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Eric Ries — How to Build an Incorruptible Organisation · The Innovation Show

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Our guest bets you have felt it yourself in your own life and in your own career.
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Maybe it was a day your favorite company killed the product you and everyone else
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loved, or when your own company canceled its innovation products to help make the
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quarter, or when you watched helplessly as the professional CEO brought in to replace
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the founder drove the company into the ground, or when leadership changed and the
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mission became just words on a website.
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We lack the vocabulary to call it what it really is.
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Mission drift?
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That sounds like a navigation error.
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Bureaucracy?
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Sounds like paperwork.
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Neither captures the gut punch of betrayal when someone precious
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is corroded beyond recognition.
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So our guest calls it by a simple old-fashioned name.
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He calls it corruption.
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He is with us to address the challenge and offer solutions.
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He is literally a man on a mission.
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We welcome the author of "Incorruptible: Why Good Companies Go Bad and
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How Great Companies Stay Great." Eric Ries, welcome to the show.
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Oh, such a pleasure to be here.
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Thank you
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It's great to have you on the show.
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I have way less time with Eric than I would like, and I was gonna do a
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golden goose on him and try and get as much time out of him as possible.
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It's just not possible with the mission work that he's doing.
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I thought I'd tee you up this way, Eric.
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Clay Christensen, who you know well, used to speak of former classmates at
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Harvard Business School, people like Jeffrey Skilling of Enron, Rhodes Scholars
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too, that he was scholars with, and how they ended up unhappy or in some
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kind of financial or personal scandal.
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And he wrote once, "I know for sure that none of these people graduated with a
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deliberate strategy to get divorced or lose touch with their children, much less
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to end up in jail, yet this is exactly the strategy that too many of them ended
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up implementing." And I thought that was a perfect setup to what you see,
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'cause your work, you've brought it even further and you're giving a system and
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a blueprint for people to manage this.
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But let's first chat, talk about what the problem is
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Oh, gosh.
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And yeah, we all miss Clay so much.
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Um, y- such a loss when, when he, he, passed away and, and, um, you know, the
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torch of his work needs to be passed to a new generation to try to figure
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out how can we help turn this around.
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Because we are in the midst of an era where the dominant best practices that
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we are teaching leadersh- uh, about leadership, about how companies should
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be built, structured, and governed, a lot of them are value destroying.
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And this is kind of hard for people to imagine, like how could it be
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that they're the best practices for a reason, but the reason is
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often not a good one.
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I witnessed this myself.
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I personally know quite a few people, as Clay did, who wound up incredibly
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rich and totally miserable or worse.
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And you see people sometimes ask me like, "Why are these billionaires having like
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a public mental breakdown every day on social media? If they're so rich, why
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don't they just go buy an island and like be happy?" It's like, well, you know, you
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might not have known, you might have heard from ancient wisdom that money does not
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buy you happiness, and here we see that, uh, uh, evidence over and over again.
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But I think there is something particular to the unhappiness that we're seeing
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now, and, and Clay of course, had his finger right on the pulse of it, that
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we are teaching people a strategy, a specific way of making money via value
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extraction, via value destruction.
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That does work, that's why it's dangerous.
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But although you can make money like that, it's very hard to find satisfaction
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with that, and it's very difficult even to just create any kind of sustainable
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value creation with those tools.
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Ultimately, they are short-term in nature, and so they tend to plant
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the seeds of their own destruction.
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And that's how people wind up in jail.
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That's how wh- people wind up with all kinds of moral compromises because
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they're having to do more and more and more and more like a drug addict chasing
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the next high, chasing the next fix.
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It's ultimately quite sad
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You start with the story of the professor and it sets up
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the challenge so brilliantly.
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And to tee you up, I'm gonna just quote a little piece here.
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You say, "Like many builders, he was not interested in making
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money by any means necessary.
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He wanted his company to prosper by creating a product that was useful,
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trustworthy, and healing to customers.
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In today's hyper-financialized economy, these simple aspirations
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have become radical acts.
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Every one of them has become expendable, too often sacrificed on
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the altar of growth, share price, and short-term returns." Apart from
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how I love how you've written that,
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Oh, thank you.
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Yeah
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love the story of the professor, and let's give the context 'cause
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it really sets up the challenge.
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Yeah.
