Transcript from Eric Ries AMA: Trustworthiness Is the Most Underrated Asset in Business

A live recorded conversation on UpTrust between Pete Michaud and Eric Ries.

Watch the recording or see the original AMA post, where the live questions came from.

The Mistake Frankenstein Makes with His Monster

[00:00:00]

Pete Michaud: Hey there, Eric. Thank you for being here.

Eric Ries: Hey, my pleasure.

Pete: For most people watching, you probably don’t require any introduction, but let me introduce you anyway. Eric Ries — I think you first came to prominence with The Lean Startup, which was a book, and I’m going to broadly call it a startup ideology, or a framework. And now your latest thing is called Incorruptible — incorruptible organizations — and I think we’re going to mostly talk about that. Thanks for being here.

Eric: My pleasure. Nice to be here. And congrats on a lot.

Pete: Thanks. Okay, let me just jump in. Your current project is Incorruptible, and it’s about — you’re starting a company, and you don’t want it to be taken over, or enshittified, or corrupt. So just to tee you up with an easy one: why isn’t this book one sentence long, and the sentence is don’t do bad things?

Eric: Right. If it was that simple, we’d be set. Look, I think there are probably a lot of people watching for whom that is confusing. There’s this question about when a company does something bad, who’s responsible — and look, I’m not saying there shouldn’t be accountability for the leadership of an organization. Obviously leadership has tremendous influence. But what’s strange is that I’ve been around these companies a long time now, and I’ve seen many, many people who were quite idealistic build a company and have it grow into something that they come to despise. And of course you can say they made mistakes. That’s really easy — well, they should have done this, should have done that. But if you really dig into a lot of these stories, what you’ll see is kind of like the mistake that Frankenstein makes with his monster: they built something they could not control, and then tried, unsuccessfully, to control it.

Now, look, there are some leaders who are sociopathic. There are some people who intended to do harm, and succeeded. So I don’t think that’s true of every single leader — but it’s more common than people realize. And so one of the things I’ve been working on for many years now is: what are the structural incentives, the underlying physical forces, that are dragging these companies into this end state?

You said, very naturally, that these behaviors are corrupt behavior, which I appreciate — because for me that was a really hard intellectual step to take. To say: look, this is not just about mission drift or bureaucracy, or something kind of nice to have. This strikes right to the heart of what it means to be a for-profit company. It strikes right to the heart of our entire economic and political system. If transactions become extractive and exploitative, that becomes a way of making money. Then the pressure and the gravity of that way of working becomes overwhelming — and frankly, value-destroying.

They Didn’t Need the Money

[00:03:08]

Pete: Okay, let’s talk about the overwhelming. I think there are very clear ways to talk about the pressure. For example, we’re on UpTrust right now — this is being displayed on UpTrust, and UpTrust is a company. Our intention with it is to make social media good instead of bad. However, we are under the constraints that basically every company is under. For example, we have to have money to survive as a company. And so there have been times, and there will be times in the future, when we might be able to do something dubious. You can say, well, just don’t do that. And my response is: sure — but would you do it in exchange for money? You can say no. But would you do it in exchange for the money you need to continue doing this thing at all? It’s a harder question.

So one of the ways I think about Incorruptible is that some of these things are tying yourself to a mast — pre-committing to doing the right thing even when it would be expedient not to. Not because I’m corrupt, but because I might be tempted to keep employing all the people who work for me, rather than telling them all to go home and find different jobs.

Eric: Right — exactly. So let’s break it down, because in the book I talk a lot about organizations that fall to corruption, and I tell the story of how it happened. And there are of course some companies that fell for bad reasons — or, as you say, they were forced to make a compromise because they had no other choice. That happens sometimes. But the vast majority of the stories that I tell in the book are companies that did not need the money. They didn’t have to give in to corruption. They did it anyway.

And I think the reason mission-driven, social-impact entrepreneurs have been so ineffectual in shifting this business culture is that we don’t recognize what we’re up against. We’re not actually clear-eyed about the situation today. We are teaching a generation of entrepreneurs and business leaders and MBAs a set of business best practices that is antithetical to the essential alchemy of capitalism — which is to put value creation at the center of everything it does. We’re teaching best practices that are destructive. And therefore, when they get into positions of success, they’re being told that they must sacrifice for the sake of these best practices — when in fact it’s not true. So a big part of what we have to do is try to understand these deeper forces, figure out how we got into this situation, and through that analysis figure out how to get out.

I’ll give an example. This is actually a story I had to cut from the book, so it didn’t make it into the final manuscript, but I thought it was really interesting. There was a startup called Practice Fusion a few years ago — a high-flying unicorn private company. Raised a lot of venture capital, was doing really well. And then they got tied up in the Purdue Pharma scandal, and they got blown up. Basically what happened was Purdue Pharma came to them and asked them to push opioids on doctors as part of their electronic health record system. When you were a doctor, you’d log in and you’d see ads and recommendations for Purdue Pharma. They shouldn’t have done that — it was an illegal deal. When it came out, when Purdue went down in flames, they were collateral damage to the scandal.

Here’s what I want to focus on. They’re a huge, successful unicorn company. Purdue Pharma paid them one million dollars — put on your best Dr. Evil face, one million dollars — to do this corruption. Why did they say yes, for a mil? The only possible explanation for why you would say yes in that situation is that the person making the decision felt like it was their job, their fiduciary duty, to make as much money as possible. Not to achieve the mission — to make the money. Now, I’m sure they rationalized it to themselves: this money will help us achieve the mission — without really considering the externalities, the consequences of taking that money in. That’s very common. That is really considered to be a best practice.

And I saw an interview with the founder some years later. They were asked to reflect on the mistakes they made, and they were giving advice to the next generation of founders — and it was good advice, like: be very careful who you take on as an investor. But it was all personal advice. Here’s how you, as an individual person, need to have integrity in the face of these systems. There was not one word about the structural changes that are needed to resist this at an institutional level. And that is very, very, very common. Having interviewed many, many successful mission-driven founders — even the ones who have been betrayed, even the ones who have been fired, even the ones who had activists take their company apart — they very rarely see the structural element of that outcome. And I think I understand why: it’s psychologically too painful to imagine that it could have been different if they had made different choices, especially because, as it was happening, all of their highly paid advisors were telling them to follow the best practices.

