689: Eric Ries - The Costco Hot Dog, Why Good Companies Go Bad, Financial Gravity, Building Incorruptible Organizations, and The Lean Startup's Unfinished Business

My next book, The Price of Becoming will be out soon. I have sent it to a number of authors and leaders that I really look up to and I asked them what they thought. And here is what Liz Weisman, one of the greats of our times as both a leader and a writer said about the price of becoming. Quote, Ryan Hawk is a master of dualities. He's a great leader, but also a ferocious learner. He's an accomplished athlete, but he's also excelled in the business world. He's eminently interesting, but he's also genuinely interested. It is kind of weird reading these things about yourself. Anyway, Ryan has uncovered the secrets of what the best leaders do and how they think. Do yourself and your team a favor and read this book. I am so grateful for Liz's support and all of yours. I would love it if you'd go to learningleader.com and pre-order The Price of Becoming right now, or go straight to Amazon and pre-order The Price of Becoming right now. Thank you so much for your support. Welcome to The Learning Leaders Show, presented by Insight Global. I am your host, Ryan Hawk. Thank you so much for being here. Go to learningleader.com for show notes of this and all podcast episodes. Go to learningleader.com. Now onto tonight's featured leader, Eric Rees is the author of The Lean Startup, one of the most influential business books of the past 25 years. He then did something almost no business author does. He tried to live his own ideas at the highest level of difficulty. He built a new stock exchange from scratch. The long-term stock exchange is now the first new United States exchange to both list and trade multiple stocks since Nasdaq launched 50 years ago. He also wrote a new book. It's called Incorruptible, How Good Companies Go Bad and How Great Companies Stay Great. During our conversation, we discuss why the culture, mission statements and values posters on the wall don't actually protect a company and what does instead. Then Eric told the story of sending the manuscript to 600 early readers and how their feedback shaped the final draft of the book and also how to know when and who to listen to when receiving feedback. And then you'll hear me depart from our regular conversation about his new book in comment about Eric's unique communication style. We talk about that and so much more, ladies and gentlemen, please enjoy my conversation with Eric Rees. When I talk with leaders, one of the words you hear the most is culture. Let's build a culture and focus on culture and I get it. You say the secret to outlier companies, it's not the culture or the founders or their missions. It's something structural that protects all three. What is the structural thing that protects all three? Okay, this is very tricky for most people because the way we teach leadership today, we obsess over culture, business model, strategy, the things we can taste, touch and control. Does this mean culture is not important? No, obviously it's very important. Does it mean strategy is not important? Of course it's very important, but we have enough books about that. I tried really hard to write this book without using any trendy modern consultant language at all. I tried not to use the word stakeholder, I tried not to use the word culture, I did my best because I wanted to be more clear, more specific about the prescription. I don't care about culture and stakeholders, I wanted to talk about character, ethos. What does a company stand for? What does it do even if someone tries to bully it? What does it do even if somebody falls into some kind of temptation? I tell the story in the book of one of the greatest entrepreneurs of all time, a guy named Saul Price, the father of modern retail, which if you're not in the retail sector, you probably don't know this guy's name, but he is so influential. Just to give you one example, when Sam Walton was thinking about getting into retail, he decided to call his company Walmart as an intentional tribute to Saul's company, FedMart. Okay, FedMart is the original American discount retailer. And Saul, he was a lawyer before he became an entrepreneur and he believed as a lawyer that he had a fiduciary duty to his client. Meaning he puts the client's interest before his own. So when he became a retailer, he asked himself, who's my client? And he said, well, the customer is my client. So I'm a fiduciary to the customer. So I don't wanna hear about your trendy stakeholders, I wanna know, who would you rather die than betray? And for FedMart, that was the customer. When competitors would sell a product for lower price than FedMart, Saul would put up signs inside his own store saying, don't buy this product from me. You can get it cheaper from somewhere else. He wouldn't mark up items more than 14%. He practiced capped margins. He understood that margins were not a source of strength, they were on my ability. He paid above market wages. He did so many things right, but he was always being pressured by investors who wanted FedMart to operate according to best practices. After he built that company for more than 20 years, one day he came into work and he couldn't get into his office because the locks on the doors had been changed. He didn't work there anymore. The investors pushed him out and forced FedMart to practice best practices according to retail thinking at that time. And within seven years, they had bankrupted the company. It's so much easier to destroy than to create. In fact, we have built an economy that routinely rewards people for cost cutting without holding them accountable for the consequences of those cuts to trustworthiness, to brand, to culture, to all the other things we claim we care about. Now, the reason why Saul is so famous though is not just that he got betrayed and was fired and the company was destroyed. That of course is a very sad story. But because after he took, I love this, he took two weeks off, he was back at work. He leased the office upstairs from FedMart and he started a new company. That company was called Price Club, but today Price Club is not that well known because one of the people that left FedMart with him was a young guy named Jim Senegal who had worked his way up from Stockboy to executive at FedMart. Saul was a big believer in hiring and promoting from within. Jim eventually went out and started his own company using the Saul Ethos. And a few years after that, his company and Saul's company merged to form a company that they called Price Costco. But we just call Costco. This is the deep cut origin story of Costco, the $400 billion public company that everybody routinely calls the exception to every rule in business. But why are they such an exception? Why was FedMart destroyed but Costco's endured more than 40 years? Is it because Wall Street loves Costco because it makes so much money? Wrong, no. Investors are constantly trying to pressure Costco to abandon their Ethos. Wall Street analysts say stuff like this, at Costco, they take money that rightfully belongs to shareholders and instead invest it in the customer experience. I said, that's a criticism, you know? The reason why Costco endures is because it is protected by a governance fortress, a series of worst practices that give them routinely getting bad governance ratings from all these experts and rating agencies that see the company as besieged by outside pressure and needing to resist that pressure structurally. That's the key to an incorruptible company, the Ethos of a Sol Price. They still practice his philosophy at Costco to this day, the capped margins, the fiduciary to the customer, but they also practice this structure that makes it hard for them to be bullied into abandoning their principles. The hot dogs are such a great story, especially when Jim Senegal has been pressured