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Most people don't realize how revolutionary their own ideas are
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'cause they think, "Well, I'm just, I'm just making a company to make
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money." And it's like, "Oh, really?
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Money by any means necessary?
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Sure.
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That's what will give me leverage to let me do the other things I
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wanna do." I was like, "Yeah, but what if somebody finds a way…"
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Let's say you say you value quality, or in this case, the professor, he was building
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a health company that was doing research that would ultimately lead to incredible
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breakthrough therapies using, using AI.
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And, you know, he had been indoctrinated into the for-profit ideology like all
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of us had, that, that all ways of making money are basically just as good as any
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other, even though in his heart, he felt what I call the builder's intuition,
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that the best way to make money is actually to create more value than
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you capture, and other ways of making money are suspicious or maybe even bad.
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So he would have investors who would say to him, "Well, you know Why don't
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you worry about that stuff later?
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Just make the technology work.
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Get to product market fit.
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If you're like too worried about what's-- how, how you're gonna make money or
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the different… If you're worried about that stuff, like maybe you're not
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very serious about being in business.
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Maybe you should go back to academia.
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But meanwhile, his employees, he's trying to like hire the most talented
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researchers on the planet, and they have real questions for him about,
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"Well, is this gonna be used to create long-term value or something terrible?"
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And he would say, "But don't worry, I have such good intentions." And
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that was not getting the job done.
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You know, they're like, "Well, what, what does that matter?
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Aren't we a for-profit company?
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Aren't we gonna have investors?
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What if the investors pressure you to do something bad?" "Well, I'll
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resist." "That's not very satisfying.
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What if they fire you?" "Oh yeah, what about that?" So, so
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he was feeling really trapped.
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Now it happened to be, and of course in the book I, I tell this in dramatic
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fashion as best I can, that I was having this conversation with a professor
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at the same time as I was going to commemorate a founder who had-- who
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was like 14 years into his journey.
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He had had, tremendous success.
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I mean, he had made more money for his investors than they could
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spend in five lifetimes, okay?
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He'd really been a very successful entrepreneur, and yet his board had
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fired him at the earliest possible opportunity because for all the
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money he made them, it wasn't enough.
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They wanted more.
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So we were at this event and I'm explaining to the professor,
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I'm going to this event.
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Look, there's like a thousand people here.
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We're all celebrating this founder.
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People had flown in from all over the country to see him.
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I saw people who had been laid off who come-- who came back to celebrate him.
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And the professor's like, "Wow, what respect.
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That's just the kind of company I wanna build." I'm like, "Man,
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you are not listening to me.
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He doesn't work there anymore.
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This is not a party.
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It's a wake." And he's like, "Oh my God.
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Did somebody die?" "No, nobody died." "Oh, did the company go bankrupt?"
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"No, the company's not…" I was like, "No, everything's fine, except
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something really precious has been lost and none of us quite know what to
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call it." And I remember being at that party and everyone being like, "Yeah.
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Do we trust this company anymore?
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No." We-- and the new CEO, the new CEO's not a bad guy.
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But what, what good are the new CEO's promises when he
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could be fired at any time?
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So there's this loss, this corruption that is all over our economy.
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And the professor was starting to get really worried.
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He's like, "Wait a minute.
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Are you saying that's gonna be me someday?" And I'm like, "That's
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what I'm trying to tell you." And he, he asked me the question that
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kinda launches the whole book.
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He said, "Is it, is it even possible to build an incorruptible company or is this
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corruption inevitable?" And I was like, "Well, the good news is, although most
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people think it's impossible, I disagree.
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I think it is possible to do this." But the bad news is you've already taken
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steps in the wrong direction because you have already bought in to these
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so-called best practices, and you have now incorporated and built a company
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that is structurally weak to the same forces that led to the demise of this
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and so many other great companies.
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So that's really the project of the book is to identify the why.
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How do we get into this mess?
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Why is it happening this way?
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Where do these best practices come from and what's wrong with them?
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We have a lot of really great evidence, but far more important
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to lay out the blueprint.
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If you wanna build an organization that can resist this corruption for
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the long term, that can actually create quality or health or whatever you care
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about, whatever revolutionary idea you have, we wanna protect and defend it.
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We know how to do it.
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We have the research, we have the case studies.
