The “best practices” corrupting business, with Eric Ries and Krista Tippett

AI is full of possibilities. Enterprises run on realities. That's why Pega combines the world's most powerful AI with the governance, transparency, and control enterprises demand. So you can move faster, adapt faster, and scale AI with confidence. All the power of AI, none of the uncertainty. Learn more at pega.com slash AI. Companies that have been rated to have good governance have performed worse for their shareholders than companies rated to have bad governance. Costco has terrible governance. Patagonia, if it was rated, would have the worst possible governance because we live in the era of shareholder primacy. If companies cannot be instantaneously bullied to do whatever shareholders demand, that's considered bad governance. So we glorify weak leadership, weak structure, weak cultures. But is that really what we want? That's Eric Ries, author of The Lean Startup. Recorded live at the Masters of Scale Summit in San Francisco. In this special episode, Eric talks with Krista Tippett, host of podcast On Being and National Humanities Medal recipient about his new book, Incorruptible, and why some of the business world's most common best practices need to be reconsidered. Pointing to real world data, Eric challenges all of us to rethink basic assumptions about what fuels success, whether our motivations and capabilities are pointed in the right direction and what drives true long-term value. The implications for the future of our society are intense and the urgency in an AI era is high. So let's get to it. Here's Krista and Eric. This is the segment of Masters of Scale where we ponder a catastrophic blind spot in what you think you may know about the greatness of scale. Eric, you've written this book, Incorruptible, Why Good Companies Go Bad and How Great Companies Stay Great. And you say that the book is littered with open secrets and hidden truths. This book also is a bit of, I don't know, an evolution, a corrective to a lot of the wisdom that you have imparted across years helping people create value and grow and scale. I don't write anything except for my own personal suffering and pain. You know, the curse and the blessing of being known for 15 years now as the lean startup guy is that every day of my life, without exception, somebody calls me for advice about how to start a company or revitalize an existing company or work in a government or nonprofit. I mean, it's just been an incredible variety of things. I've helped hundreds of people, thousands of people I've lost track, create companies and become incredibly wealthy and have all this success. And I'm immensely proud of all that. That's been wonderful. And I've seen the dark side of this business too because so many of those companies have been destroyed. And they didn't, you know, some of them failed because they didn't do a good job creating fine customers. And destroyed even while they were succeeding. It was their very success that led to their failure. It was scale that ultimately was their undoing. And we're not supposed to talk about that. I feel like it's like a taboo subject. But all of us have had the experience. I've been on book tours. I've been on a book tour now a few months. And I do this with audiences all over the top. If I ask people, raise your hand if you have like a favorite product. Everyone has a favorite product. Was it successful? Did it scale? Did it raise money? Was it taken over by private equity? Did it go public and acquired by a public company? Everyone's got a story like that, right? All of you do? I say, great. Can anyone just tell me a quick story about a time where thanks to that massive infusion of financial resources, the product got better? Why is it funny? Why are you laughing? Why is it funny? We all know that this, we're like swimming in. We just take it for granted. Yeah, of course. Of course, when companies get to a certain size, of course, they become extractive. Of course, they become, but why is it an of course? Yeah. I think this is a massive error where we're like killing the golden goose on an industrial scale. And I mean, the word corruption is big. Yeah. And, but you have come to understand it as a proximate condition for every entrepreneur and founder. And I'm going to read a little bit. You said, we're all one acquisition, one IPO, one board meeting away from watching something we love turn into a success. Turn into something we hate. Yeah. But we lack the vocabulary to call it what it really is. Mission drift sounds like a navigation error. Bureaucracy sounds like paperwork. Neither captures the gut punch of betrayal when something precious is corroded beyond recognition. And you say, let's call that corruption. Yeah. It was hard for me to write that actually, because a lot, you know, you may have heard I'm a big believer in feedback and I had hundreds of people test, read this manuscript. So I really know how people responded to it. And a lot of people were like, you can't do that. You're not allowed to use the word corruption that way. That's not what it means. I said, well, that's not what it means anymore. But our grandparents and our great grandparents would have had no trouble with this. We are confused. We're the ones who are confused, but they would have understood that when somebody finds a way to make money for themselves by destroying value, that is a corruption of the moral law and that is the logic of our entire economic system. And we have to stop celebrating it. You got to stop. Thank you, right? Enough. So you speak of something called financial gravity, which has come to make this kind of corruption feel inevitable. It does feel that way. So what are the laws of financial gravity? Okay, so I use the metaphor of financial gravity because we love, when we talk about scale organization, we love talking about the surface characteristics. I mean, look, me too. What's fun to talk about? Strategy, personalities, founders, vision, business model. It's fun, right? But those are the surface characteristics. There are forces that operate beneath the surface, that