relentlessly to raise the prices. And the famous quote to COO, I'd love for you to tell the story about how that brings that Ethos to life. Okay, so I'll tell the hot dog story. If those who don't know it, this is a super famous story in our business history. And if I get to be the one to tell it to you for the first time, I'm so delighted because it's a great story. The key quote in the story is so famous, you can buy a T-shirt with the quote on it, okay? So this is not like my original reporting or anything like that. Jim did tell me something really interesting. He said, if you took a dollar bottle of ketchup at Costco and sold it for a dollar and three cents, nobody would notice. It's the exact same number of bottles of ketchup. If they did that across the whole store, they would basically double their net income, just a tiny little raise in prices. He called it the business equivalent of taking heroin. Because if you do it once, you're gonna wanna do it again and again and again. At Costco was a huge company to get a sense of how big if Kirkland Signature was its own spun out company, it would be bigger than Procter & Gamble, United Airlines or Coca-Cola. It's a huge company. So if you could double your net income, that's a lot of money they could be making and they choose not to. Why he said? Because if you do that, eventually you will no longer be the low price leader. Eventually you won't stand for anything at all. Your promises to customers will be empty and you will lose the engine that creates all that profit. He really understood investors by pressuring FedMart, they were killing the goose that laid the golden egg. And Costco is designed to resist that pressure. So the symbol of this resistance is the $1.50 hot dog. So in 1986, Senegal had the idea in their original store in San Diego that they should sell a hot dog and soda combo like on a cart outside the store. Because you're shopping, but you might get hungry on your way in or you out. They charged $1.50. That was a perfectly reasonable price. At that time, just for comparison, McDonald's Big Mac was about $1.60. That same Big Mac today in California is crossing $7. The hot dog and soda combo is still $1.50 at Costco. So like in the era of shrinkflation and price inflation and broken promises, like this humble hot dog has become this icon of Costco's commitment to not raise prices when they could otherwise do it. Again, to give you a sense of the scale, Costco sells more hot dogs from this cart than every major league baseball stadium in America combined. More than 200 million combos a year. If they could charge $7 for this combo, we'd be talking about like literally an extra billion dollars of net income. Free money to the bottom line. Why don't they do it? Well, in 2008, they had to confront this problem because they were trying to keep the price of $1.50, but costs, their underlying costs were rising. Now they don't believe in lost leaders. They don't do that. So they only sell a product, they can do it profitably. So the COO comes to the boss, Jim Senegal, CEO, and says, boss, we're getting killed on this hot dog. We got to raise the price. And Jim, this is the famous quote. He said, well, that's fine, but you should know, if you raise the price of the effing hot dog, I will kill you. So figure it out. And it's just a great quote. It's like so fun. It's got the F word in it. It's got the killing quote in it. It's got all the stuff. But it actually reveals a lot of business wisdom if you stop and think about it. First of all, when I tell the story, I tell it a lot. My vegetarian friends can't stand the story. Okay, first of all, because they're like hot dog, it's disgusting, okay, like it's not good for you. I'm not saying Costco has my values. I'm pointing to Costco stands up for its own values. And this hot dog is its idea of human flourishing, okay? Second, why was the COO trying to raise the price? No one has ever asked me that question when hearing the story. Everyone just like, we just assume, of course he's going to raise the price. As Jim Senegal said, that's the easy way. That's what we've all been taught is the default of business. You can get away with doing the wrong thing, you do it. You don't have to ask why. So that's really important to understand that they could have done this. The question was normal, but Costco's answer is what's abnormal. And the last thing that's key to understand this as a leadership principle, not just about Costco, is those three words at the end, figure it out. You cannot imagine how much work Costco has done to vertically integrate the supply chain of this fricking hot dog in order to be able to sell it for $1.50. They literally own their own hot dog production plants in multiple cities. They have done these incredibly complicated business dev deals with the soda vendors, they get the soda costs down. Like they take it incredibly seriously. And like from the outside, most MBAs would be like, I don't get it. Why are they doing all this extra work, incurring all this extra cost for the privilege of not making more money from the hot dog? So this is a principle I call harder is easier. When you take the hard road, and you make the principle of commitment, you get these almost unbelievable values because you are generating the most underrated and most valuable asset in all business, trustworthiness. I think this could be a good life maxim in addition to what Costco does. This harder path is actually, this is quoted from your book, you argue that the harder path is actually easier in the long run. So people kind of nod and like, oh yeah, yeah, that makes sense. You know, climb the mountain, do that type of thing. But this actually can unlock advantages both in a business, as well as I think in a personal life. Let's go a bit deeper on this harder is actually easier over the long term. You ever heard the expression easy choices, hard life, hard choices, easy life? Is it Jersey Gregory? Is that? I actually don't know the origin. I've been meaning to look it up because people keep quoting it to me in these interviews and I'm like, man, I need to look this up. I think that's who it is, but I'm not sure. Yeah. Who did you say it was? Jersey Gregory or I've heard them on a podcast. I'm just gonna look it up right now. What am I talking about? Okay. Hard choices, easy life. Yeah, Jersey Gregory. Yeah, exactly right. Olympic weightlifter. Yeah, I need to learn more about this. I don't know the original source of that quote. I thought it was just a euphemism. Okay, no, apparently not. That's really cool. Okay, Olympic weightlifter. No, that makes a lot of sense. And I use it, it's funny, it's so funny. I use Olympic athletes as an example all the time of the way that we see business as a fundamentally different discipline than other pursuits in ways that I find hilarious. So this is a great example. So imagine I go to the Olympic weightlifter and I'm like, man, I really wanna be an Olympic weightlifter like you. How do I do it? Because our business heroes that we look up to, these mega companies and these successful founders, they're our Olympic athletes of business. They're extreme outliers. They work really hard at it. So you go to the Olympic bodybuilder and you say, listen, what do I gotta do? And he's like, well, before I teach you how to lift weights and stuff and do the sport, first thing you gotta do is gotta eat right, you gotta hit the gym. And you're like, okay, got it. After I become an Olympic athlete, then I have to eat right and hit the gym. He's gonna be like, no, man, no, that's not how it works. You gotta do that right now. Like you gotta do that from the earliest possible moment. You're like, oh, shoot. I didn't go to the gym yesterday. So you're saying I'm doomed. I can call the Doritos I want now, it doesn't matter. It's like, no, man. I don't know if you can become an Olympic athlete or not, but I definitely