Transcript of 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 Wiseman, one of the greats of our times as both a leader and a writer, said about The Price of Becoming. Quote, Ryan Hawke 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 Leader 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 on to tonight's featured leader. Eric Ries 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 US stock exchange. 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 and comment about Eric's unique communication style.

We talk about that and so much more. Ladies and gentlemen, please enjoy My conversation with Eric Ries.

When I talk with leaders, one of the words you hear the most is culture. Let's build a culture. And they 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's not important? No, obviously it's very important. Does it mean strategy's 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 Sol 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, For example, when Sam Walton was thinking about getting into retail, he decided to call his company Walmart as an intentional tribute to Sol's company, FedMart.

Okay. FedMart is the original American discount retailer. And Sol, 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 don't care about that. 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, Sol 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 a liability. 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 7 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 2 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 stock boy 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 Sol'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. As if 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 Sol Price, that 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, I'd love for you to tell the story about how that brings that ethos to life.

Okay, so, so I'll tell the hot dog story. If, for those that don't know it, this is a super famous story in business history. And if I get to be the one to tell it to you for the first time, I'm so delighted 'cause it's a great story. The key quote in the story is so famous you could buy a t-shirt with the quote on it. Okay, so this is not like my original reporting or anything like that. But Jim did tell me something really interesting. He said, if you took a dollar bottle of ketchup at Costco and sold it for $1.03, nobody would notice. They'd sell 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. Costco is 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. So he really understood, like, what investors— by pressuring FedMart, they were like 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, Sinagal 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 like you're shopping, but you might get hungry on your way in or your way out. They charge $1.50. That was a perfectly reasonable price at that time. For just for comparison, a 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 an, in the era of shrinkflation and price inflation and broken promises, like this humble hot dog has become this like 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 $1.50, but costs, their underlying costs were rising. Now they don't believe in loss 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 gotta 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 this 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. The point is 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. If 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. That 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 3 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 trying to 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, when you make the principled commitment, you get these almost unbelievable values because you are generating the most underrated and most valuable asset in all of 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—

harder.

You argue 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 that—

I don't, I actually don't know the origin. I've been meaning to look it up because I, I, 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. Sorry, who did you say? You say it was?

Jerzy Gregorek, or I've heard him on the podcast.

You know what, I'm just gonna look it up right now. What am I talking about?

Yeah, okay.

Um, hard choices, easy life. Yeah, Jerzy Gregorek. Yeah, exactly right. Olympic weightlifter. Huh.

Yeah.

Yeah, I need to learn more about this. I, I, 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'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 want to be an Olympic weightlifter like you. How do I do it? Because our business heroes that we look up to, these mega companies, 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 got to do? And he's like, well, before you— I teach you how to lift weights and stuff and do the sport. First thing you got to do is got to eat right. You got to 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 got to do that right now. Like, you got to 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 get all 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 got to take, right? And so then you're like, oh, got it. Well, good news. I went to the gym yesterday, so now I'm an Olympic athlete. No, man, you don't do it one time. This is a lifetime commitment you got to 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 it to outlive you, you better put something into it to give it that durability. And so this is, 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's like the oxygen of the body of this thing. So you hear that people like, you know, oh, oxygen's 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. Like, 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 like, kind of like a college kid, you know, who like just had the insight for the first time that they're living in a body and like encountering the mind-body duality problem, like for the first time late at night, you know, with some friends and being like, whoa, man. What am I? Am I in a body or I am a body? You know, like, what am I, a soul? Am I a mind? What am I? Okay. 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, you know, 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 want to 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— 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 learned from your research, from talking to all these brilliant people, and then go and be an operator yourself and run a company?

Well, you know, 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, you know, to do things like to bring entrepreneurship into how we to 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 guy's 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 going to be extractive or is it going to be committed to human flourishing? Are we going to be about building things and making things for a living? Are we going to make our money by stealing from other people? And I don't know, I want to 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, you know? 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 a going concern making money and is 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, more than one company listed on it again since the 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. I remember when 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.

Good.

You have this kind of soft, voice of how you end the sentence. Again, this is really weird, but I mean, I am fascinated by communication and how leaders communicate.

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 this is 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 or 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 rizz, 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 sakes. Okay. So this is not like the natural 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, 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 times. I've been on stage maybe like 5 times in my life in a professional context. That was it. So for me, giving a talk to like this big audience of like 700 people there is at 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. Because 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 they can throw you. That's why we keep actors separated and 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, all everything I recommend, 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 what 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, or like the Beatles playing those clubs in Germany for all those years when nobody knew who they were.

I've put in the time, like I have given talks about Lean Startup more times than you could possibly imagine. I have 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 communications 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. You know, I remember sitting in the back of a Hobee's restaurant in Santa Clara, California, not even close to where I live, at 7 o'clock in the morning for this incredible group called the Bootstrappers Breakfast, which was like a tiny little group.