operate on organizations, that cause them to conform to a common shape, a common kind of dismal shape. I call it financial gravity because just like physical gravity, you can tell me, oh, I don't believe in gravity. But guess what? Gravity believes in you. As you will discover, if you try to jump up, you're coming right back down. Well, organizations are the same way. And so what is financial gravity? It is the psychological force, psychological pressure by which values are transmitted from those who have resources to those who want resources. And if you've ever seen someone like meet a celebrity for the first time, or to meet a billionaire for the first time, it's like kind of gross. All of a sudden they're like, oh, what can I do to please you? Like they become sycophantic in a weird way. And if you ask them afterwards, like, why did you do that? They don't know. It's hardwired into our psychology. And so that's fine. It's funny when an individual person does it. But of course, when we have a whole organization that does it, how many of you have been in a meeting in an organization, whether you're a nonprofit, government, for-profit, it makes no difference, where people say, oh, I think we should do something. And someone else would be like, I don't know. The market might not like it. Right, right. The donors might not like it. I might say, oh, you've interrogated the donors to find out what they, no, no, no. I just have this feeling that they might. It's like, there's this ghost. That is participating now in every meeting and every decision that we make. And it's not conscious, but it doesn't mean it's not real. And shareholder primacy, right? That is one of the laws of financial gravity. I mean, you say a lot of, like, basically un-American things. Hey, hey. Not all forms of money-making are equal. Some create wealth. Others merely distribute or destroy it. Yeah. You know, you redefine profit as the surplus of human flourishing that an organization creates. And, I mean, we live in a secularizing world, but this world pays homage to profit and people who make it. Yeah. And the market is more omnipotent and omnipresent than God ever was. Yeah. Yeah, it is, it was challenging to write about this in such a way that it could be understood in a secular way and also in a non-secular way. Because I actually think all of the writing, all the studies, all the research that came to bear, like, it can be understood in purely materialistic terms. For example, one of the ideas in the book is that an organization is actually a vital living thing. It is a superorganism. It has its own sense of a moral compass. It has its own drive. And any of you who have ever tried to change an organization know how wickedly hard that can be. It's like, who are you wrestling with? Like, what is the source of that inertia? It is because the thing is, the thing is alive. Now, that sounds a little bit metaphysical. And if you want to interpret it that way, you have my blessing to do so. But actually, we have really good science on this point also. We know a lot about the science of emergent intelligence, which is what these things are. So a big part of the book to me was just grappling with what is our work? What is an organization, like, in a deep way? And what's sad is this idea that an organization is vital living, like, if you ask most entrepreneurs, most board members, most leaders, what is an organization? They'll be like, oh, yeah, a vital living thing. A vital living thing designed to create really awesome products to make its customers' lives better and to make money by doing so. Some of you feel that way, right? Yeah. Suckers. Oh, you think that's what it is? No, my friends. We live in the era of what's called shareholder primacy, which holds that, oh, no, an organization is nothing more than a financial instrument designed to enrich its shareholders. That is the legal doctrine in this country. But it's funny you call these ideas un-American. I disagree. This is a very new idea. When you're walking around the Presidio, you will see almost every, The tree in the Presidio is older idea of shareholder primacy. It's actually a very recent idea. And just to give a little bit of the history here. It's un-American in terms of Milton Friedman as the prophet. Why did Milton Friedman get to define these terms, but we don't have the power to redefine them? Yeah. No, no, absolutely not. So just to give you a sense of this, okay, in the 19th century in America, if you wanted to start a company, you had to get special permission. You had to show to your state legislature why the company existed to do a specific thing, not just to make money. And that specific thing had to have what we would now call a defined public benefit. If you were like in the 1850s, if you were the richest man in America and you decided, you know what I'm going to do? I'm going to borrow a bunch of money to take over some company and change its mission from whatever it was meant to do to just to enrich me and my shareholder buddies. That would have been considered a crime and the courts would void your charter as beyond the scope of what was authorized. This didn't change until the rise of what we call general incorporation, which came to Delaware in 1899. So this is not ancient history. This is actually relatively recent. And the greatest era of American prosperity is between the advent of general incorporation, which was pretty good and the rise of shareholder primacy. Like we had this brief period where we democratize access to the means of production to be able to create, anyone to pursue some specific purpose. I just let's go back to that. See, we're ready. We're ready. It's time. Let's go. When you are ready to incorporate your business, Stripe is ready for what's next with Stripe Atlas. Start your company with incorporation, founder equity setup and startup legal documents all in one guided. And once your company is formed, which for most people happens in just one day, you're ready to begin accepting payments on day one. More than one in four new Delaware corporations is formed with Stripe Atlas. Learn more at stripe.com slash Atlas. Every business hits the same wall the moment your business outgrows the systems that got you here. 