So this is not something that can just be solved through something easy. As a community of leaders, as a community of founders — as a generation of founders, really — we have to take back what has been taken from us. Which is a clear-eyed understanding of what it means to do business in the first place. We’ve taken a civilization-level wrong turn on some of these concepts, and we have to reclaim them for ourselves.

To Make a Profit Is to Maximize Human Flourishing

[00:09:09]

Pete: And what I heard you say earlier is that part of this reclamation is that what we’re trying to do, ideally, is create value for people. I was going to say in the economy, but even that’s too abstract. It’s like: look, we’re some people, we’re trying to do some stuff in the world that helps other people. And almost as a side effect of that, we’re going to accrue some of that value, hopefully, so we can keep doing it. And that’s going to be mostly denominated in dollars — but that’s a side effect.

Eric: Yes. The way I would put it is that what it means to make a profit is to maximize human flourishing. That’s actually the correct definition of it. And so many ways of making money that we have gotten used to in our economy today are much closer to theft than they are to value creation. At best, they’re just moving money from one pocket to another — but they don’t create anything new. A lot of these ways of making money, by the way, our grandparents would have seen as either borderline criminal or outright crimes. Many, many ways of making money today were illegal in the very recent past.

I always ask people, when they’re learning about corporate governance best practices, to look outside the nearest window. If you can see a tree, you’re probably seeing something older than our modern best practices. They’re very, very recent. What’s interesting about our moment in history is that they’re recent enough to be changeable, but they’re old enough to have been studied. I have a table in the book called Best Practices Destroy Shareholder Value, and I just list a whole bunch of these best practices and the corresponding academic studies that show that each of them is destroying shareholder value. One of my favorites: there’s a study that shows that companies rated to have good governance have underperformed companies with bad governance since 2008. Isn’t that interesting? But governance is supposed to produce shareholder performance — that’s the whole theory of shareholder primacy. So some very basic assumptions about what we think we’re doing at the board level, at the executive level, in terms of culture, in terms of fundraising, in terms of the relationship between companies and investors, are founded on faulty premises. We can do a lot better than this.

Build Something You Can Protect

[00:11:27]

Pete: Okay. Let’s start with the basics. If I’m starting a company and I want it to be incorruptible, what’s the MVP version of making my company incorruptible? What’s my low-hanging fruit?

Eric: There are a lot of really easy things you can do — but we’re going to start with a but first. It’s not a one-weird-trick kind of situation where if you just do one thing, you’re set. In fact, I was just corresponding with one of the architects of the Public Benefit Corp legislation, and he was telling me — he hadn’t even read the book yet — Listen, I’m all for PBCs, they’re really great, but everyone thinks they’re a silver bullet. They’re not a silver bullet. You have to do the other stuff. I was like, I know, man, I’m with you. I wrote a whole book about it — take a look at my manuscript, please.

So, broadly speaking, the blueprint is as follows. We tend to think of governance and operations as two separate domains. Operators are CTOs, product people, marketing people, executives, general managers. Governance people are lawyers, finance people, board members — they kind of fuss over the legal documents. And in a lot of companies, frankly, the opposition between these two groups leads to a lot of problems. But in the book, I argue that these two are actually two sides of the same coin, and we have to have an integrated approach. Which is why the first step in building something incorruptible is to build something worth protecting. That’s really more about ethos and strategy and mission and purpose. And then once we have accomplished that — we have the inner strength to resist temptation, we’ve got a clear-eyed North Star about what we’re trying to accomplish — then we can work on protecting it with structural integrity from outside pressure.

So, for example, something like the Public Benefit Corp conversion — that’s a legal tool in the domain of protection, of structural integrity. And there are a bunch of things in that category: a board mission pledge, what are called industrial foundations, purpose trusts. We can talk about that as much as people want to — I think that stuff is super cool. But what’s really, really important for people to remember is that those structures can only protect a preexisting ethos. They can’t cause it to come into effect.

I was just talking with Reid Hoffman this morning at a different event, and we were talking about how in Silicon Valley we tend to treat mission and purpose as distinct from culture — he was saying culture is distinct from strategy. And I proposed the following thought experiment, which I’ll share with you. If they were really independent, you could take a strong-culture company like Patagonia and say: everybody, I want to keep the culture the same, but we’re changing missions. We’re not going to be environmentalists anymore — we’re going all in on fossil fuels.

Pete: Right.

Eric: That’s nonsensical. That wouldn’t work, right? You couldn’t maintain that culture in the presence of a different mission. And conversely, if you take a company that’s got a really dysfunctional culture and say, well, now we have a really lofty mission — that doesn’t magically fix the cultural issues. The cultural issues are what they are. The two things are intrinsically linked, and oftentimes the bad culture is a consequence of mission error, or vice versa — having a bad culture causes you to start making strategy mistakes, because you’re in the grip of a wrong idea about what the nature of the company is.

Big-Co Disease Can Be Avoided

[00:14:55]

Pete: This feels — not exactly the same, but very related to the borderline criminal, or morally criminal, type of companies. Patagonia, if it were a morally criminal type of company — which it’s not — would create that kind of culture.

Eric: Yeah. What’s funny is we know exactly what would happen. Because if I tell you that a certain company, without naming the name, has succumbed to big-co disease — you already know what I mean. Nobody I’ve ever said that to has failed to figure out what I’m talking about. So first of all, that’s really telling. Because all these different companies that get big — they start in different industries, with different strategies, different missions. They’re so different and diverse. And yet if I tell you they have this disease, we know they all wind up in the same place. That says to me that there must be a force aligning them behind the scenes. Otherwise, they would start out varied and they would end varied, and their dysfunctions would be many. But the dysfunctions are actually very similar. I know whereof I speak — I’ve been behind the firewall at many, many big companies, and most of them are indistinguishable.