I think it's still going. Sean Murphy's been doing that for many years. Shout out Sean, he's great. He invited me. He's like, you know, I was like, I need to, I need to practice this talk. Who can I talk to? He's like, well, you can come to have breakfast with us. I'm like hanging out with like 6 people and a 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 it. So I think, yeah, 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 in leaders who make it happen and the ones who don't. And so that, 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, 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, what would you do here? What do you— Yeah, like, there's a lot of that going on in the world. And so, yeah, you just by being willing to be cringe and like, be sincere and be 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, are 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've done. Like, they've made this incredible amount of progress in like 2 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 going to use when we eventually get to Mars? They were just like, we're going to 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. That would scare 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, who? Why are you the king of this thing? Because 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. You might have picked up on that, 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. People, 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 I'm— it's because of their sacrifice that you can 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 4 or 5 now— like a, 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 realize there's an opportunity staring me in the face that I never noticed. And each of those businesses, if I look at what they have in common, they're all of this form. There's a certain category of business that sucks. Like, every vendor sucks. Everyone hates all the players. Why is that? They're like, why, 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 staring— massive opportunity 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 the— what are 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, and the impact and the, 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. I feel bad, B. I feel like I'm like, I'm being your like motivational workout coach here, but like, 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 kick 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 getting 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, 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? Because 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, you gotta treat your own morale, your own vision as like a, 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. Like, you know, I, I don't go get feedback from total raging a-holes in the early days of a project. Like I go find more people who are gonna be more friendly cuz 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 not 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. I know it's not. What is being accomplished by this argument? Never, never won a single one of those arguments, and all I did was piss people off. And more importantly, I blinded myself. My defensiveness blinded me to the information. Because 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, right? 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 to 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 ax to grind about my favorite company. Like, you know, fuck 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 could 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 a 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 the qualitative. If, if I just noticed nobody could read chapter 7 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 wrote about, Jim Mackey, I had him on this podcast. We talked about this, and, and it sounds like you went really deep on this. I mean, he called Whole Foods essentially his child, but then he, 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, 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 from 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 what 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 one of America's— 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 disadvantageous position and activist investors forced them to sell the company, eventually selling it to Amazon. And, you know, 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, Mackey 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 6 months of work. And the activists who did that transaction made $500 million in 6 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 Mackey, 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 it explains that Mackey 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, he's seeing it as a personal hypocrisy on Mackey'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 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 trustworthy, we are like this, right? We're straightened up to the right. 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, where do I even start? Whole Foods seemed great. I want to 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. Yeah. Let me give you, I'm going to give you the check. Okay. I'm going to give you the checklist. Yep. 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 know the Ronnie Coleman quote. No.

Do you know who Ronnie Coleman is? Mr. Olympia, 8-time Mr. Olympia.

Yeah. Yeah.

Okay, it's like 12-second video. He goes, I'll try to do his impression because his voice is amazing in this video.

Everybody want to be a bodybuilder, nobody want to lift these heavy ass weights. Yes. Oh, you got to send me that clip. That's so cool.

I will.

It's the best because it's just so true. Everybody want to be a bodybuilder, but we don't want to do the actual thing to lift the weights.

God, that is such a great metaphor because Everyone thinks they're going to be fine. Like their investors tell them. I tell the story in the book of a CEO, founder CEO came to see me, multibillion-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, is Wall Street really short-term? Is it going to be bad 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-backed startup founders, who have conventional governance will still be CEO even 3 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 I told him the story of Whole Foods and all these stories. And he's like, okay, okay, I got to get on this right now. But he called me back a few months later. I said, okay, you know, how did you do any of that stuff we talked about?

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 5 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 multibillion-dollar company, he couldn't even last not even 6 months to turn it 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 the tree is 40 years ago. The second best time is today. Okay, here's the easiest one in the whole book. If you're the founder or you're on the board, or you, you know, 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 that says something like, the Acme Corporation is hereby incorporated. To pursue, and it's like a Mad Libs. 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, then 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 2-page legal filing. It's just true in like 44 states. Very easy thing to do. It's called a public benefit corp filing, PBC. So just remember the 3 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, you know, 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. You know, get outta 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 cuz 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, you know, 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, Novo 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 Taylor guitar, as I have in my, my music room, that is governed by an employee stock ownership plan, an 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 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, I'm gonna— 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, 'cause most people don't. Speaking of the heavyweights, people are like, I wanna, I wanna learn how to do this awesome thing, but book's 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 CEOs and boards and fancy people. That's, I can't help it. You know, even when I deal with two kids in a garage. They're the boss of the tiny thing that we're making, right? So I'm just used to seeing things from the owner-operator-leader's perspective. I mean, you— it's a leadership podcast. Maybe, 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? That 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, you know, 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. As 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 at 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 going to solve climate change with recycling? You know, fuck 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 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, 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 OKR. 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.

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 if 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. So wield it well. Hmm.

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 moves 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, but of course, remember, I don't run LTSE anymore, but I still have the habit of calling it we. LTSE filed a 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 LTC, I said, listen, it's not my decision to make anymore, but I recommend we do this filing. Let's, 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 going to do it. So if you told me in September to have a chat, I'd be like, we'd be celebrating that. That'd be 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 they were going to do that. It's like everybody, this was considered impossible like 5 minutes ago. Anyway, so, 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 going to sell a lot of copies or be a bestseller 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 going to be boosted by a lot of traditional media. It's not like going to get get like wall-to-wall coverage like a book about Elon would get, you know, like it's 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 going to 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, and 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, that's my right. I deserve that. Otherwise, I'm going to be betrayed. Who wants that? That starts to happen. We see even 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? Publishing company?

It is. This is published by Author's Equity. Absolutely.

Nice, man. I, I had a dinner with him a couple months ago and we were talking. He seems so jacked about what they're doing there. He's surrounded 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 Author's 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 have tremendous credit to Madeline and James for inventing this thing. I think it's going to 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 dialog as we both progress, man.

Oh man, I'm, 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@learningleader.com. Let me know what you learned from this great conversation with Eric Ries. 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 lifting 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 Reese. 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 Podcasts, rate the show, hopefully 5 stars, write a 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.