know you cannot become an Olympic athlete if you don't exercise and eat right. Like I know for sure all the other things, first thing you gotta take, right? And so then you're like, oh, got it. Well, good news. I went to the gym yesterday. So now my Olympic athlete, no, man, you don't do it one time. This is a lifetime commitment you gotta make to take this seriously to the discipline, the craft, like all these things. And for some reason in business, we don't have that same idea of the craftsmanship of the personal commitment and discipline that is required. Governance is the same way. Governance is just another word for organizational soul craft. You wanna build something remarkable. You want it to live for a long time. You want to outlive you. You better put something into it to give it that durability. And so this is what we're talking about. People do not seem to understand that things like culture, mission, all the attributes we really crave in an organization. They are what are called emergent properties of the organization. They are things that can be cultivated, but cannot be commanded. Most leaders get this wrong. And this is the key to the harder, is easier principle. Once you understand that when an organization is healthy, all these good things will happen. It'll have a growing stock price. People will want to work there. It will make money. Money is like the oxygen of the body of this thing. So you hear that, people like, oh, oxygen is very important. Without oxygen, a company will die. That's true. Therefore, the goal of a company is to breathe as much oxygen as possible? No. As though to breathe were life as the old poem goes, no, there's a lot more to human life than oxygen. It's just one very important component. It's an input we need to create the thriving thing we want to make. So managers, a lot of leaders, they're kind of like a college kid, who just had the insight for the first time that they're living in a body, and I can countering the mind-body duality problem for the first time late at night with some friends. I mean, like, whoa, man, what am I? Am I in a body or I am a body? Like, what am I a soul? Am I a mom? What am I? And sometimes people go through that phase and they come up with a very simplistic answer. They say, no, I am in control of my body. I own it. It obeys me. How do you know? I have the impulse raise my hand and look what my hand does. I'm in control. But you ask such a person, and most of us went through this at a younger age, right, like, okay, but can you command your body to heal a cut? Can you command it to be healthy? No. And some people go into nihilism when they first hear this. They're like, oh, no, nothing I do matters. So I can eat all the Doritos I want? No, man. You wanna be healthy, you can cultivate health. You have to make consistent, responsible choices. Well, most managers are the same way. They say, I'm in charge of my team. I'm in charge of my division or my company or my whatever. Oh, really? How do you know? I give a command and it is obeyed. I say jump, they say, how high? I'm in charge. It's like, okay, that proves that you have a functioning nervous system. But can you command the organization to be profitable, to have integrity, to have any particular culture at all? No. But therefore, is there nothing you can do? No. It can be cultivated, it cannot be commanded. So a huge part of the book is how do we translate these fiduciary commitments into the business leadership elements we need? How do we align the business model with the mission? How do we create a culture that is aligned to this mission? How do we make it so that even if no manager is present, people still know what the right thing to do is and do it? You write this book that goes mega viral and then you do something that I think a lot of people don't do who are in that position. You actually put it into play. You start a company. You try to live by these principles if that's the right phrase. Can you tell me about that and how you tried to institute this and take what you learn from your research, from talking to all these brilliant people and then go and be an operator yourself and run a company? Well, I've been thinking about these problems for a long time. Even in the Lean startup, if you read the last chapter, I'm trying to already talk about how we need to have ecosystem level reform to do things like to bring entrepreneurship into how we teach business education and to change how long-term managers should be in their thinking and stuff like that. And one of the ideas that I floated is that somebody should really do something about the financial incentive side of this. We need to build a long-term stock exchange and I sketched out how it should happen. It's one of the last ideas in the book. The Wall Street Journal literally called it a crazy idea in a headline. That's how wild it was seen. Like not an op-ed. It was like literally Lean startup guys next quote, crazy idea. So it was considered really wild, but I don't know. I'm not the kind of person that likes to sit back and enjoy doing the things I've done in the past. I'm always on to the next thing because to me, there's like a global battle going on here for the soul of our economy, the soul of our civilization. Like is it gonna be extractive or is it gonna be committed to human flourishing? Are we gonna be about building things and making things for a living? Are we gonna make our money by stealing from all the people? And I don't know, I wanna be on the side of the builders. And so this idea to do that as an operator, I'm a builder at heart. So I was like, yeah, of course, if this infrastructure needs to be built and no one else is willing to do it, then I'll do it. Okay, so be it. And that has been the hardest and most painful project of my life. I mean, building a new stock exchange is not the kind of thing you do for fun, but I did it because I felt it was necessary from a mission perspective. And although I don't run the company anymore, it is still going concerned making money and it's the first new stock exchange of its kind since the creation of NASDAQ. 50 years ago, it has companies listed on it, the first such exchange to have more than one company listed on it, again, since creation of NASDAQ. So I'm very proud of what the team there has been able to accomplish. But to me, it's all one thing. From Lean startup to this, it's one project. Now remember where I signed up for Twitter all those years ago when it first came out, just trying to change how startups are built. This is still to this day, that's what it is. I think we have a better, more humane, more scientific, more long-term way to build organizations. And we as a movement, as a community, have to figure out what are the new best practices that should come after this fallen age of shareholder primacy. Can I ask you a completely random question? Yeah, the best kind. Your cadence, the way that you tell your stories and talk is unlike maybe anyone I've ever talked to. Yeah, there's a kind of soft voice of how you end the sentence. Again, this is really weird, but I mean, I am a fast end by communication and how leaders communicate with people. Super important. So I think it's vital to be a good writer. It's vital to be a good speaker, a good email sender. Like I think it's really important if you're leading people. And so I'm curious, is your cadence and tone and communication style something you've really worked on or is this how you always been and just naturally talk? No. I love the question. Okay. Yeah, no, I've worked very hard at it. And I think when people talk about communications, look, certain people have the RIS, okay? Like some people are very charismatic and they just, everywhere they go, they're popular when they, like, that's not been my life. Okay, I'm a super introverted person. I was a computer programmer for God's sake. Okay, so this is not like the natural