However, the fact that we can distinguish this as a disease means that at some level, we understand that it’s not inevitable. Patagonia is a multi-billion-dollar company, and it doesn’t have the disease. Novo Nordisk is a hundred-year-old company, and it doesn’t have the disease. Vanguard is fifty years old now, in financial services, with trillions of dollars under management — and somehow doesn’t have the disease. So you have these outliers that we all vaguely know are outliers, and yet we don’t really try to emulate them. In fact, if you’re an entrepreneur and you try consciously to emulate one of these companies, your own advisors and lawyers and investors will tell you not to, because they violate the best practices. And it doesn’t matter which one we’re talking about — Patagonia, Vanguard. Even if you’re like, I want to build the next Costco, people are like, That’s a great idea. I definitely want the upside of that — but I’d recommend you don’t follow the structure of Costco, because it violates best practices. I could name so many great companies that don’t follow the best practices. We vaguely know they’re there, but we don’t emulate what they do.

So one of the things we have to do is stop treating these companies as exceptions that prove the rule, and start asking ourselves: is that rule sensible? Is that actually a good rule? Because if these things were inevitable, they wouldn’t be exceptions. So therefore they must not be inevitable. And therefore we can start to ask the question: if they’re not inevitable, under what conditions does the bad thing happen, and under what conditions does the good thing happen? And having done that research, I found the results pretty interesting.

Pete: So — it’s broad, you wrote a whole book about it, I get that. But if you had to name the killer incentive gradients that all lead to big-co: what are the things that Patagonia and Vanguard are doing right? Or what are they not doing wrong, is really what I’m asking.

Eric: Yeah, exactly. I do think a lot of these things companies generally have when they’re small — it’s very common for them to have a pretty strong ethos. So think about it from the inside out, on a spectrum from most under leadership’s control to least. The thing that is most under the control of leadership is actually not strategy or mission or culture, any of that stuff. It’s simply: what is our intention? Why are we starting this company?

The Purpose of Hellmann’s Mayonnaise

[00:18:24]

Eric: And it’s so interesting that that question has become almost a punchline in governance circles. A lot of ESG discourse has become frankly ridiculous, so I get why people are like, oh God, none of that ESG stuff — believe me, I get it. But there was a big-time investor the other day who put out a statement complaining about Unilever, the big food company. Because Unilever was on this kick for a while that they were going to infuse purpose into every one of their products. And the investor was like: you’ve got to be kidding me. At the point that we’re talking about the quote-unquote purpose of Hellmann’s mayonnaise, we have lost the plot. And I was like, man, I hear you. But actually, of all the things he could have picked to criticize — Hellmann’s mayonnaise, humble though it may be, is food. So actually, its purpose is very clear. Its purpose is to nourish and delight the human beings who eat it.

And this investor — I never talked to him about it, I don’t know — but he probably would say: no, it isn’t. Its purpose is to make money for me. Now, this is something that’s very hard for normal people to understand, but I want to really emphasize this point. Most governance experts today consider it just an obvious thing that everyone knows: that companies should only care about the welfare of their customers insofar as that benefits their shareholders. And when you really think about the implications of this, it’s crazy. But they consider it super obvious, and they get really annoyed every time someone questions it.

If They Can Get Away with It, They Can Kill You

[00:19:57]

Eric: So literally, every time you swallow a pill, or eat Hellmann’s mayonnaise, or fly on a plane — any action you take — you are investing your life in this web of institutional trust: that it’s going to lift you up and take care of you. And yet we have now entered into this ideology — I’d use the word ideology, a global ideology — that says if the government fails to put sufficient penalties on misbehavior, companies not only are allowed to, but are expected to — even obligated to — exploit those loopholes to the maximum degree.

We all grew up under the reign of something called caveat venditor. That’s a fancy Latin phrase — but everyone knows caveat emptor, the phrase buyer beware. For most of human history, caveat emptor was the rule. Let the buyer beware: the seller has no obligation to you. If you buy a lemon, if you buy something poisonous — well, you should have done your homework. Modern life is made possible by the institutional trust of the change to vendor liability, which basically says: no, sorry. Our grandparents really worked this out — they worked it out the hard way, believe me. No, you cannot sell scam stocks to the public. You cannot sell unhealthy supplements. They really worked out a lot of these rules. And so we all grew up in this very soft world, where a whole huge apparatus exists to take care of us every time we interact with a corporation. And yet shareholder primacy has been reversing this safety net, inexorably, by changing the rule to: well, actually, if they can get away with it, they can kill you.

Never Once Has Any Legislature Said This Is a Good Idea

[00:21:43]

Pete: Why did this happen?

Eric: Why did it happen? So — I talked about the inner intention. The most important question is: what is the purpose of a corporation? People think purpose is so vague, but it’s not vague. Purpose is written into the corporate charter. And unfortunately, starting in the 1980s — not the 1880s, the 1980s — a series of academics and judges effectively decided that even though most corporate charters today say something like Acme Company is hereby incorporated to pursue any lawful act or purpose — so, basically, do whatever it wants — even though that’s what it says, they interpreted it to mean: it exists to maximize shareholder value. That’s the rule. And it’s kind of wild that people can’t even agree about whether this is the law of the land or not — because it was never enacted by any legislative act. Never once in human history has any referendum or legislature said this is a good idea. It was done without any democratic sovereignty at all.

And it’s important to understand that this is not only a recent change — it replaced a system that was fought for statehouse by statehouse in the United States. It has tremendous democratic legitimacy. It was called general incorporation. The idea was that any person should be allowed to form a company for any purpose — but you still had to say what the purpose was. If you had told people in that era that one day there would be corporations that exist only to enrich their shareholders, they’d have been like: why? What is the point of that? That’s not allowed. That’s not what we had in mind. It’s incredible — in the late 19th century, that was considered a crime.

