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

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.