thought thing I thought I would be doing when I grew up at all. But like I've always loved ideas. I've loved debate and politics and all kinds of stuff, history and philosophy. So like I've always been interested in ideas. I've always wanted to be able to write. But I remember, I can still remember to this day, the first time I ever actually gave like a big talk about Lean Startup. So as an engineer, I had given small tech talks like a couple of times. I've been on stage maybe like five times in my life in a professional context. That was it. So for me, giving them talk to like this big audience of about 700 people there, is that the old web 2.0 Expo in San Francisco, for those that remember what that was, incredible time. And I was really nervous and I was an engineer. I was like, what am I doing with my life? That I'm standing in front of all these people. And I sat, I was like in the bathroom, like backstage, like freaking out. And I was like, okay, why am I doing this? Honestly, like time to get real with yourself. Cause to me, I think one of the keys to communication that people don't talk about enough is what are you trying to communicate? People just assume that you can equally well communicate anything. And if you're an actor, the reason why we love actors and put them on this pedestal is because they actually can do that. They can make you believe they believe anything. But in real life, that is not a positive. That's not good. If you're somebody who can make anybody believe anything, like, damn, you're not, no one's gonna trust you as far as I can throw you. That's why we keep actors separated. It put them up on a stage. You know, it's different. In real life, the authenticity of what's being communicated, the integrity of it is the first and most important thing. So to me, bottom line, I was like, why am I stepping on this stage? And I thought to myself, I was really like thinking about the pain that I had experienced as a failed founder myself. I had been there, done that. And all my books, I don't recommend that people do anything I haven't been willing to do myself, you know? I was like, this was my message was about what I had learned from these failures and how to prevent them. And I thought to myself, okay, there might be 700 people here, but I can't worry about that. Maybe there's one founder in this audience who as a result of what I say today will change their course. And they'll be able to avoid the humiliation and the pain that I endured. And that will be worth it, enough. That's enough for me to feel like this is okay. So anyway, that got me through that day. And let me do it. But I tell that story because I've had a lot of reps since then. Okay, people talking about the 10,000 hours or whatever, like the Beatles playing those clubs in Germany for all those years when they nobody knew who they were. I've put in the time, like I have given talks about the startup more times than you could possibly imagine. I've put the reps. If you try to get better at something and you put in the reps, you get better at it. So yeah, I'm very flattered that you think that, I'm a good storyteller, I'm flattered that you think that there's something here from a communication perspective to learn, but mostly it comes from just trying to get better. It was not natural to me. Like when I gave that 700 person talk, I spent so much time on that talk, you can't even imagine it. I had a customer advisory board for that talk. I took it really seriously. I marketed it very heavily. I was like on social media, the early social media, not the toxic algorithm driven garbage we have today, but the old days when like, you could just talk directly to people about it. I gave several practice talks in actual venues. I remember sitting in the back of a Hobie's restaurant in Santa Clara, California, not even close to where I live, at seven o'clock in the morning for this incredible group called the Bootstrapers Breakfast, which was like a tiny little group. I think he was still going. Sean Murphy's been doing that for many years. Shout out, Sean, he's great. He invited me. He's like, I was like, I need to practice this talk. Like who can I talk to? He's like, well, you can come to have breakfast with us. I'm like hanging out with like six people and I'm of Hobie's, giving my talk. And again, I had that moment of like, what am I doing with my life? But I needed the reps. I needed the reps and I'm glad I did. So I think if you're willing to put in the time, and if you're intentional about it, you can learn to communicate in a way that's authentic to you. And I think that's what people resonate with. I'm so glad you told that full story because that's a portable lesson for many areas of life. One, just thinking about how hard you work to get ready for that first one. And then everything you've done since then, again, I think there's a lot to learn. Like from a leadership perspective, there's a lot to learn from, you have to have this like willingness to endure, this willingness to get the reps, this willingness to practice in front of your friends. I don't think that's normal. I don't think most people want to do that. You kind of like wing it and say, well, if it goes bad, then I can just say, well, that's because I just didn't have enough time when that's an excuse, right? That softens the character to use that excuse. I think getting the reps, practicing, actually really caring about it is weirdly a superpower. It's a difference maker and leaders who make it happen in the ones who don't. And so that's inspiring to hear that whole story. I'm glad you feel that way. And I do think just caring and trying to do a good job is so unbelievably rare. I mean, I just, you know, I work with a lot of big companies and I work with a lot of startups. I meet people all the time who as far as I can tell do not do anything. They don't work. They don't do their job. I don't understand what they do, but like you give them even a simple task and they can't do it. And if you try to hold them accountable, they're extremely skilled at evading the accountability. And you're just like, what? But what, you know, it's like, Office Space made it a joke. If you remember that movie, like what would you do here? What do you? Yeah, like there's a lot of that going on in the world. And so yeah, just by being willing to be cringe and like be sincere and like I actually am trying to do a thing and I'm trying to make it happen. You know, I met an entrepreneur the other day and I said, what do you do? And she said, well, we're working on terraforming Mars. And a bunch of people around me at the table kind of laughed. And I was like, well, you, you laughing. That's awesome. Is that even possible? And she's like, well, we didn't know, but yeah, it is. And here's a plan and here's what we did. And like they've made this incredible amount of progress in like two years on a civilization grade problem that everyone would just be either like, that's impossible. So not to worry about it or surely somebody's working on that. So it's not really my business to worry about that. And they were like, no, nobody's actually working on the plan. Like what kind of microbes are we gonna use when we eventually get to Mars? They were just like, we're gonna work on the thing that is that we think is important. Now look, that might not be your thing. It wouldn't be my thing. I was scared me to death to work on a project like that. I was like, are you, what are you even hoping to achieve in your lifetime with this? They had an answer. They had really given it a lot of thought. And I was like, that's like super cool. And you meet these entrepreneurs all the time that are just the only person in the world working on some problem. And critics often say this, like who died and made you God? Like, why are you the king of this thing? Cause I'm the only person working on it. Like literally nobody's working on