And there are these crazy stories from the 19th century where people used to try to take over companies. Super-rich people would show up and try to buy out a company, force it to do something terrible — and the company would resist with techniques and tactics that were super unethical. Bad behavior on both sides. They would literally have a war between the two, involving bribing legislatures and all kinds of nasty stuff on both sides. People at the time were like, Ooh, this is really lame. We’ve got to have some ethical rules here. People would complain about it. But no one ever said, well, gosh, the shareholder is doing the thing they’re supposed to do, and the board is breaching their fiduciary duty. No — everyone understood that both sides had the right, and were obligated, to pursue their side of it. Whereas today, as soon as Elon Musk wants to take over Twitter, we literally believe it is the fiduciary duty of the board of Twitter to get the highest price from him, no matter what. In fact, that duty is so strong they had to sue him to complete the transaction when he tried to back out of it, if you recall.

So we have this monumental change in the nature of corporate purpose that happened in living memory — and yet it was done kind of by a sleight of hand. Most people don’t realize that this is a change. They don’t know this prior history, and they think this is an essential element of capitalism. It’s why young people have turned against capitalism almost universally: they see all these private equity companies ruining their favorite brands and driving them into the ground, and they’re like, how is that value creation? It’s not an essential element. That kind of behavior would have been literally illegal in our grandparents’ time.

So it starts with the purpose — what are we actually trying to do? Then, as we move outward, we can get into strategy, mission, management systems, culture, investors, all that stuff.

Mission-Driven or Just Mission Hopeful?

[00:25:11]

Pete: One side note I wanted to comment on — you kind of alluded to it before. I think a lot of the time, these corporate drives toward okay, let’s be mission-driven now, or let’s make a purpose, are lost causes. They aren’t real. The Hellmann’s mayonnaise example you gave could be real. Somebody at the helm of the Hellmann’s division of Unilever could be like: I actually want to nourish and delight people. How do we get there? Let’s actually figure this out together. But I think a lot of the time, the unspoken reality is: okay, how do we keep doing exactly all the same shit that we’re doing? Let’s make a statement.

Eric: No, totally. That is very real. And I have a whole section of the book called They Are Lying to You. Because whatever role or relationship we have with a company — as consumers, as employees, as potential employees, as executives, as board members — it’s very important to evaluate whether the promises it’s making to you are true, so that you can decide whether to invest it with your trust or not. Trustworthiness is the most underrated asset in business today. It is the magnetic power that makes so many incredible results possible — I talk about that a lot in the book. And yet we give it away so cheaply, because we can’t tell who’s for real and who’s not. One of my goals with this book was to empower everybody to be able to tell the difference between a company that claims to be mission-driven and one that is just what I call mission hopeful. You know: well, maybe it’ll work out, hopefully our mission will happen. Nah. Doesn’t count.

Pete: Right. And again, it’s a whole book worth of content — but for people who just want to walk away with a heuristic or two: what can they look for when they see a company? How do they decide whether it’s a mission-hopeful company or a real one?

Eric: So what we want to look for is: has the company taken the time to develop a system whereby it only makes money when it achieves its mission — and it’s not capable of making money any other way? That’s different from making money by whatever means possible.

I’ll tell you a funny story. I met this founder once who was very gruff — a very technical engineer. And he was like: I’m not into ESG. I’m not woke. I don’t want to hear about stakeholders. I just want to make a great product. I want to build a company where every engineer says this is the greatest company they’ve ever worked for in their life, where we make truly high-quality products. That’s my dream. He was a successful entrepreneur already — this was like his third company. And I was like, oh, interesting. Is it your experience in life that that kind of happens naturally? He’s like, no, actually, every company I’ve worked at, eventually it gets enshittified, and then, you know, blah blah blah. I’m like, okay, interesting. So would you like that to not happen in the future? He’s like, I’m determined — in this new company, I won’t let that happen. I was like, excellent. Okay, so how? What’s your plan? He’s like, well, I’m just going to make a lot of money for my shareholders by whatever means necessary, and then I’ll do the thing.

I was like, oh, really? By whatever means necessary? He’s like, yeah — I don’t want to hear about stakeholders. Interesting. But if one of your employees came to you and said, Hey, boss, I just realized we could make this product a little bit crappier, and we could charge people a little extra for it, and we’d make a lot of money that way — would you do it? He’s like, I would never do that. That’s outrageous. How dare you say that? And I was like, I thought you said money by whatever means necessary. He’s like, well — not like that. Sure, not like that. How interesting.

So that was all we needed. I was like: listen, you don’t think of yourself as a revolutionary, but what you have just described is such a radical act, you have no idea. You are already in contravention of the most essential best practices of our modern financialized business life. And if you want to hold to product quality as your corporate purpose, then you’d better make some changes, or you’re in big trouble. And it was an interesting conversation — we went on from there. He was like, but I love my employees, I would do anything for my employees. Really? Anything for your employees? But I won’t use the word stakeholder. Okay — I don’t care. I don’t use the word stakeholder either. In fact, in the book, I worked really hard — it was very difficult — I tried to write the whole book without using the word stakeholder or the word culture. Really challenging. Instead, I think the word we need to use is the old-fashioned word: fiduciary. Stakeholder has such a bland connotation to me. I’m like: who are you committed to? Who would you rather die than betray? You tell me that list, I’ll tell you what your company stands for.

Where Is the Apparatus for Don’t Be Evil?

[00:29:36]

Eric: So now, going back to your question — how can I tell if someone is serious? The analogy I ask people to use is quarterly reporting. I did this exercise with an ex-Googler. He’d been there many, many years, had recently left, and was very disappointed about the mission drift of Google. And I hate picking on Google, because they’re not the worst offender by any means — but there are just so many ex-Googlers who’ve written extensively about this phenomenon, the loss of the don’t be evil ethos and everything. I said to him: look, I hear that you’re distressed. But just answer me this one question. What do you view as the probability that Google will file its next quarterly report on time? He was like, a hundred percent. Of course it’s going to do that. I was like, 95? And he was like, no — a hundred point zero zero. I was like, really? As certain as the sun will come up tomorrow, Google will file this report on time? Excellent.