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But in order to do it, we're gonna have to go on a journey where we reject so
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many of the so-called best practices we've all been indoctrinated to believe in.
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Beautiful, man.
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Beautiful job of the professor.
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Nice setup as well, like you do inside the book.
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I want to tell our audience, you got to read the book to really get a grasp of the
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setup is br- beautiful in part one, the problem, and then the solutions as well.
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But you really have to settle down, and there's an accompanying website I'm gonna
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link to as well for people and QR codes.
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Just to dive a little bit more into the challenge, I don't
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know if you've ever been there.
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I worked for a company once, and at one stage, , the owner
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was quite malignant, this guy.
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And He made me feel, I was being moral and I wanted to do right by my family, all
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those things we talked about with the Clay Christensen message at the start, that he
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made me think, "Well, maybe I just need to knuckle down and be more business-like."
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And you bring this up.
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You say when you talk to investors, they say to CEOs like this or founders
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like this or builders like this, "Oh, well, you're just not very serious about
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business because if you were, you'd do what I tell you, because I know how
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to build businesses." And in there, there's this moment of Dorian Gray where
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you're like, "Do I put the portrait up in the attic here and knuckle down and
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be business-like and give up on that gut feeling of doing the right thing?"
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So many people compromise in these situations and wind up with a company
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that is undifferentiated and mediocre because they are being pulled down
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by this financial gravity, I call it.
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This force that unless you actively resist it, will turn your company
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the same as every other company.
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The way we know that it's a force is think about all the big companies
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you know that are all the same.
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You know, they put out the same anodyne press releases.
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They have the same-- They jump on the same stupid bandwagons.
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They're all, they're all sucking into the same social contagion of, you know,
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whatever the latest trendy thing?"
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is.
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They are weak.
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And one of the goals of the book is to introduce this idea that
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organizations can be not just good or bad, not just, you know, evil or not
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evil, not just growing fast or not fast, but they can be strong or weak.
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That there's an idea of organizational strength that is required if you wanna
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actually sustain some kind of mission or purpose, over longer periods of time.
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And in order to do that, we have to be willing to take our own beliefs and
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values seriously so they don't just become paper on a wall, but they become
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the, the true convictions, the ethos, the character of the whole organization
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You're seeing this yourself.
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So when you against the flow, when you introduce a system that might replace
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or threaten the existing systems, against huge resistance and, and the
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status quo by its very nature can be nasty and try to drag you down.
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And you experienced this with your brilliant project, and I wanna
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really share this one as well, the LTSE, the Long Term Stock Exchange,
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Mm-hmm, mm-hmm.
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and how that was welcomed the industry
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Yeah, yeah.
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I mean, I, I'm very proud of our work at, on the Long-Term Stock Exchange.
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It, for those who don't know, it is the first new national securities
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exchange here in the US, the same, like, legal kind of thing as the
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New York Stock Exchange or NASDAQ.
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The first one of its kind since the creation of the
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NASDAQ, like, 50 years ago.
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So it's, it's, um, it was quite the ambitious and difficult undertaking.
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Now, one of the-- And, and I don't wanna get into the arcana of exchange
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stuff, unless people are interested.
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We know we obviously could do a whole separate episode just on, on,
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on how to bring long-term thinking back into the public markets.
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But what you have to know about this is so many things in our
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modern economy are all the same.
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I said all these companies all behave the same.
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Whether it's, you know, everyone's got the same, like, dumb click-through
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license agreement that nobody reads, or everyone's doing an extractive
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business practice, or they're laying people off, or whatever the thing is.
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When you see unanimity or consistency, you ask people, "Why, why is everything
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the way that it is?" People say, "Well, that's the invisible hand of
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the market." It must be, 'cause if it wasn't, it-- competitive pressure
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would force it to be something else.
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Therefore, the market has spoken.
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This must be the best.
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That's where a lot of our best practices come from.
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I thought so too, and I had wondered, "Huh, stock exchanges. All the US
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stock exchanges all have the same listing standards. I wonder why?"
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Must be because that is the best?
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I don't know.
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Didn't all seem very good to me.
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I think we could do better, so I thought, let's build a new stock
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exchange, hard though that is.
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Let's get it approved by the SEC. Let's go compete, with new listing standards
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compared to the incumbent exchanges.
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Okay.