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Every week, I sit down with the pioneers shaping our future and we take you behind the scenes of the AI that's transforming our lives. Find Pioneers of AI wherever you tune in. One of the things you told me backstage is that young people are loving this book and that's very interesting. You're not against companies that grow and build and turn a profit, but the dark side of scaling is, as you said, you wrote The Lean Startup to do those things, but what you hadn't accounted for is what happens next that can imperil everything that came before, every good intention, every beautiful vision. Yeah, so if you ask most normal people, not us in the business, but normal people who work for a living, what is going on with our economy? I've had cab drivers and baggage handlers explain this to me with much greater clarity than all these fancy people I meet in DC or whatever. What is going on with the economy? Yes, once something scales, once money gets its grips in that, it's greedy. But those same people who will tell you that this is an inevitable force of capitalism, if you say, well, are there any exceptions to that rule that you can think of? They'll be like, oh yeah, Costco. But you just told me once a company goes public and gets really big, it will become a big company. I'm like, oh yeah, Costco. It's promises are, yeah, but not Costco. Well, how can something that's inevitable have an exception? I'm like, I don't know. I guess just, you know, I don't know, maybe Costco is just too big for Wall Street to mess with. Yeah, you laugh. It's like, that's ridiculous. Ain't nothing on God's green earth that's too big for Wall Street to mess with. You got to be kidding me. And in fact, if you study Costco or many of the other exceptional companies. I mean, you also like Patagonia, Ikea, Novo Nordisk. Novo Nordisk has been going for more than 100 years. Credit unions, them. Yeah, just these, there's these exceptional organizations that seem to be immune to financial gravity. So how can there be exceptions to a rule that's inevitable? Obviously, it's not inevitable. There must be conditions under which this happens and doesn't happen. Yeah, I say you right. They violate these, these outliers, which are multitudinous, violate practically every conventional business best practice we've been taught. And then period that I, in my ignorance used to teach. I was told they were the best practices. Best is right in the name. So how could they not be the best? I, of course I taught them. That's what they're the best. And you, one of the hardest things people have to grapple with, with this book is like, you have to be open-minded to the possibility that you've been taught an error. Nobody wants to hear that. I know, I'm sorry, but we actually have tremendous evidence. There's a whole chart in the book. It's just called best practices, destroy shareholder value. And it's just practice, practice. And it's not my opinion, man. These are like, there's academic research about these things. So for example, just to give you one idea to, to take home with you since 2008, which is not an inconsiderable data set. Now, companies that have been rated to have good governance have performed worse for their shareholders than companies rated to have bad governance. Patagonia, if it was rated would have the worst possible governance because we live in the era of shareholder primacy. So we glorify weak leadership, structure, weak cultures. But is that really what we want as leaders for ourselves? No. And you also say that there's so many objections that get made, right? And it really is like, it's gravity. It's financial gravity. It's, it's inevitable. And you say harder is easier. Yeah. Has anyone stopped to ask why business is like, it's so difficult, right? Why is everything so hard? Could it be that all that mistrust and friction comes at a cost? Yeah, this, I was really surprised how many stories in the book come down to a leader who's willing to say, like someone comes to you and says, look, I get that you believe in design or treating people right or not poisoning our customers or whatever, but it's so much harder to do. It would just be so much easier if we, you know, just poise them a little bit. They probably won't notice. And we've, we've been trained that that's a best practice. Why? Because we're not poisoning my customers, has an, a intangible return, but a very tangible cost. So we've been taught to ignore the most underrated and most valuable asset of all for organizations, which is trustworthiness. If an organization cannot be trusted, it ultimately cannot endure for any period of time. So we have to get used to seeing that these. We're not enduring it in a, with an ethos. With an ethos. With which its visionaries would recognize it or be proud of it, I think is the story you tell. Well, yeah. No, thank you for that. Like, yeah, ethos is really a key word in the book because organizations have a character. They stand for something or they don't. And so many of us have lived through watching once great companies like fall into disrepair. And we teach this in schools often as like an ethics question. So like, think about the loss of the don't be evil ethos at Google. Everyone remember don't be evil? Like whatever happened to that, you know? And it was also really vague. Can I say like evil was never defined? Right. It was like, And it was a negative negative? It was not the best way to define an ethos. And of course, it was eventually lost. Of course, that's been sad because of the scandals that eventually, you know, they got themselves into. But I want you to see it as an economic disaster. Because if you study the rise of generative AI, now the transformer technology powering this entire wave was invented at Google. All eight of the co-authors of the original transformer paper left Google before the rise of Google. And I think that's one of the reasons why I'm so proud to be a co-author. So how expensive of a