Now — what do you think is the probability that Google will accidentally kill somebody for money, and then try to cover it up? And he was like, come on, man, that’s not a fair question. They probably wouldn’t do that. How certain are you? He’s like, I’m like 90%. Hmm. Well, what if the self-driving car hit somebody? 85%. What if their social network was complicit in a genocide? He was literally enumerating these things for me. And he’s like, I just don’t think that— And I was like: you see? What happened to as certain as the sun will shine?

So why is it that we view it as essential that a corporation will file its quarterly report on time, and we’re not so sure whether it will stick to its mission in the future? Is it because people have a natural longing for quarterly reports in their hearts? Oh, come on. Don’t be ridiculous. We know why: because there is a massive, unfathomably large, expensive bureaucracy — an apparatus that has been built to make sure that the Alphabet Corporation files these reports on time, every time. It is incredibly expensive, and it is viewed as absolutely essential. And if you ask where the corresponding apparatus for don’t be evil is — we can’t find it. Google’s been sued twice — not once, but twice — for violating their Don’t Be Evil pledge, and they had to settle both lawsuits. It’s actually really sad. And again, Google’s not even close to the worst offender. At least they tried. A lot of companies don’t even try.

But what I think we have to really see is that the performance element of bureaucracy — inability to innovate, low morale, all these kinds of operational failures — and the mission drift — ethical lapses, easy temptation, inability to stand up for what’s right in public, can’t defend your values or your own employees, easily bullied by outsiders — all of those attributes have the same underlying cause. That’s why I use the word corruption for it. I don’t think we should shy away from saying that those are corrupt acts. Because why did everyone invest so much time and energy and love into this institution? We thought it was going to stand for something. And to see it stand for nothing is really tragic. We shouldn’t accept that as an inevitable outcome.

Ruled by Whoever Can Borrow the Most Money

[00:32:42]

Pete: Yeah. So one heuristic I’m taking away — and it’s kind of a hard heuristic to use, because it plays out over time — is: can the company stand up when it doesn’t have to? Or under pressure, even when it seems to have to give in, it’s just like — no, actually.

Eric: That’s certainly one heuristic. But the most important heuristic is just: tell me what the apparatus is. Again, someone says, I’m mission-driven. I always say: great. Where does it say that? And they’re like, what do you mean, where does it say that? Is it in your charter? What does it say in the charter? I tell a story in the book about Silicon Valley Bank. Silicon Valley Bank had this awesome, highfalutin-sounding mission to support the next generation of innovators. But if you go look at their charter, their charter is just shareholder primacy. So that divergence between stated mission and actual purpose — if there’s a divergence there, forget it. You can’t be mission-driven. Who are you fooling?

Second question: what is the apparatus? What are the operational mechanisms? I call the mechanism a mission drive — like an engine. What is the engine that creates this virtuous performance cycle, where the more we do the mission, the more successful we are — and where temptations are not present? You can look for the elements of cultural coherence, which we can talk about — that’s a separate thing. And then — and I think this is really underrated — is there a mission guardian? So if somebody just shows up and tries to bully this company with money, do they resist?

And what’s really wild to me is that it’s currently considered a best practice for whoever has the most money to be able to get companies to do whatever they want. And people say, oh, that’s rule by the richest — that sounds bad. But it’s actually worse than that. Believe it or not, there’s something worse than rule by the richest, and we got it: rule by whoever can borrow the most money. So it places the values of the financial system — and of banks in particular, who they’re willing to loan or give large amounts of speculative equity capital to — that decision becomes the decision of who gets to rule all of the institutions of modern life. Does that seem like a good idea to anybody? I don’t really love that system. I think we could do a lot better.

Pete: Okay, I want to jump back really quick to it being in the charter — like, you can’t be mission-driven unless it’s in the legal structure of what you’ve built. Look, the cynical part of me is like: that doesn’t actually matter. People are going to do whatever they’re going to do; you write down whatever you want. But I think the reason it does matter is that when push comes to shove — when Moneybags shows up with money to bully people, or a lawsuit comes up — what’s written in the charter is going to matter for the decision. You have to have the actual backup, not just the spiritual willingness to do it.

Eric: Yeah, totally. And the good news is — I just want to really emphasize the historical nature of this — this used to be mandatory for all companies. In order to form in the first place, you literally had to state what the public benefit of the company was. For the vast majority of the time there have been corporations, it was considered obvious to everybody involved that corporations should serve a public purpose. That’s why we have the chartering system in the first place. Why do corporations need a legal charter? Because they enjoy privileges from the public — and especially these days, they enjoy corporate personhood, massive tax benefits, and the shield of limited liability. That’s a precious, precious, precious grant of this form of sovereignty from the public. So of course the idea was that corporations should serve a public purpose. We lost that. It was kind of a three-legged stool, and I walk through this whole history in the book — how we lost each of the three legs of the stool, and how it collapsed.

So, lucky for you, a band of corporate governance rebels over the last twenty years has been establishing, state by state, statutes that are called Public Benefit Corporation statutes. It’s slightly different in different states — some states have what’s called a social purpose corporation; it goes by a lot of names. In Delaware, it’s called the Public Benefit Corporation, or PBC. Very importantly, that’s not the little b with a circle in it that you see at the farmers market. That’s a different thing — also cool, but different. A Public Benefit Corp is like a two-page legal filing. It’s super easy to do. You file it in Delaware, and you just say: this is the stated public benefit of this corporation. So that to the extent that its directors are ever tasked with making a decision, they have the ability to say: listen, we’re doing something that might not be shareholder-value-maximizing, but it is maximizing this mission, this central purpose. It’s a really important prerequisite for a lot of the other things that you need to do. And again, I want to emphasize: it’s not a one-weird-trick thing. Do the PBC — that’s not enough. But it’s certainly an important first step in that direction.

Mission Guardians

[00:37:19]

Pete: Okay. So the building blocks that we have so far: have a mission at all to defend. Second thing is, do the basic paperwork required to enshrine that mission in a way that our legal system can see — this Public Benefit Corporation thing. What are the other basic building blocks? Baby’s first incorruptible company.

