that our modern governance orthodoxy is just, it's based on an incorrect set of premises, an incorrect foundation. And we've taken a kind of civilization level wrong turn. It's not too late. While we still can and we better make a U-turn and go back and undo. Okay, look, we could be talking hours. I know for sure because this is a passion of both of us governance. But we have to get a rapid fire questions and maybe we'll bring it back because I'm also very curious on the reaction. I mean, it is turning the tables on our traditional focus of governance. So if you succeed in your vision, corporations will change and board members will have to, there's something's gonna have to change in the market. - I certainly hope so. - Okay, so let's go to the rapid fire questions. What are the one, two, three books that have greatly influenced your life? - Oh, that's really difficult. Oh my God. Yeah, I'm a voracious reader and there's just so many great books. I mean, I think about, you know, what would I, I would never have been able to write the Lean startup if it was not for the machine that changed the world or or Tai Chi Ono's Toyota production system like these like seminal management books were like profoundly important to me. I could never have written the startup way if it wasn't for the Toyota way. That's why I wrote the book. I guess like Tito named it that way as an homage to the great Jeff Leiker in his, in his Magisterial work. It's funny 'cause Dune is back in the news, the science fiction novel, but like as a young person, I read a lot of civilization scale science fiction. I feel like that has served me really well actually in trying to imagine alternatives for our own civilization. Like I think that's a really important practice to be able to get out of the blinders we all have about what is possible. If you want something a little bit more close to our actual planet earth, there's that David, the book David Graber wrote before he died, the dawn of everything is super valuable. It has problems and so I wouldn't take it as gospel truth, but just a simple idea that our basic conception of political power relations between people, that that's been like linear set of progress or that the way we do it now is inevitable is wrong. And it just for me it was very helpful to expand my moral imagination for like water. The fact that it's like part of the human condition to experiment with governance, to experiment with different power relations and different political philosophies. When you have that insight, you start to realize corporations are each a little bubble of utopia. They're a little pollist, like a little Greek city state. Every organization encodes its own values about how humans should treat each other. And the beauty of a market system is that we can have those political differences compete in the marketplace without having to resort to violence. And there's one book that you, I don't know how I learned it from you. Either we talked about it or you wrote about it, which is James the tool in lighten capitalism. - Yes, yes. - And about the wonderful stories of these founders that created cities and towns and on the company, why don't you talk a little bit about that? I saw that you also mentioned it in your book. - Yeah, yeah, this was a very influential book in my own thinking because if you're a founder or a board member, this should be the most depressing book you'll ever read. Like worse than any Stephen King horror, okay? Because every story in this book, it's 200 years of case studies and they're all the same. It's like person, I'll tell it from the top, Robert Owen very famously takes over a bankrupt mill in Scotland in 1800. Figures out that if he treats his workers better, he was so far ahead of his time, it's unbelievable. He gets rid of corporal punishment. He reduces the work day. He provides housing and healthcare. He built one of the first pension systems in the world. He created this. like very modern management techniques. If he did that, he could make the mill more profit. With his bankrupt mill, makes it super profitable. Employee morale goes way up. Investors should be thrilled because he's making them all this extra money. But no, they're not thrilled. They're super pissed and they try to get him out. He has to get a second group of investors to buy out the first investors, including by the way, my favorite tidbits. The famous utilitarian philosopher, Jeremy Bentham is one of his investors. Okay. Like gets another new lease on life keeps going. And they just keep being like, why are you wasting all this money on employee welfare? It seems like we could make more money if you would stop that. They try to oust him. He has to get a third group of investors. He has to go find a bunch of religious investors where the only people he can find who were nutty enough to back him on this crazy quest. Meanwhile, he's minting money in this whole time. Can't find investors to want to back him. Third set of investors finally get into a theological argument with him about the nature. Anyway, just they finally get him out. And they just take the mill back to conventional practices and drive it right back into mediocrity. And Robert Owen couldn't figure out why if the logic of capitalism is competition, why we're not his fellow industrialists thrilled by his discovery. It was like imagine inventing the power loom and then you can't get other companies to adopt it, even though you show that it's more valuable. This has been happening time and time again. Whole Foods is the same way. Ben and Jerry's was the same way. Cadbury, I mean, I just this story, if a series of book is wonderful, I tell the story in my book of essay, I see the famous defense contractor, which was the largest employee owned company in America had 40,000 employees owners was minting $5 billion of revenue a year, maybe even net income a year. I was making unbelievable amounts of money. And yet the board fired the founder and took the company public without his consent so that they could return it to to quote unquote best practice governance and utterly ruined it. And anyway, it's a depressing book, but it's an important book to grapple with because if our if our mental model of capitalism was really about