it. There's just a problem sitting here. And I've got, there are so many things like that. And the most thing, the thing I'm most proud of so far with the new book, you might have heard, I really believe in feedback. I might have picked up on that theme in my work, right? So I had more than 600 test readers of incorruptible. They generated more than 10,000 individual comments as I was working on the manuscript for months and months. Instead of scrolling social media, I was scrolling the feed of test reader comments. It was awesome. I'm so grateful to the test readers. The book was so much better because of them. I actually feel really bad how bad the book was when they first started test reading it. Okay, so I'm really proud of how good it is now, but it's because of their sacrifice that you could enjoy this book. Anyway, one of the things I'm most proud of with this is that several of the test readers, I think we're up to four or five now, like a not zero, not zero, but like quite a few have written to me and said, thanks to this book, I'm pursuing a business idea I wouldn't have had otherwise. I've learned to see the world in a different way. And I realized there's an opportunity staring me in the face that I'd never noticed. And each of those businesses, if I look at what they have in common, they're all of this form. It's a certain category of business that sucks. Like every vendor sucks. Everyone hates all the players. Why is that? They're like, why can't we have a good one? Why don't we have a company in that space that everybody loves? Like it's such an obvious thing. Like just this massive opportunity is staring you in the face. But because we see this corruption as inevitable, we don't even think to attempt to pursue an organization that would try to create what we're called the positive externalities in economics. So to me, that's one of the coolest things about writing something like this, is you start to open up the aperture of what people consider to be possible, then good stuff happens. You bring up feedback. I think this is critical, the people you surround yourself with, truth tellers in your life, because staying self-aware and aware of the world is hard at times. But there can be potentially a downside because sometimes you get feedback and they're wrong. Or they don't know what they're talking about, especially if there's 600 of them. I'm curious in your life, you're a very bright guy. There's a bunch of evidence to support that statement based on your body of work and the impact and the positive dent you've already made in the world. So when you seek feedback, especially from hundreds of people, how do you know, like what should I listen to and what should I implement and what should I just say thank you for your feedback and then throw it in the garbage? That seems like it would be hard. Extremely difficult, extremely difficult. And again, a skill that takes reps. Feel bad, B, I feel like I'm like, I'm being your motivational workout coach here, but yeah, reps is the thing. So okay, first thing is, how do you know you're ready for feedback? First question, and especially in an artistic project, okay? With business, I'm a little bit more, like I've kicked people in the pants a little bit more to be like, come on, don't be precious. Go get feedback. And that's only because in business, we tend to wait way, way too long before we get any kind of feedback. So like go get feedback early. But in general, like whether it's a book or a movie or a screenplay or a company, it doesn't make any difference. If you're personally invested in it, then you have to take feedback in the earliest moment when you won't be devastated by it, right? Cause like sometimes if you get feedback too early, you can get so sucked into the feedback that then you lose your original spark or vision or inspiration. So you gotta be careful. You gotta treat your own morale, your own vision as like a perishable resource, not to get overwhelmed. But notice that there's two dimensions of that. There's like how early you get the feedback, how strong is the feedback? You know, I don't go get feedback from total raging A-holes in the early days of a project. Like I don't find people who are gonna be more friendly cause I wanna be able to have a more safe conversation. That's okay. But the other dimension is how sensitive are you to the feedback? And that's the thing you actually have the most control over. And you can learn to interpret feedback in this very special way. And I learned this in an interpersonal context long before I learned it in a business context. It's a very simple rule. Feedback tells you something about the person giving it, not about yourself. So if someone reads my manuscript and says, this book sucks, what have I learned? I've learned that they don't like this kind of book. I have never learned anything about the book, whether it quote unquote sucks or not. If I'm building a product, I used to have this problem all the time when people would like go onto my product forums and be like, your product is terrible. I would go in there and argue with them. But no, it's not. What is being accomplished by this argument? Never want a single one of those arguments and all I do is piss people off. And more importantly, I blinded myself. My defensiveness blinded me to the information. Cause you start to be like, huh, people 16 and younger think my product is awesome. People 16 and older think my product is terrible. Is my product actually terrible? Or is it for teenagers? Oh, interesting. I'm learning something about who likes my product right now. So I'm gathering information. When you make this shift to be able to take in feedback without taking it personally, you can then get feedback earlier in the process. It becomes safer and safer and safer to get product. The point where you could actually get feedback, you know, at the very beginning, especially of a business product, like that's what that's really the whole idea of MVP is to get you into a situation where you're comfortable finding out if this is any good. And the last dimension of feedback is we always have to separate out qualitative from quantitative feedback. Qualitative feedback is for hypothesis generation and quantitative feedback is for hypothesis validation. I'll give you an example again from the book. There was a certain company, I won't name them, but a certain company that I used to think of as the good guys. I did a lot of work with them and I love them a lot. And so I put them in the book. Here's a story about the good guys doing good stuff. And readers started to write me and say, those guys are not the good guys. How dare you call them the good guys? They're actually evil. And I was like, man, first time it happened, I'm like, oh, someone's got an axe to grind about my favorite company, like, you know, F off, right? But after a while, I started to be like, okay, I'm noticing a pattern. First of all, people are getting hung up on this chapter. Like I can see the data in the test reading platform. Like people are not getting past this point, they're getting distracted. They're not learning the information that I want them to learn. And so this chapter is not working. And I also had a hypothesis as to why I think the reason is because I'm telling the story that is framed as the good guys doing something good and people don't have that. Like they just don't believe me because they think this company is bad. So like you have to have a qualitative, if I just noticed nobody could read chapter seven or whatever chapter it was, that wouldn't have been helpful. I wouldn't have known what to do. But because I had both the qualitative and the quantitative, I could put them together. So the same thing is true, like in any kind of process, if you're not sure what the problem might be, you talk to people and get qualitative depth with them. Once you're pretty sure you know what