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And we get to a certain point, I tell this story in the book, where
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we were almost about to succeed.
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Like, we had our first listings lined up.
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We were about to get our regulatory approval, and all of a sudden, this
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kind of group comes together to, to put a stop to what we're doing.
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And they called me up, and they're like: Look, we just
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think what you're doing is bad.
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It's inevitably gonna fail.
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Like, we're not gonna allow it to go forward.
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And I, I was very naive.
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I said: Look, this is America.
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If we're gonna fail, what's the big deal?
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Let's fail.
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We're a market economy.
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Let's fail.
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They said: Well, your failure, you might be drawing attention away from other
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things that we like even better than you, so we're not gonna let this happen.
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And I was very overconfident that we could, that we could
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overcome that, but I was so wrong.
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Anyway, I won't, I won't belabor the whole story, but they, they started to
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put pressure on our vendors to abandon us.
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So it wasn't just like oppose our government application.
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They didn't do anything out in the open.
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They would just call the CEO of anybody we worked with and say:
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Listen, if you partner with this company, other things that you need
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more than that, we're gonna deny you.
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you.
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need us for other things, so don't, don't waste your political capital on this.
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Anyway, it all came to a head.
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I was actually in, in the UK, when this happened, so I was far away from
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my team, thousands of miles away.
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It's the middle of the night for me.
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You know, you can't be mad at the ambush because it was done effectively,
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and they knew what they were doing.
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And we get the word from our vendors that they're gonna capitulate and withdraw
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our application, the whole thing.
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It was all about to blow up.
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And we get a last-minute phone call, and they said: Listen, you
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know Nice exchange you have here.
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It'd be really a shame if something happened to it."
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I said, "What do you mean?
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You're, you're, you're literally in the process of destroying my whole
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company." And they're like, "Well, you know, it doesn't have to be this way.
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If you'll just change your listing standards to be the same as everybody
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else, all this can be made to go away." And that's when I finally
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understood what was really going on, and I gathered my team and I said,
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"Hey, everybody, here's the situation.
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I think if we say no to this offer, we're probably going bankrupt.
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But if we say yes, we're compromising our principles.
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So what should we do?" And one by one, every person on that Zoom,
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I'll never forget this, it was so late at night, I was bleary and
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delirious from this crazy situation.
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I was so stressed.
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Every person on my team, they just said, "No deal. We'd rather go bankrupt than
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betray what we stand for." And I say in the book, I wish I could say it was
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my visionary leadership that got us through, but the truth is, I was the
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one curled up on the bathroom floor.
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Like, I could barely function, I, was so upset.
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I thought the company was gonna die to save a principle.
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Now, as it turned out, we did say no.
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They did withdraw our application.
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Our-- The whole thing fell apart, and we had to start over from scratch.
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But as is often the case when you stand on principle, in retrospect,
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I can say this is one of the best things that ever happened to us.
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And the reason why LTSC exists at all today, is because, , of the
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learning and the pivots we were able to get out of this ambush.
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But in the moment, and this is so key, in the moment, we didn't know what
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the consequence of sticking to our principles would be, and so, we had
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to take the leap into the unknown.
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And I just think many, too many of our leaders are taught to compromise
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at the first sign of difficulty.
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They don't stand for their principles, and therefore, they never get the
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chance to unlock the incredible magnetic alignment that happens when you take
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the principled stand in business
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I don't think anybody ever regrets that.
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I'm sure there's probably financial considerations, all
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that kind of stuff, and cognitive dissonance kicks in to justify
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Always.
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Always.
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Yes, of course
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But one of the challenges is, and to call this out, I'm sure you've had this where
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I think when I thought, when I read about this, I was thinking about great stories
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where founders stuck to their principles.
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Walt Disney, for example, when everybody said he was crazy making
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Snow White, then he was crazy making Disneyland, even though he'd succeeded
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massively on the previous pivot to Snow White when a fe- doing a first
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feature film ever as an animation.
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H- had you experienced that where somebody you exper- you thought
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would, would be there to support you actually wasn't and was like
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going, "Eric, are you crazy, man?"
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So many people, I can't even tell you.
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And in fact, it's not just people who, who abandoned us or who kind
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of were like A very large number of people would say to me, "I'm so
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glad you're working on this problem.
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It's the most important problem in the world.