Eric: I’ll give you some more examples — but again, it’s really important to see that these are interlocking components of a complete system. There’s not a checklist where you just do all these things.

Pete: So let me be clear — I am asking you as though there’s one weird trick, and I hear that there’s not one weird trick. But what I’m actually thinking of is kind of like an IT security person, where there are multiple layers that interlock and plug into each other in various ways. And generally speaking, in those IT security systems, you do have some basic things — SSL certificates or whatever — and then you have to have a bunch of stuff on top of that.

Eric: Yeah — I’m happy to talk about it. So another thing that’s really important is what I call having a mission guardian. Today, we can pretty much divide companies into two categories: investor-controlled companies and founder-controlled companies. And then you have self-controlled companies, which is what nonprofits basically are — they’re accountable to nobody but their own directors. And none of these solutions is really satisfactory. Investor-controlled companies have this problem that the richest person — whoever can borrow the most money — can take them over. But founder control has its own problems. You have the kind of Mark Zuckerberg effect: you see some of these founders who have tremendous power to resist outside pressure, but that power is not absolute. And I tell stories in the book about times in which founder control has been defeated. It’s almost always precipitated by a drop in the stock price. So ironically — paradoxically — founder control often turns mission guardians into power gremlins who just cannot bear for the stock price to go down. It’s my precious, you know? It’s Gollum-style. So we don’t want that.

On the other hand, there’s a lot of psychological research that having absolute power causes personality disorders. It’s actually a mental health problem. You wonder why all these famous and rich people are having mental health breakdowns on social media every day? You need to understand — this is part of the reason why.

So the solution is to create what are called mission-controlled companies, where the mission itself has some level of sovereignty. The first step is to appoint a mission guardian. Founders can be the guardian in the early days — that makes a lot of sense; founder mode and all that. As the company grows, though, we want to look for institutional mechanisms to protect the mission. So, for example, Alibaba, the Chinese e-commerce giant, has what’s called an employee voting trust, where the board of directors has to be approved by this special council of long-tenured employees who really buy into the mission of the company. But there are other ways to do it, and a lot of them involve having a second entity whose job is to do the mission guardianship. What’s called a purpose trust, or sometimes it’s a nonprofit foundation. There are quite a lot of different ways to do it — employee ownership trusts. And part of the reason why this is so confusing for most founders is that there’s like a zoo of all these different alternative forms. There are advocates for each form, and they don’t get along with each other, because everyone thinks their form is the best one. So in the book, I try to create omnibus terminology to say: look, there’s actually a higher-level concept here that we need to focus on, which is just having somebody play this role — the guardianship of the underlying spirit of the thing that is being protected.

And the cool part is, we have really good data. There are so many alternatives, and the alternatives have all been studied. And what’s so crazy is — contrary to what pro-shareholder-primacy people say — on almost any financial performance or productivity metric you care to name, employee-owned companies, mission-protected companies, purpose-driven companies outperform. Not just at parity — superior performance, superior productivity, superior Tobin’s Q, if you know what that is in the financial metrics. So many metrics of asset-driven performance are enhanced by these mechanisms. So it’s not like — I know everyone feels like when they’re being asked to move off the road most traveled, they’re giving something up, or sacrificing some level of financial performance. But the truth is, this is actually the road of superior performance.

The Pundit Industrial Complex and the Ghost of the Market

[00:41:59]

Pete: So that opens the question for me of: what is it — I’m imagining it’s some extremely short-term incentive — that means people don’t naturally choose this? There’s some way that this intuition gets formed that doing this is going to cost money, when in fact it doesn’t.

Eric: Well, there’s nothing natural about it. There is an incredibly vast pundit industrial complex that is extremely expensive and is going all the time, to make sure everyone knows this to be true.

Pete: Which starts with business school.

Eric: Of course it starts with business school. Absolutely. Business schools teach an absolutely intellectually incoherent version of corporate ethics, which is wild to me. It goes like this — sometimes the two classes will be on the same day. People have told me: in the morning, I took a class about how business does not have moral responsibility for its actions, because society sets the rules. So as long as you play by the rules, you can sleep well at night, knowing that you maximized shareholder value within the rules. And in the afternoon, you’ll take a class on how to lobby to have the rules changed. So it’s like — well, hold on. Which is it? Do corporations set the rules, or only follow the rules? If they set the rules, then they also have moral responsibility for their actions.

And so what we see is that this incoherence leads to a situation where companies are told it’s their fiduciary duty to lobby for rules that are profit-maximizing for them — even though that behavior routinely causes corporations to collapse and self-destruct. To tell the story of Silicon Valley Bank — which is a very close-to-home example, here from Silicon Valley; it was a nightmare — during the first Trump administration, they lobbied to have the banking rules changed in just such a way that they could shoot themselves in the foot five years later. So it cost their shareholders everything in the end. Meanwhile, I tell the story of Novo Nordisk. Novo Nordisk is controlled by a nonprofit foundation, and there was a time when the for-profit subsidiary basically wanted to sell itself — basically commit corporate suicide for a quick buck. And the foundation intervened to say no. That intervention wound up making, for the Novo Nordisk shareholders — I’m not exaggerating this — more than $500 billion of shareholder value.

Pete: That’s a lot of billions.

Eric: That’s a lot of billions. So why have we been taught this really nonsense idea? I think it’s worth reflecting on. But most founders who hear about this for the first time often think I’m mistaken. I did an AI-driven close-reading experiment — if people are interested, ask me more about it. Anyway, I had a lot of founders and engineers, people kind of far from this mission-driven stuff, doing an AI-assisted close read of the book. And if they chose to share them with me, I could see the questions they were asking. And so many readers were like: that can’t be right. Surely that’s not true. And luckily, they had the AI right there to look it up for them. Is Eric being fair here? Is this true? And the AI would go: believe it or not, that’s actually true. I’m like, look, I’ve got the citations right there. I’m quoting from the actual people.