the problem is, then you do a test to measure whether the new chapter works better than the old chapter. And that was the key. Like I finally broke down and took that company basically out of the manuscript. Not only did people stop complaining, I could see in the data that they could get through that chapter. One of the guys you heard about Jim Mackey, I had him on this podcast, we talked about this and it sounds like you went really deep on this. I mean, he called Whole Foods essentially his child, but then he sold it. And there's a number of reasons as to why, what did you learn and what can we learn from that whole process of Jim Mackey Whole Foods and eventually selling it to Jeff Bezos and Amazon? Yeah, I tell the whole Sorted Saga is in the book. And it's a sad story. I mean, I feel bad telling it because John Mackey, he meant so well. And it's so sad to me the way people write about these dramas. Like I actually talk about at the end, we're going backwards in the end. So people don't know Whole Foods is a grocery store that was literally founded on the principle of love. Okay, it was like literally he wanted to build the greatest place in America to work. And for all the years that he ran Whole Foods, it was super profitable. And it was very frequently named, born in the United States, it was on that those famous best places to work lists. And yet once it went public, the gravitational pressure of the public markets like made it impossible for them to do certain things they needed to do. As a result, they wound up in a competitively disaventages position and activists investors forced them to sell the company, eventually selling it to Amazon. And Amazon hasn't been a bad owner of it by any means, but the thing that made it special has clearly been lost. And just go on the Reddit forums, you'll see people still to this day mourning what could have been. So I quote this article, because when the activists showed up, Mackie fought them in the press. He was like trying to fend them off and he called them greedy bastards. He's like, you don't care about Whole Foods and its history and its customers and its quality. You just want to make a quick buck for six months of work. And the activists who did that transaction made $500 million in six months from forcing the company to be sold. So he was not wrong about their motivation and he estimated the amount of money they were going to make pretty well. But the press loved that story. It was like Mackie, the idealistic, conscious capitalism guy versus the greedy bastards of Wall Street. Who will win, fight? You know, it's like a personal drama. So I quote this article at the end, someone wrote, the greedy bastards won. That's the title of the article and explains that Mackie wanted to have it both ways. He wanted Whole Foods to be this mission driven avatar of conscious capitalism, but he also wanted it to be a bog standard public company using all the usual mechanisms of being a corporation. And so kind of he's seeing it as a personal hypocrisy on Mackie's part. But of course the point of my book is, why should Whole Foods have been embodied in this so-called best practice structure? What if it had been embodied in a stronger structure, one that would have allowed it, first of all, to resist the activist, of course, but years earlier to make the tough business decisions that Wall Street wouldn't have liked in the short term. That's ultimately what they weren't able to do. So yeah, I think you see these examples of a company that should have been able to succeed, but couldn't. And I call them unusual failures because it wasn't Whole Foods mistakes that doomed it, it was its success. Let's say somebody has not a Whole Foods, but they're doing well, growing maybe rapidly and all of a sudden they listen to this, they get your book and they're, well, I mean, I've been focused on my culture and I think my people are great, high character, high competent, we trust worthy, we are like this, right? We're straightened up to the right. And you know, we have our life stuff like every company does, it's messy at times, but it's going well, it's going well. They're like, well, we don't even start, Whole Foods seem great. I'm gonna be more like Costco though. I mean, where does that person even start? What are some of the few things they can do to say, okay, let's do boom, boom, boom. Yeah, I'm gonna give you the checklist, but just like if you talk to the Olympic bodybuilder and he gives you a checklist, you're not done. The checklist is like clues to the- Do you know the Ronnie Coleman quote? No. Do you know who Ronnie Coleman is, Mr. Olympia? Eight time Mr. Olympia? Yeah, yeah. Okay, it's like 12 second video, he goes, I'll try to do some pressure because his voice is amazing in this video. Everybody wanna be a bodybuilder, nobody wanna lift these heavy ass weights. And it's- Yes, it's- Oh, you gotta send me that clip, that's so- I will, it's the best because it's just so true. Everybody wanna be a bodybuilder, but like we don't wanna do the actual thing to lift the weights, you know? God, that is such a great metaphor because everyone thinks they're gonna be fine. Like their investors tell them, I tell the story in the book of a CEO, founder CEO, came to see me, multi-billion dollar company, going public, planning for his IPO. He heard that I know a lot about that because I run the long-term stock exchange. He's worried about, hey, her Wall Street's really short-term, is it gonna be that for me? And I'm like, yeah, if you have standard governance, Harvard Law School did a study, by the way. Only 20% of startup founders, venture-back startup founders, who have conventional governance, will still be CEO even three years after an IPO. The mortality rate here is extremely high. So I'm like, dude, you know, you've defied the odds so far, but you need to be worried, the odds are still not in your favor. And I explained to him all the bad things that can happen, just like told him the story of Whole Foods and all these stories. Like, okay, okay, I gotta get on this right now. But he called me back a few months later, I said, okay, you know, how did you do it? And stuff we talked to him, he's like, no, not really. I talked to my bankers, I talked to my investors, I talked to my GC, I talked to my CFO, I talked to all these people, one expert after another. And they were all like, you know, man, Eric is such a downer. If he really believed in your vision, he wouldn't talk like that. You're the exception, you're special, you're this, you're that. He's like, so we're gonna be fine. He went public and five months after his IPO, investors freaked out about something one of his competitors had done, drove the stock down 90% and he was ousted. Now, did he make mistakes? I'm sure he did. Was the business model perfect? Probably not. But had he really earned so little grace? After all these years building a multi-billion dollar company, he couldn't even last not even six months, turned around like, this is the culture we're in. So for people who think they have plenty of time, the principle in the book, the most important principle is it's always too early until it's too late. People always ask me, is it too late for me? I don't know. Is it too early? I don't know. All I can say is each of these techniques I'm gonna tell you, can you do it right now? If you can do it right now, you should do it right now. Don't wait. The best time to plant a tree is 40 years ago. The second best time is today. Okay. Here's the easiest one on the whole book. If you're the founder or you're on the board or you're in the C suite of an organization, you can go read your corporate charter. Most founders have never read their corporate charter, by the way, you should. In the corporate charter, you will find a boilerplate paragraph at the beginning. This is something like the ACME corporation is hereby incorporated to pursue, and