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You know, business has been struggling with quarterly reporting
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and the short-termism for 50 years.
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It's, it's just about like, I really admire what you're doing."
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And I'd be like, "Oh, great.
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I'm so glad.
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Would you like to help us out?
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Maybe you'd like to invest, maybe you'd like-- We don't even, not,
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don't need your money, but even would you publicly endorse it?
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Even would you just, like, encourage, uh, your company to do it?"
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"Oh, no.
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Absolutely not.
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Can't put my neck out.
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Glad that you're the one doing it." So, so yeah, that I, I get that a lot.
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And, and I've learned to become sympathetic to this, although as
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a founder, it's very frustrating.
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And yeah, Walt's folly, the whole thing, is such a common pattern.
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And I tell a story like this in the book.
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It stems from two very different stories of what's happening with innovation that
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somehow coexist in the same organization, which I think is really fascinating.
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Story one is the founder hero story.
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So like, what is a company?
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Well, it begins with a founder, their vision, the business model, the strategy
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that they build a team, they raise money, they gather resources, they figure this
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out, and the last step is they bring this thing to the market, customers
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buy it, validating their vision, and that's what makes a company great.
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But if you go to an economics class, you'll hear type story
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two, which is totally different.
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In story two, what makes a company?
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Oh, well, a market need.
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The market has a need for a new thing.
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The customer demand summons an organization and therefore its
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attendant network of business model and, supplier relationships.
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That requires capital.
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So that attracts investors to provide the capital to do this thing.
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And because there's capital and there's this thing, we need, we need
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employees to run it, and somebody has to be like the impresario who
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puts the whole thing together.
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But basically, the founder is like the last, least important thing about what's
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happened, because the founder is basically privatizing gains that were created by
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the social structure that they live in.
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Now, what's so interesting to me about these two stories is they're
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the same story but told backwards.
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One begins with founder, ends with customers, and the other begins with
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customers and ends with founder.
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So , in an organization, you will find these both stories coexisting.
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The founder obviously believes in story one, but many of their executives
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believe in story two because they weren't there when the company
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was just a scrappy little thing.
20:56
They never saw the founder acting heroically.
20:58
They just, they showed up to a company that has always
21:00
existed as far as they know.
21:03
And so these two stories coexist because they're surf-- they're
21:05
very, very, very similar.
21:07
But when push comes to shove, they produce very different outcomes.
21:11
If we have to take a bold bet on something new, the founders always tell
21:16
me, like I've said to so many founders who'd be like, "I don't get it."
21:18
Like Walt Disney We're only here 'cause of me in the first place.
21:22
Why do I have to re-prove myself?
21:24
Like, surely the fact that I was right before should give you some level of
21:27
belief that I'm right again." But from the type-- from story two, that's not true.
21:32
The founder was just in the right place at the right time.
21:34
They didn't really do anything.
21:36
They, they, were summoned by the market.
21:39
So the frustrating thing about these two stories is that they are,
21:43
in a very large degree, both true.
21:47
And if you study the history of business, you will find that these stories actually
21:52
lay out a hierarchy of business concepts, business model, culture, strategy,
21:57
customer, like… And therefore, almost every business theorist of the past has
22:03
picked one of these levels of the story and made their whole career out of it.
22:08
You know?
22:09
If-when they define what is a company, they'll be like, "A
22:11
company is a business model. It does this thing." What is a company?
22:14
A company is a frictionless, way of reducing the friction of internalizing,
22:18
the friction of contracts.
22:19
So, like, the contracting layer is what a company is.
22:21
Other people will say, "Yeah, you know, founder mode is what a company
22:24
is. It's all about the, the vision and pri-priority of the individual person."
22:28
It's like doctors who study a certain subsystem of the human body who kind
22:33
of, like, unconsciously start to think that their system is the most important.
22:37
Like, why?
22:37
If I study the heart, I'm like, "The human being, I mean, human being is--
22:41
The heart is the main thing, guys.
22:43
How do I know?
22:43
Well, if you didn't have a heart, you would die." But the guy who studies
22:46
the lungs is like, "Mm, if you take the lungs out, you will also die."
22:50
And the person studying the nervous system, they'd be like, "Excuse me.
22:52
Excuse me.
22:53
I actually command all these things, including the heart." And
22:55
the guy who studies the brain is like, "Mm, actually, guys," right?