So this is one of those things that people find really hard to believe. They’re like, if it was such a good idea, surely I’d have heard about it by now. But that’s the thing. I was talking to a very famous mission-driven founder — someone you know well, an icon; I won’t name him, because it’s not really about him, this has happened to me several times. They got screwed over by these forces, and they were starting a new company. And I was like, hey — based on what you learned, what protections are you encoding into the new company? And they were like… like what? I’d asked a question they didn’t understand — they didn’t understand the category of the question I was asking. Because they were like, this is just how it is. Companies live and companies die. I’ve come to accept it, and there’s nothing you can do. And I’m like — well, the hedge funds and the private equity guys don’t seem to have that fatalistic attitude. They seem to say: if things are not the way I like, I make them the way I like. How come we don’t have that same sense of outrage, and willingness to defend ourselves?

But anyway — he told me this story, and it was really amazing to me: at every step of the way, he was being guided by very highly paid advisors who were extremely well credentialed, and they always counseled him the same way — toward the best practice. So a question we all have to ask ourselves as builders: why are all these advisors more loyal to the best practices than they are to my mission? Even when I’m the one paying the bills. Even when they have a fiduciary duty to me. They nonetheless are more loyal to these practices. So I feel like that’s also something we have to get much more savvy about.

Pete: What do you think the answer is?

Eric: I lay it out in the book in great, excruciating detail. Excruciating detail. But it was funny — this person actually gave the theory to me. He was like: listen, my experience is that most of the people you hire into a mission-driven company are in it not for the mission, but for their own career. So over time, people start to say: listen, if I show my loyalty to these practices, that’s going to be good for my career. I call it career equity. So even though you compensate them with financial equity, they’ve always got one eye on their career equity. And it’s especially bad for independent directors and boards.

And then, on top of all that: financial gravity. It’s a psychological force. It’s kind of an odd thing to call a psychological phenomenon a force, but I’m trying to emphasize that although it is driven by perception, that doesn’t make it not real. You remember, from the end of Harry Potter — is this all in my head? And it’s like: of course it’s in your head. But why would that not make it real? So yeah — it’s very real. And what happens is, because everybody’s always, in the back of their minds, thinking about how to succeed at their next transaction, they unconsciously take on the values of whoever they think will be most helpful to them in accomplishing those goals.

You actually asked me a version of this question right when we started, which is: what if I need money? I meet with all these startups, and they’re like, hmm, I don’t know — investors might not like it. And I love the word might in that sentence. I’m like: they might? Well, rather than think about what they might or might not do, why don’t we go ask them? Let’s go find out. It’s like saying, well, I don’t know, customers might not like it. They might not! Don’t we need to know what they actually think? So it’s like having the ghost of the market sitting over your shoulder, whispering these ideas to you. And unfortunately, this transmission happens unconsciously. And so a lot of people’s own values wind up being warped by the thing they’re doing to be successful. And I think it’s quite tragic and sad.

Like — we tell people, we whisper in their ear, that selling their company, getting to retire, making all this money will make them happy. And then they wind up miserable. So many of them wind up building another company, and I’m like, well, if you’re just going to build another company, why not stay with the company you had? How rich do you need to be? It’s actually really strange to me. And if they don’t build another company, they often wind up with really bizarre hobbies — they become tinkerers and artists and all that stuff. Nothing wrong with that, of course. But you can feel the hollowness — the ache for the thing that was lost. Because the reward for building an organization is like the reward of being a parent. It’s not that you get rich from it. The reward is the thing itself. And I think a lot of builders, at the beginning, intuitively understand this — and by the time they sell their company, they’ve forgotten, or lost their connection to, that authentic inspiration. And it’s leading to a lot of problems. So we have to reverse it.

Closing

[00:49:47]

Pete: We do. And luckily, there’s a book about it that you’ve written. I’m going to use that to transition into — we’re actually doing a giveaway for this book.

Eric: Oh, cool.

Pete: Yeah. We’re going to drop the link for the giveaway into the AMA thread. Basically, all you have to do is sign up, and you’ll have a chance to get the book. I think it might be first come, first served, it might be a lottery — but in any case, you put your information in the form, you get a book.

Eric: Oh, that’s so cool. Thank you for doing that.

Pete: You’re welcome — and thank you for writing it. I appreciate your time today. This is fascinating and super important. And as you’re well aware, UpTrust is very interested in all of this. We’re taking all the steps we can to be incorruptible ourselves, and we’re going to do our best to stick with our mission and provide value and human flourishing.

Eric: Well, let me just say how important I think it is. We so badly need incorruptible social media — so bad. So many of the problems that are happening in our world are happening through the division, and the loss of a sense of shared truth and shared values, that is being caused by these algorithms. And for everyone who’s watching who has a sense of hopelessness, of despair — obviously, we watch TV, or just look at the news; it’s hard right now. And I even feel torn, because here we are talking about all this abstract philosophy, and meanwhile there are people being shot in the head. It’s terrible. But I think it’s very, very important to realize — as painful as it is to say this — when people talk about polarization, division, misinformation, crony capitalism, you pick your problem: those attributes are a choice. We have the technology to create different social spaces. We can do it. So the only question is: do we actually have the will to do it? And in order to find that will, the first step is to acknowledge our own complicity in these choices — and then, hopefully, make a different choice. So thank you for what you’re doing today.

Pete: You’re welcome. We’re trying our best. Thanks a lot.

Eric: I love it. Thanks so much — I appreciate it. And everyone, thanks for stopping by, and please get a book if you’d like.

Pete: Yeah.

Eric: Take care. Thanks.

Show Notes & References

Books

Incorruptible: Why Good Companies Go Bad… and How Great Companies Stay Great — Eric Ries (Authors Equity, 2026). The subject of this conversation. Ries argues that corporate corruption is structural, not primarily ethical: as organizations grow, the systems that govern them — ownership, incentives, charters, accountability — reshape behavior, and poorly designed systems push even principled leaders toward outcomes they never wanted. He calls for mission primacy to replace the shareholder-first framework that has dominated governance since the 1980s. Discussed throughout: the Best Practices Destroy Shareholder Value table, the They Are Lying to You section, and his decision to write the entire book without the words stakeholder or culture.