business mistake was it to lose that ethos? I think, depending on how you count, it was a mistake between $1 and $10 trillion of lost opportunity to Google. So this is not just an ethical thing or a moral thing, although I personally think it's perfectly fine to do something just because it's the morally right thing to do. But this is not one of those times where we have to choose. We actually have tremendous evidence, and the book is loaded with it, a lot of footnotes if you want to check it out, that companies that are able to consistently stand for something and do the right thing, they build up this asset of trust where they that actually powers their success and gives them competitive advantages. I just say you need to read the book to learn about how to build a governance fortress, a mission lock vehicle to preserve what you call the culture bank, and even a spiritual holding company. I mean, you're creating something called the long-term stock exchange, and you mentioned that the same people who are pursuing the key to immortality have heard your idea of a long-term stock exchange and asked you if that's realistic. Yeah, it's true. It's a true story, I swear to God. I imagine that might happen with the spiritual holding company as well. You know, something I've been aware of this because I've spent much of my life more in the nonprofit world, and all of this applies. This scaling issue applies to social entrepreneurialism, to the nonprofit sector. I want to read something you wrote, which feels especially relevant. You say, we birth organizations. We do not own them. Like children, they develop their own character, inevitably absorbing ideas and values from the environment around them. One thing we know about children is they don't actually do what we program them to do, or they don't actually listen to what we say, but what they do to an extent that is uncomfortable is they watch our behavior. I was thinking about how, you know, I think a lot these days about Einstein observed as the arms race of his generation took off, that he said science in this generation has become like a razor blade in the hands of a three-year-old. And we can't actually allow the technology of our age to become like a razor blade in the hands of a three-year-old. Also because we're dealing with agents who are kind of acting like toddlers or delinquent adolescents. I would swap them for toddlers if I could get them. You would swap them for toddlers. I could, you know, that would be an upgrade. Oh my God. I mean, yeah, just let's talk a little bit about, you know, that notion and how you're specifically looking at this astonishing development of our lifetime in business. Yeah, I think the urgency is off the charts. And the way you can tell how people are going to feel about AI, people wonder like, why is there this massive backlash to AI? All you have to do is ask people if they think the social media era went well. Anyone feel like that was a big success? All of our hopes and dreams were realized. Like there's nobody except the people that like are on those boards who think that. It's actually like, incredible to me. And yet we're like, well, let's run that play again. But with a technology that is potentially a hundred times, a million times more devastating. And I know I was, I got called by the Wall Street Journal the other day to ask, wanted me to comment on all these people in New York who have gotten religion about AI doom. And so we're buying gold bars and guns and stuff and stockpiling it. And I was like that, if this goes badly, that's not going to help you. You know, this, you're not going to be able, this is not, this is not that kind of disaster. This is not something you prep for. This is something you have to prevent. You have to prevent it by governing the technology. But who govern, thank you. Thank you. But, but who governs the governors? Who aligns the aligners? This is actually a corporate governance problem. This technology, every single piece of it is being created by corporations. Corporations are the very first artificial intelligence we ever had on this planet. And we're not doing it well because we're teaching them this sociopathic set of best practices. So, yeah. So I recommend we change course urgently. And they're teaching their creations. Of course they are. And you make a case in the book, and I say, you know, you start talking about governance, governance, how important it is, and, you know, your eyes close up, my eyes close up. I'm sorry, it is very boring. But you really make a case for it being so important in doing, being done well to not separate governance from purpose and mission. We have to finish, but I want to say, you know, I think that, you know, the industry and the companies represented in this room are the superpowers of this century, which is also something that we're grappling with. And we're going to co-create the future with these technologies. And, you know, you've said, like, we were already going to have to recreate all of our institutions and civic infrastructure. So I feel like this offering of yours is so important, not just for corporate health, but for social health. And thank you for writing the book. Oh, gosh, thank you so much. Thank you. I really appreciate it. So how rampant is corruption in business? As Eric defines the term, it's hard to argue about widespread implications. The easy road is to accept all the, quote, rules and best practices. The hard road is to question everything. But maybe the hard road is what we need. I'm taken by Krista's connecting of Eric's business observations to social health. Business has so much influence in our world. And with that influence comes responsibility. How we address that responsibility will define our long-term bottom line and our future. I'm Bob Safian. Thanks for listening. I'm Bob Safian. I'll see you next time. Our executive producer is Eve Trow. Our senior producer is Alex Morris. And our associate producer is Masha Makutonina. Mixing and mastering by Aaron Bastinelli and Brian Pugh. Our theme music is by Ryan Holiday. For more, visit rapidresponseshow.com. Thank you.