rewarding value creation was true, these stories would be exceedingly rare and yet they happen all the time. And yet also, if you say, well, this is just inevitable, therefore there's nothing you can do about it. Why are there all these exceptions? So to me, the whole book that I wrote is just a double mystery. Why is this so common? And why is it yet? Why is it not universal? And what can we learn from that phenomenon? All right. Who are your mentors? And what did you learn from them? Oh, I've had I've been so blessed to have such incredible mentors. You know, very famously Steve blank was one of my early teachers in the lean startup time. You know, my the original people that took a chance on me in Silicon Valley are now super successful like, you know, Canduda, who is, you know, it's not the president of Arista, the networking company was an early mentor of mine. But I've had in the in the more modern era of governance and everything. I just I feel like I've been loaded up with too many too many to name. I'm like, Oh, God, I'm going to make people so mad. You know, Melissa Beams, who's been the CEO of LTSC's been a terrific mentor of mine. And I feel like so many of the founders that I've gotten to collaborate with, you know, like Dario Amade and Brian Chesky and Matthew Prince and and Sid Subranjee, these are just some of the ones that that I mentioned in the book. You know, I've learned so much from Dustin Moskovitz at at Asana James Reinhardt at Threda. These are all people who have shown me that there is a different way to do business that doesn't require all the sacrifice in the trade office that we were taught. Like it was really their example Todd Park, former CTO of the US now founder of devoted health until history in the book. They opened my eyes to the fact that I call it harder is easier. If you're willing to make the principal choice, if you're willing at the board level, this is board stuff, if you're willing to say we are going to have a principal ethos and a long-term mission aligned with human flourishing and the integrity to defend it. That's a lot of extra work. It is a pain. But if we do that, everything else we need to accomplish as a company as an organization will get so much easier. And I'm just I'm very grateful to them for that. All right. Are there any quotes you think of often or live your life by? So many. One of my favorites. Well, let me see if I really want to say this or not. I'm trying to understand what I'm saying. I think, all right, well, since we're getting into the real stuff, I'll just I'll just tell you there's a a book of the course in miracles. It's a spirituality book. It's like known in the New Age circles in California. It's very popular. But I don't know I don't know how widely known it is outside of the other circles and it begins with a very simple quote, which is that nothing real can be threatened and nothing unreal exists. And I really feel like that there's such an elegant power in that simple statement that if you read the book carefully, you'll see it's imprint on what we're talking about because to see organizations not as sacred, beautiful organisms, but merely as like advanced financial contracts. Like I mentioned before, it's degrading because it's missing and it's actually ignoring a really important part of the reality of what we do when we govern organizations. We are birthing new beings and we are nurturing and protecting them. We don't own them and control them. We grow them. And I think that is that's one of the most transformational ideas I've ever heard of my life. Yeah. No, that's that's great. What is an unusual habit or an absurd thing that you love? Oh boy. Oh gosh, these are great. So many things. I write and work at the most, are no regular schedule whatsoever. So I have the complete opposite of the proper writers schedule where you're supposed to sit down and write pages every day. I will take a whole day and accomplish nothing and just be frustrated and piddling around the house and watching TV and playing video games and whatever. And then at 8 p.m. be like, aha, and the musul strike me and boom, out of come. So yeah, I am the most disorderly and disorganized writing processing yet somehow that's the way in which the work comes to me. So I've learned to accept it. Okay. And you put it together there. All right. Final question. Which living person do you most admire? I already named dropped so many of them. Like yeah, someone like Todd, I admire Todd so much. You know, I don't I don't put celebrity, like I feel like there's a lot of celebrities and famous people and you know activists, you know, like that I would love to name drop. But I just I've become, you know, I always say don't put people on a pedestal. And I just like, you know, I've gotten to meet so many famous people up close. And then you're like, I'm not sure. I'm not sure where as Todd has someone I've actually been in the trenches with and have seen his style of leadership and his generosity. And I just I admire him immensely. All right. Eric, I feel like this a lot more that we're going to be talking about because hopefully this is another revolution. You know, you had you've had a couple of revolutions now. Hopefully this is in my world and the governance world. So thank you very much for your time. This is an incredible book for anyone who's interested in governance. What I like about it, it actually goes into the real topics. And it's not as boring as people think it's it's actually existential and and and it's it's really foundational for people. So I'm a huge fan and I can't wait until it comes out. And thank you very much again for your time. Thank you. Thank you for the kind words. First of all, when you're an author, you work on these things for such a long time. You never know how it's going to be responded to. And one of my like dreams for this book is that you would like it. So to me that you do like it is like it's extremely validating to me. I really I appreciate it so much. And I hope that through you, so many more people who who you know as a class control one of the most important professions on this planet will get something out of it. So I'm grateful to all of them who give the ideas a chance. Thank you. Join us on www.supstack.com.