InsightfulDiscussion

Why Good Companies Go Bad (And How to Stop It)

Y Combinator

Eric Ries, author of 'The Lean Startup,' discusses his new book 'Incorruptible,' arguing that shareholder primacy is a recent and destructive legal norm that causes good companies to lose their missions. He presents structural alternatives like Public Benefit Corporations, dual-class shares, and industrial foundation models to help founders protect their companies long-term. Case studies from Costco, Novo Nordisk, and Anthropic illustrate how mission-first governance structures outperform standard Delaware CC Corp practices.

Summary

Eric Ries joins to discuss the core themes of his new book 'Incorruptible: Why Good Companies Go Bad and How Great Companies Stay Great.' He opens by arguing that the same thing that makes a company worth building — its mission and trustworthiness — also makes it a valuable target for takeover. Using an anecdote about a founder he calls 'the professor,' Ries illustrates how most founders unknowingly adopt corporate structures that legally obligate them to maximize shareholder value, leaving them vulnerable to being ousted if investors disagree with their decisions.

Ries traces the history of shareholder primacy, explaining that it is not a natural law or ancient pillar of capitalism, but rather a normative consensus invented by academics and legal scholars in the 1960s and 70s — most famously Milton Friedman — and never passed through any legislative or democratic process. Prior to this shift, corporations were chartered for specific public purposes, and converting a company away from its stated mission would have been considered a crime. He argues that the widespread use of boilerplate Delaware charters with 'any lawful activity' language effectively smuggled shareholder primacy into every company without founders realizing it.

Ries then tells the story of Sol Price, founder of FedMart and the intellectual father of Costco, who built his retail empire on the principle of being a fiduciary to the customer — putting customers first, employees second, and shareholders last. When investors ousted Price in 1975, FedMart went bankrupt within seven years. Price went on to found Price Club, which eventually merged with Costco. Ries uses Costco as a modern example of a mission-controlled company protected by what he calls a 'governance fortress,' noting that Costco consistently receives poor governance ratings from mainstream analysts yet dramatically outperforms Kroger, which adopted all the recommended best practices.

Ries also tells the story of Novo Nordisk, founded in Denmark in the 1920s as a for-profit subsidiary of a nonprofit foundation specifically to prevent insulin from being price-gouged. When the for-profit board tried to merge the company in the early 2000s, the nonprofit trustees blocked the deal, preserving research programs including one that was 11 years into developing GLP-1. That decision ultimately helped Novo Nordisk reach a market valuation greater than the GDP of Denmark. Ries cites academic research showing that companies using this 'industrial foundation' structure are six times more likely to survive to year 50.

On the practical side, Ries strongly recommends that founders convert to Public Benefit Corporations (PBCs), describing it as a two-page legal filing that restores purposeful incorporation and shields boards from being legally compelled to maximize shareholder value above all else. He also critiques the standard Silicon Valley board composition of two VCs, two founders, and one independent director, arguing that independent directors have a hidden conflict of interest — they are nominated by investors and have no financial stake in the mission's survival. His alternative is a two-tiered governance structure with outside trustees empowered to appoint directors, similar to the Novo Nordisk model.

Ries discusses his involvement with Anthropic's long-term benefit trust — a perpetual purpose trust that gives outside trustees the power to appoint directors to the for-profit board. He argues this structural integrity is a key reason Anthropic has been able to attract top talent, maintain mission alignment, and resist external pressure, including their decision to turn down a $200 million government contract that conflicted with their values. He closes by calling on founders to reject the normative consensus of shareholder primacy, read their own corporate documents, and adopt governance structures designed to last decades or centuries rather than quarters.

Key Insights

  • Ries argues that shareholder primacy — the legal obligation to maximize returns for shareholders — was never passed through any legislative or democratic process, but was invented by academics like Milton Friedman in the 1960s-70s and became a 'normative consensus' enforced by courts as if it were law, despite having no formal legal basis.
  • Ries recounts how Novo Nordisk's nonprofit foundation trustees blocked a major merger in the early 2000s, inadvertently preserving a GLP-1 research program that was 11 years in with no proof of success — a decision that ultimately helped the company reach a market valuation greater than the GDP of Denmark.
  • Ries claims that Sol Price's FedMart, after he was ousted by investors who wanted standard business practices, went bankrupt within seven years — destroying in seven years what Price had built over 20 — while Price went on to found Price Club, which eventually merged with Costco and became one of the greatest performing stocks of all time.
  • Ries argues that the standard Silicon Valley board composition of two VCs, two founders, and one independent director is effectively investor-controlled, because independent directors have no financial stake in the mission but do have a financial incentive to appear pro-investor since investors are the ones who recommend them for board positions.
  • Ries attributes much of Anthropic's competitive advantage — including talent recruitment, model quality, and resistance to external pressure — to their long-term benefit trust structure, which gives outside trustees the power to appoint directors and prevents the company from being legally compelled to prioritize shareholder returns over its AI safety mission.

Topics

Shareholder primacy and its historical originsPublic Benefit Corporations (PBC) as a structural alternativeSol Price, FedMart, and the founding of CostcoNovo Nordisk's industrial foundation structure and GLP-1Anthropic's long-term benefit trust and mission-controlled governanceFounder control vs. mission controlCorporate governance best practices vs. actual performance

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