Eric Ries: preference

Transcript context

…And this might be a good segue to the second bucket of stuff. So the way you described it earlier, I think is a really helpful way of framing it. There's the ethos, which is what we've been talking about, values, purpose, mission, and then there's integrity. So talk about that. Sure. So why did I use the word integrity? In normal human language, not consultant speak, but among normal people, integrity has two meanings. One is like, Lenny, you're a very high integrity person. If you say you're going to meet me at two o'clock at a place, I know you're going to be there. Everyone's got a friend like that where if they say they're going to do something, they're going to do it. And more importantly, if they're not sure, if they're like, "I think I can be there at two o'clock," they never would say, "I'll see you at two o'clock. " They won't do it. They know that to tell the truth requires you to really make a commitment. So that's the ability to keep your promise. But we also have the word structural integrity. I told them before, the difference between corroded bolts and stainless steel. Organizations, these two senses of the word become one. An organization that is weak cannot keep its promises because the person making the promise won't be there. Imagine you got a promise from the founders of Vectura that they'll never sell cigarettes to children. Oops, sorry. No, that's not integrity. So the goal of structural integrity for an organization is to give it the power to resist temptation from the inside, resist betrayal at the board level and resist pressure from the outside. As I mentioned, Costco very famously has this governance fortress that protects it from outside pressure. And people have come for Costco. I quote some hilarious quotes in the book about one of my favorites is Costco takes money that rightfully belongs to shareholders and instead invest it in improving the customer experience. That's meant to be a criticism. That's not what they're supposed to do. So why can they resist? Because they have the tools they need to fight back. Their board seeds its responsibility as a bulwark against pressure rather than as an amplifier of financial gravity. So that can sound very challenging and abstract as now we're talking about board level stuff, IPOs, people, a lot of people are like, "Oh, I don't have the power for that." Okay, that's okay. We can start with something very simple. We started with purpose and ethos. We can start with purpose here too. I mentioned before that most founders have never read their own corporate charter, which if you're a founder and you're listening to this and you've never read your own corporate charter, you have a company that is operating, it is your homework. You have to do this. You have to know what it says. This is so common that the HBO show Silicon Valley makes a joke about it where one of the investors is upgrading the founder to be like, "You don't know how your own effing company works?" Because he loses control of it. So they did their homework. This really does happen. But if you do read your charter, you probably will be more confused than you are now because you will read a sentence like this. It will say: f it. So they did their homework. This really does happen. But if you do read your charter, you probably will be more confused than you are now because you will read a sentence like this. It will say: "The Acme Corporation is hereby incorporated to pursue any lawful act or activity." And you read that and you're like, "That sounds pretty open-ended." Wrong. It sounds open-ended, but it's not. Unfortunately, we live in the era of what's called shareholder primacy, meaning that according to this theory, which is the governing theory of our lives, we live under this law today, right now. This says that an organization is not a vital, beautiful, living thing. Rather, it is a financial instrument designed to enrich shareholders and nothing else. And therefore, any lawful act or activity today means maximize shareholder returns under the law. People have been raised... Now we're old enough. This idea is old enough that we now have a generation of people who've been raised as if this was a natural law. This is how capitalism has always been, but that's wrong. For the vast majority of the time, for hundreds of years, we have had joint stock corporations. Only the last 40 have we had this idea. Before the '80s, it was considered obvious. Our grandparents thought it was obvious. Our great-grandparents thought it was obvious. Adam Smith thought it was obvious. Everyone before thought it was obvious that corporations existed to pursue a specific thing, what's called a beneficial purpose in the law. So in the 19th century, for example, if you wanted to make a company, you had to make a declaration to your state legislature that this thing you wanted to make would do something that is publicly beneficial. You'd be like, "I want to make a railroad." They'd be like, "Why?" You had to say it would be beneficial to the public to have a canal between this place and that place. And just to get a sense of how different our best practices are than the historical norms in the 19th century, let's say you were the richest person in America and you're like, "I want to buy this company and change what it does because I can." First of all, the board would be authorized to fight you to the death. They didn't have to say yes. They would do crazy stuff in the night. These battles were legendary. Some of them are hilarious what would go on between these people. But the second thing, let's say you succeeded anyway. You took the company over and you said, "I'm going to change its purpose from make a railroad to maximize shareholder value." That would have been a crime. The courts would void your charter. You would earn the corporate death penalty for having exceeded the authority of your corporation. So this is a new idea that we live under. We think it's natural, but it's very new. So if you don't want that, and that's what doomed Vectura and all these companies, if you don't want that, you can change it. The good news for you listening right now in the year 2026 is that a band of corporate governance rebels have spent the last 15 or 20 years fighting this and building alternative structures that are available to you.…

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