22:58
And then, you know, like, we all have a natural tendency to think
23:01
our piece of the whole is the whole.
23:04
And the same thing is true for business.
23:06
Most of us as leaders, most of us as business authors for
23:09
that matter, are focused on our system, our part, our piece.
23:13
We don't see the whole.
23:16
So as a result, we have this incomprehension, this, this confusion
23:20
about what to do next, about where to bet, who to trust, that kind of stuff.
23:23
And one of my goals with writing this book is to lay out a more comprehensive
23:28
theory of what an organization actually is that encompasses both stories and
23:33
all of these levels so that we can start to see and develop techniques that
23:38
address the holistic thing, the whole enterprise, whatever that thing is.
23:43
And actually, the more you study what it is, the more wild it is, the more I think
23:48
it's actually really utterly fascinating how many people are confused about what
23:52
is the thing that they themselves operate.
23:54
Love it, man.
23:55
Absolutely love it.
23:56
And you reminded me of an Aesop fable, which is just, you set me
24:00
up so beautifully for a nice segue.
24:02
There's an Aesop fable called The Body and the Members, and it's about how the rest
24:06
of the body turn on the stomach and think the stomach's not worth anything and get
24:10
rid of it, and then the whole system dies.
24:13
But it's a segue to the brilliant golden goose challenge that
24:17
you set up in the, in the book.
24:19
And I'm gonna share on the screen for those people watching us on
24:23
YouTube, diagram I made, and it includes your quote there, if you can
24:27
see, which I just absolutely love.
24:29
"Everything worth protecting will eventually need protection," a
24:33
brilliant line that I'm gonna, I'm gonna definitely stick it on one of
24:38
those quote sites, man, to last forever.
24:40
But for those people who are only listening to us, what it is, it's
24:42
a boardroom and it's a, load of board members looking at the golden
24:47
goose, and they're carving knives.
24:49
They're getting ready for more and more and more, and they're about to butcher the
24:56
Oh
24:56
my God.
24:57
God, that cartoon is painful to look at
24:59
Yeah, it's horrible.
25:00
And, you talk about the two stories that companies tell themselves or are
25:03
told, there's two brilliant stories, contrasting stories, tragedies that
25:08
you open up in chapter one, the story of the legend who is Sol Price, and
25:13
then the tragedy that is Robert Owen.
25:16
I'd love you to juxtapose these
25:18
Okay.
25:18
Yeah, yeah.
25:19
Happy, happy to do it.
25:19
Yeah, so let, let us begin with the legend of Sol Price, because Sol
25:22
Price is a giant of entrepreneurship.
25:24
I mean, and, and not that well-known today, but in his
25:27
day was, was very famous.
25:29
He's really widely considered to be the father of modern retail.
25:33
So, um, to give you a sense of how influential his ideas were, when a guy
25:37
named Sam Walton was thinking about getting into retail and was trying to
25:40
decide what to name his company, he called it Walmart as an intentional
25:44
tribute to Sol's company, Fedmart.
25:47
Fedmart was the original American discount retailer.
25:50
It was started by Sol Price in 1954 in San Diego.
25:53
And Sol, before he became a retailer, was a lawyer.
25:57
So he, when he was a lawyer, he was trained that he had-- he
26:01
was a fiduciary to his client.
26:03
What does that mean?
26:04
Well, the lawyer is trained that you have to put the client's
26:06
interest before your own.
26:08
When he became a retailer, he asked himself this simple
26:10
question: Who's my client?
26:12
And he thought it was really obvious that the customer is his client.
26:16
So when he would, uh, uh, operate, he said, "Everything we do has to be set
26:20
to, to be a fiduciary to the customer." So for example, if competitors would,
26:25
um, sell products below Fedmart's cost, Sol would put up signs saying, "Listen,
26:30
you shouldn't buy this product from me.
26:32
You can get it cheaper." And he would show exactly where you could
26:34
get the com-- where you could get the product cheaper. "I don't know
26:37
how they're doing it below our cost, but you shouldn't buy it from me.
26:39
Buy it from them." He's like, "My job is to put your interests ahead." So
26:43
as a result, people really trusted Fedmart, and they liked shopping there.
26:46
The company grew and thrived.
26:48
He became a wealthy Man, Company went public.