The Lean Startup — Eric Ries (2011). Referenced in the introduction as the book that first brought Ries to prominence; its build-measure-learn framework became a defining methodology for a generation of startups.

Frankenstein — Mary Shelley (1818). Eric’s analogy for idealistic founders: they built something they could not control, and then tried, unsuccessfully, to control it.

People & Companies

Practice Fusion / Purdue Pharma — Electronic health records startup that accepted roughly $1 million from Purdue Pharma to push opioid-related prompts to doctors inside its EHR software. The company later paid $145 million to resolve U.S. Department of Justice criminal and civil investigations (announced January 2020). Eric notes this story was cut from the final manuscript.

Reid Hoffman — LinkedIn co-founder and investor; Eric mentions a same-day conversation with him about whether culture, mission, and strategy are separable.

Patagonia — Eric’s recurring example of a strong-culture, mission-coherent company. In 2022, ownership was transferred to the Patagonia Purpose Trust and the Holdfast Collective — an example of the mission-guardian structures discussed here.

Novo Nordisk — The Danish pharmaceutical company, controlled by the nonprofit Novo Nordisk Foundation (via Novo Holdings). Eric recounts the foundation blocking the for-profit subsidiary from selling itself — an intervention he says was ultimately worth more than $500 billion in shareholder value (his figure; he flags it himself as I’m not exaggerating this).

Vanguard — Founded 1975 by John Bogle; owned by its own funds, and thus by their investors. Cited as a fifty-year-old financial services outlier without big-co disease.

Costco — Cited as another widely admired company whose structure advisors nonetheless recommend against emulating.

Unilever / Hellmann’s mayonnaise — The purpose of Hellmann’s mayonnaise complaint Eric recounts is likely a reference to Fundsmith founder Terry Smith’s 2022 letter mocking Unilever for purpose branding (a company which feels it has to define the purpose of Hellmann’s mayonnaise has in our view clearly lost the plot). Eric does not name the investor; attribution is our inference.

Google / Alphabet — The don’t be evil motto and its drift are the basis for Eric’s quarterly-report thought experiment. Eric states Google has been sued twice over the Don’t Be Evil pledge and settled both suits; there was a well-publicized 2021 suit by former employees invoking the pledge, but we have not independently verified the count of two settlements.

Silicon Valley Bank — Eric’s example of self-destructive lobbying: SVB pushed for the 2018 rollback of Dodd-Frank enhanced-supervision thresholds during the first Trump administration, and collapsed in March 2023 under conditions that regulation might have prevented. Also his example of mission/charter divergence: a lofty stated mission, a charter of plain shareholder primacy.

Alibaba — Eric describes an employee voting trust in which the board must be approved by a special council of long-tenured, mission-committed employees. This matches the Alibaba Partnership, which holds the right to nominate a majority of the board.

Elon Musk / Twitter — The 2022 acquisition, in which Twitter’s board sued Musk to force completion of the deal, as an illustration of how absolute the perceived fiduciary duty to accept the highest price has become.

Key Concepts

Shareholder primacy — The doctrine that a corporation exists to maximize shareholder value. Eric’s central historical claim: it took hold in the 1980s through academics and judges, was never enacted by any legislature or referendum, and displaced the older general-incorporation understanding that a company must state — and serve — a purpose.

General incorporation — The 19th-century state-by-state legal regime under which anyone could form a corporation, but had to declare its purpose. Corporate charters today typically permit any lawful act or purpose.

Caveat emptor vs. caveat venditor / vendor liability — Buyer beware governed most of commercial history; the modern shift to seller responsibility (let the seller beware) is, in Eric’s telling, the web of institutional trust that makes modern life possible — and the thing shareholder primacy is quietly reversing.

Public Benefit Corporation (PBC) — A Delaware (and multi-state) statutory form in which the charter states a public benefit that directors may weigh against shareholder value. Distinct from B Corp certification (the little b with a circle in it that you see at the farmers market). Some states use the name social purpose corporation.

Mission guardian / mission-controlled companies / mission drive — Eric’s terminology. A mission guardian is a person or entity (purpose trust, nonprofit foundation, employee ownership trust, employee voting trust) with the standing to say no when money shows up to bully the company. A mission drive is the operational engine by which the company only makes money when it achieves its mission. Mission-controlled companies give the mission itself a degree of sovereignty.

Tobin’s Q — The ratio of a firm’s market value to the replacement cost of its assets, named for economist James Tobin. Eric cites superior Tobin’s Q among the evidence that employee-owned and mission-protected companies outperform.

Governance-underperformance study — Eric cites research showing companies rated as well-governed have underperformed badly governed ones since 2008. This likely refers to the literature on the disappearing governance index premium (e.g., Bebchuk, Cohen & Wang’s work following Gompers, Ishii & Metrick); exact study unverified.

Enshittification — The now-standard term (coined by Cory Doctorow) for platforms degrading as they extract value from users; both speakers use it (the ASR garbled it — restored here from the audio’s second witness).

Career equity and financial gravity — Eric’s terms for why highly paid advisors and employees stay loyal to best practices over the mission: everyone keeps one eye on how today’s loyalty prices into their next transaction, and unconsciously absorbs the values of whoever can help them succeed at it — the ghost of the market sitting over your shoulder.

Pundit industrial complex — Eric’s name for the apparatus of business schools, advisors, and commentators that keeps shareholder primacy feeling natural and inevitable.

Founder mode — Passing reference to the 2024 essay/discourse (Paul Graham) endorsing hands-on founder leadership; Eric’s point is that founder-as-guardian works early but needs institutional replacement as the company grows.

Cultural references — Dr. Evil’s one million dollars (Austin Powers); Gollum’s my precious (The Lord of the Rings) for founders who cannot bear a falling stock price; Dumbledore’s of course it is happening inside your head… why on earth should that mean that it is not real? (Harry Potter and the Deathly Hallows) for financial gravity; Odysseus tying himself to the mast, via Pete, for pre-commitment.

UpTrust is a trust infrastructure platform for the internet. Find it at uptrusting.com.