it's like a mad lib. There's like a blank line, and it says any lawful act or activity. And you're like, oh, that doesn't sound too bad. Wrong. Under shareholder primacy, the legal doctrine that we live in today, any lawful act or activity is routinely interpreted to mean maximize shareholder value. So you think you have a mission statement that everyone is working towards, but your legal charter says something different than you're lying. Not your mission. Okay. Give me a break. So the easiest thing in the book is simply to write your actual mission into the corporate charter. You do this, if you're a Delaware company, you can do this with a two-page legal filing. It's just true in like 44 states. Very easy thing to do. It's called a public benefit court file in PBC. So just remember the three letters PBC. This is something literally your lawyer could do for you tomorrow. It's very easy. Why more founders don't do it? I honestly don't know. Second thing is we need to focus on what I call those fiduciary commitments. So once we say that our mission is, to improve human health or something, right? Like then we say, okay, who would we rather die than betray? And then we have to figure out how to actually make those commitments real. Is it your customers? Is it your employees? I'm not gonna tell you who it should be. You tell me who you would rather die than betray. If you say, nobody, I got nothing to say to you. You're a sociopath. Get out of here. You wanna run that company? I can't tell you not to do it. I'm here for the people that want to accomplish something. And it doesn't have to always be a person. You could say, well, my number one priority is product quality. Cause I wanna bring a little beauty into people's lives. Okay, whatever it is, we need to write it down. Put it in the mission. Now the second step is how do we make sure that all of our employees, everybody is aligned to that goal. I give a bunch of techniques for this in the book. And the third thing is we gotta deal with the board and investor pressure. Like board betrayal and investor pressure are like some of the leading causes of death of companies in the modern world. So we need to have something I call the director's oath. This is like the version of the Hippocratic oath for doctors. We need that for the board of directors to make them pledge to commit to the company's mission. And the last thing, maybe the most important thing, but maybe the most controversial thing is I think the directors, even the independent directors need to be accountable to somebody. Power without accountability is corrosive to the human spirit. And the same people that are always talking about how important it is to hold founders accountable. Think that we should staff boards with absolutely unaccountable independent directors. So no, we need to have a secondary set of trustees. Think of it as like checks and balances, like a legislature and judiciary, executive and a legislative branch, like separate branches. We need to have some way to hold the directors accountable. There's a lot of mechanisms by which this can be done. Obviously famously like Nova Nordisk is governed by a nonprofit foundation. Patagonia is governed by what's called a perpetual purpose trust. John Lewis partnership in the UK is governed by an employee ownership trust. If you ever played a tailored guitar, as I have in my music room, that is governed by an employee stock ownership plan and ESOP. So there's many, many, many different mechanisms. If you've ever shopped at IKEA or you have a Vanguard Mutual Fund or you've shopped at REI, like you have encountered companies that have these structures in your real everyday life. And the data shows that having such a structure is dramatically more stable and also higher performing than conventional structures. So that would be my kind of quick checklist, would be encode the mission into the charter, make those fiduciary commitments, do something like the director's oath at the board and have the directors be accountable to somebody else via something like a foundation or a purpose trust. Towards the end, I love this idea of you are not, I felt like this is about personal agency. You are not stuck in traffic. You are traffic. Tell me more about this mindset, this ethos of you are not stuck in traffic, you are traffic. Okay, this is kind of spoiler alert for the book, but my belief when I write a book like this is you gotta reward the people that read to the end because most people don't. Speaking of the heavy weights, we were like, I wanna learn how to do this awesome thing, but books too long, you know? I'm like, okay, well, call me back when you're ready to lift the weights. All I can do is give you the information. You gotta choose to read it. So one of the biggest issues in the whole book is I tend to see the world through organizational eyes because I'm a founder. My clients, my friends, my work is the CEOs and boards and fancy people that can't help it. Even when I deal with two kids in a garage, they're the boss of the tiny thing that we're making. So I'm just used to seeing things from the owner, operator, leaders perspective. I mean, to leadership podcasts, maybe a lot of people feel this way. But one of the problems we run into when we do that is we miss that all of us have agency over this problem more than we realize. And in fact, the whole book is about this force, this force I call financial gravity that drags companies down into mediocrity. And we do a whole book talking about the structural tools we need to resist and eventually to wield and amplify this gravity. But there's like a deeper question that I leave unresolved until the end, which is where is this gravity coming from? Is it a law of nature? I can't be right. The earth has no financial nothing, like financial markets are human constructions. And we always want to blame investors, blame this, but like a lot of the issue in financial gravity has to do with people's attention, your approval, who do you give it to? Notice that the same people that are constantly telling you that you have no agency, that you don't matter, you're not important, like spend a lot of money, billions of dollars on PR to make sure you think they're great. You ever wonder why? Why do they, if you're the richest man in the world, what do you care what everybody thinks of you? Why do you spend so much money on it? Maybe because people's individual choices and beliefs really, really, really matter. So every story in the book can be read esoterically, a secret way. You can read it as a story of the founder, the leader, whoever, but you can read it in reverse. So for example, in the book, I show the evidence that says that companies that are purpose-driven, mission-driven, enjoy an employment advantage. That people want to work there. They don't have to pay them as much. They have higher morale. They have higher retention. That's a leadership principle, but it's also a guide to where to work. Your career will be better off if you work in a company like that. It says that customers are more loyal to brands they can trust. That is also a shopping guide. It shows that companies that are structured this way outperform for their investors. That's also the thesis of an investment company or a good guide to where to invest your retirement savings. Now, when I start talking about this stuff, people get real antsy. It's like, wait a minute, after a whole book of structural problems requiring structural solutions, now you're telling me I'm gonna solve climate change with recycling, you know, F-off, right? Like we're so sick of that stuff. Everyone wants to blame individuals for systemic, I get it, man, I'm not doing that. But what I want you to understand is that we live in the age of what's called surveillance capitalism. And this is where I say you are not in traffic, you are traffic. Where is gravity generated? You are generating it