26:51
But as a public company, he just felt this pressure all the time.
26:55
He believed in low prices and high wages.
26:58
He believed in hiring and promoting from within and a kind
27:01
of an organic kind of growth.
27:03
What did Wall Street want?
27:04
Well, you can imagine.
27:05
The opposite.
27:06
High prices and low wages, all the things you can get away with.
27:09
If people trust you, you know, the investor's perspective was
27:13
you can betray them for money.
27:15
They won't even notice because the trust is worth stealing.
27:20
So Sol was a uncompromising person, and so this eventually came to a massive battle.
27:25
One day in 1975, his board fired him.
27:28
He literally came to work one day, and he couldn't get into his office 'cause
27:31
they had changed the locks on his doors.
27:33
And this is the pattern we see over and over and over again with companies
27:38
that rediscover the principle that I call enlightened capitalism.
27:42
We treat it-- Uh, founders tend to treat enlightened capitalism like a technology.
27:46
Like a, like they're like, "Oh my God, I just invented something amazing.
27:49
Did you know if you treat people with respect, if you pay good wages, if you
27:54
invest in quality and R&D, if you are transparent and trustworthy with your
27:58
customers, things go really well for you.
28:01
You make a fort, you make all this money." And they say to people, "Look,
28:05
because the market rewards value creation, because we live in a competitive system
28:13
the market will protect and not only protect, ex- uh, share what I have
28:17
created and others will adopt it.
28:19
And then something different happens.
28:22
This has been going on a really long time I tell , what I call the tragedy of Robert
28:26
Owen, , the famous Scottish industrialist.
28:28
He took over something called the New Lanark Mill in 1800.
28:32
1800. But he was so ahead of his time.
28:35
He ended child labor.
28:38
He created on-site housing.
28:39
He had a social insurance scheme.
28:41
He provided healthcare for his workers.
28:43
Like, all this stuff that by our modern standards we say is basically table
28:46
stakes, he figured it out in 1800.
28:48
He had very ahead-of-his-time, feedback practices for the workers.
28:52
He ended corporal punishment.
28:53
I mean, he had these very exceptional ideas, and it really worked.
28:56
He took this bankrupt mill to world-leading profitability and, , and
29:00
quality and all this good stuff.
29:02
And his investors kept trying to fire him.
29:05
He had to bring in new investors to buy out the old investors three times.
29:09
One of the syndicates involved the great utilitarian philosopher Jeremy Bentham.
29:13
Okay?
29:13
This is, like, not stupid people he was bringing in as investors.
29:16
But every time, the same problem would happen.
29:19
The investors would fight with him about the right way to proceed, get
29:22
into a conflict, and eventually, they would try to oust him.
29:24
The, on the third try, they ultimately did.
29:28
So when people hear the story of Sol Price or Robert Owen, they say to me,
29:33
like, "Why?" It's a kind of a mystery.
29:35
Why would investors wanna kill their own goose that laid the golden egg?
29:39
Isn't the market supposed to be about value creation?
29:42
Should- wouldn't investors wanna make as much money as possible?
29:45
This is one of the biggest fallacies of all time in business.
29:49
The market does not reward value creation.
29:52
For the record, you could create a market that rewarded value creation.
29:56
We could live in that world if you want, but that's not the world we actually
29:59
live in, nor has it been since 1800.
30:01
And because of the rise of financialization, this problem
30:03
is obviously getting a lot worse.
30:05
But let me go back to Sol Price because this book is not meant to be depressing.
30:09
It's actually a double mystery.
30:11
Mystery number one is: why are we killing the golden goose?
30:15
Why is this happening all over our economy left and right?
30:18
But if you ask most people about it, they will say, "Well," you know, once you get
30:23
past the denial, "This doesn't happen.
30:25
Invest-- The markets are perfectly rational.
30:26
Investors don't do this." But we lay out hundreds of years of case studies.
30:29
People are like, "Okay, it does happen." You say, "Why?" "Well,
30:31
I guess it's inevitable when companies get big, when there's money
30:35
involved, human nature," whatever.
30:36
We have a lot of just so stories about why this is inevitable.
30:40
But if it's inevitable, this is the second mystery: why are there exceptions?
30:46
Let's go back to Sol Price one more time.
30:47
Sol Price, after he got fired, you know, remember, he was a late-in-life
30:50
entrepreneur, and he was rich now, so he could easily have just retired
30:54
and been like… That's basically what happened to Robert Owen.
30:56
He gave up on business as a tool for change, but not Sol.
30:58
Sol was very stubborn.
31:00
He took two weeks off, and then he was back at work.
31:05
He leased the office upstairs from Fedmart And started a new company.
31:11
Now, today, that company, which he called the Price Company, is not that well-known.
31:15
But like when I was a kid, the Price Club was like the store
31:18
that my family shopped at.
31:19
I didn't even know that Price was a guy's name.
31:22
I just thought it's the store with the low prices.
31:23
That's where you go.
31:25
So but today, Price Club is not that well-known because of something else
31:27
that happened right around the same time.
31:29
See, Sol was a big believer in promoting from within.
31:33
So there was a guy who had started with him as a stock boy at FedMart
31:37
and then had risen through the ranks all the way to an executive.
31:41
His name was Jim Sinegal, and he quit FedMart in protest when Sol was fired,
31:47
went to help Sol build Price Club up, and then he decided to start his own company.
31:51
That company, some years later, merged with Price Club to form a company
31:55
that they called PriceCostco, but of course, we just call Costco, the four
32:00
hundred billion dollar public company.
32:02
That is, for whatever reason, the exception to every business rule.
32:06
So if this is inevitable, like if what happened to FedMart and
32:09
New Lantern is inevitable, why hasn't it happened to Costco?
32:12
People say, "Well, I guess Costco's just too big. Wall Street wouldn't dare
32:15
mess with them." Are you kidding me?
32:17
No way.
32:18
Wall Street is constantly trying to get Costco to abandon the ethos that it has.
32:24
It still practices that fiduciary to the customer mindset, the
32:26
capped margins of Sol Price.
32:29
But Jim Sinegal added a second really important element.
32:32
Costco is protected by a governance fortress that prevents its board from
32:39
betraying the mission and prevents outsiders from forcing the board to do so.
32:45
And Costco is not alone.
32:47
There are these outlier companies all over our economy that seem to defy this rule.
32:53
And in fact, if you study those companies as a set, you will
32:57
notice something very striking.
32:58
Every single one of them basically completely defies every single one of
33:04
the so-called best practices we are teaching everybody about how they're
33:07
supposed to build their companies.
33:08
So that's the, that's the book, a double mystery.
33:11
Why does this happen, and how can we create exceptions that prove the rule?
33:16
Man, I got through that much of my notes.
33:18
Yeah, yeah.
33:19
All right, We have more to discuss.
33:20
I look forward to it
33:22
I know you're under time pressure.
33:23
I want to just tell our audience, in chapter one, for those of
33:25
you who like innovation, Eric gives a list of unusual failures.
33:29
There's a link to the book where you can sign up to the website.
33:32
I'm gonna link you to that so you can go and download that.
33:35
You'll get emails once the book is released.
33:37
There's a plethora of content to go along with this.
33:40
Really interesting.
33:40
I loved your taxonomy of the mechanisms of those failures, which is really
33:44
useful language I found in my work in
33:46
innovation as well.
33:47
Love that.
33:48
That's all in chapter one.
33:50
But Eric, I love your mission.
33:52
I love how you're reinventing yourself.
33:53
I love what you've done.
33:55
You've gone from being the animator to developing the Disneyland and going for
34:00
a bigger mission, just like Walt did.
34:02
I'm sure people said it was Ries' Folly, and I'm really behind
34:06
you with this mission.
34:07
There's a beautiful saying I'm gonna leave you with, a Greek proverb, and
34:10
it's that , "Societies grow great when old men plant trees under whose shade
34:15
they'll never sit." I know you're not old, but thank you for planting trees.
34:19
Eric Rees, thank you for joining us
34:21
that is awesome.
34:22
Thank you very much.
34:23
I appreciate your kind words and what a great, what a great note to end it on.
34:25
Thank you
34:26
With a unique blend of AI-powered consulting built on unmatched managed
34:29
service capability, Kyndryl helps leaders harness the power of technology for
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smarter decisions, faster innovation, and a lasting competitive edge.
34:38
You can find Kyndryl and the Kyndryl Institute at K-Y-N-D-R-Y-L, kyndryl.com