right now. The fact that you chose to listen to this podcast instead of something else is lending your gravitational power to this program. Why is everyone constantly like, please like and subscribe? We need the evidence of your attention to fuel the algorithms, to get the investment, to get the next thing, the next guest wants to see what's the data like you have a lot of agency. So in the age of surveillance capitalism, every decision you make, whether anyone knows about it or not, even if you keep it a secret, think about all those famous stories of people that like, their parents found out they were pregnant because like Target would send them a targeted ad for like baby stuff. And they're like, why is this coming to my house all of a sudden, right? Like even if you never tell anyone, the algorithm knows, people are surveilling you. That means every decision you make is some middle manager somewhere's okay are. It's their bonus target. It's their job to make sure you do that thing. It's probably some other person's job to make sure you don't do it. So everything you do creates these gravitational waves that trickle out through our whole economy. As a result, you can complain about surveillance capitalism. You want it has tremendous downsides, privacy is under threat, all that's true. But it also is a source of surprising power that you have to wield it well. One more personal question. It's a year from today. Okay, I love studying how high performers celebrate or maybe lack thereof. This is called the champagne question. You, the people you love, you're all popping bottles. You're going nuts. You're celebrating like crazy. It's one year from today. What are we celebrating? Yeah, oh God, that's such a great question because I don't even know. My life was so fast. Things that were unthinkable have already happened. You know, like it's hard for me to say. So like if you'd asked me not that long ago, I would have said, you know, last September, I say we would of course remember, I don't run LTSC anymore, but I still have the habit of calling it we. LTSC filed the petition with the SEC to abolish quarterly reporting. Now for 50 years, if you ask any leader in business of any consequence, what's wrong with our public markets? What they find annoying about being a business leader? Everybody says quarterly reporting makes no sense. Gotta hit the quarter, gotta hit the quarter. Everyone hates this. There's nobody alive who thinks this is any good except for the people like that that's their thing. But like actual people who work for a living find this crazy. Anyway, for decades, people have been trying to get rid of this. It's been seen as an absolute unstoppable pillar. I went to the team at LTSC and said, listen, it's not my decision to make anymore, but I recommend we do this filing. Let's lay out the case, the evidence for why it's time for this to go. It was in the news a couple of weeks ago that the SEC is gonna do it. So if you told me in September to have a show, I'd be like, we'd be celebrating that. Let me like unbelievable world historical achievement. Now it's like, well, they already did it. And everyone's like, okay, I guess it's just like, what becomes a champagne problem is like instantly accepted as conventional wisdom. Oh, everyone knew that we're gonna do that. It's like, definitely. This was considered impossible like five minutes ago. Anyway, so I don't know, man. It's very difficult to say. I hope the book is seen. You know, I don't know if it's gonna sell a lot of copies or be a best seller or whatever. I hope people will like it. But the fate is really up to the people watching this. Like this is not a book that's gonna be boosted by a lot of traditional media. It's not like gonna get like wall to wall coverage. Like a book about Elon would get, you know, like a controversy stirring book that's full of drama and talking crap about people. Like this is not that kind of book. It's antagonistic to a lot of people in power who aren't gonna like it. So to me, if a grassroots movement emerges around this, if people take it into their own hands to not just buy the book and read it, but to like to put it into the hands of their founders that they know, their friends that they give it to their boss and they start to just demand as consumers, as employees, as leaders, I want to work in an incorruptible company. That's my right I deserve that. Otherwise I'm gonna be betrayed. Who wants that? That starts to happen. We see even the, the faintest inkling that that kind of thing is happening. We're having a champagne toast about that one year from now for sure. Love it. The book's called incorruptible. How good companies go bad and how great companies stay great. By the way, did you publish this with James Clear's publishing company? It is. This is published by Authors Equity, absolutely. Nice man. I had a dinner with him a couple of months ago and we were talking. He seems so jacked about what they're doing there. He's thrown himself, not surprising, with like the best in the world at that. So how has your experience been? Oh, it's been great. The irony is many of the people that work at Authors Equity are the original team that worked on the Lean startup with me. That's cool. So I get the best of both worlds. I'm both coming home to really high end publishing professionals who I know and love, but also I get the benefit of this radically improved economic model, it's a new business model for publishing. And I'm tremendous credit to Madeline and James for inventing this thing. I think it's gonna do a lot of good for a lot of authors. Love it. Well, thanks again for being here, Eric. I've been a fan of your work for a long, long time. Lean startup days is really, really cool to have this conversation. I would love to continue our dialogue as we both progress, man. Oh man, I'm super jazzed. Thanks for making the time. Thanks for such great questions. And everybody like and subscribe, don't forget. Thank you. I appreciate it. It is the end of the podcast club. Thank you for being a member of the end of the podcast club. If you are, send me a note, Ryan at learningleader.com. Let me know what you learned from this great conversation with Eric, Reese, a few takeaways from my notes. What is your equivalent of Costco's hot dog in your organization? That one commitment you are willing to defend even when it's financially painful. What is something you stand for because it's part of your company ethos, especially if it doesn't make financial sense. I think it's a great question to ask yourself as well as to speak with when it comes to the leaders at your place of work. What do you stand for even if it doesn't make financial sense? Then find your corporate charter and read it. Most say nothing about mission, customers or employees. I liked Eric's prescription here. Encode your actual commitments into the legal document. Make them binding, not just a decorative statement that you hang up on the wall. And then pick one decision in front of you right now where the harder short-term path would build something more durable long-term. The harder path is actually easier in the long run. Think of the Ronnie Coleman, lift and weights. Everybody wants to be a bodybuilder, but nobody's want to lift these heavy weights. What is that for you? Go lift the heavy weights. Once again, I would say thank you so much for continuing to spread the message and telling a friend or two, hey, you should listen to this episode of the Learning Leader Show with Eric Rees. I think he'll help you become a more effective leader because you continue to do that. And you also go to Spotify and Apple Podcast, rate the show, hopefully five stars. Righty, thoughtful review. Subscribe to it by doing all of that. You are giving me the opportunity to do what I love on a daily basis. And for that, I will forever be grateful. Thank you so, so much. Talk to you soon. Can't wait.