How The Best Companies Defend Against Mediocrity And Rot

Introduction to Value Creation and Company Longevity

• The most effective way to generate wealth is by creating more value than one captures, and building something that people want, rather than making money without adding any value, which is possible in today's economy 10s.
• Eric Reese, author of the Lean Startup and the upcoming book Incorruptible: Why Good Companies Go Bad and How Great Companies Stay Great, is discussing his new book, which focuses on how great companies can stay great and avoid losing their original vision 1m42s.
• Reese's motivation for writing Incorruptible came from seeing many companies lose their way and founders losing control, despite the success of the Lean Startup in teaching people how to build companies 2m6s.
• The Lean Startup provided a playbook for building companies, but it did not provide tools for protecting the trustworthiness of the company and staying in control, which is a crucial aspect of long-term success 2m42s.
• Many people focus on getting from zero to one, but there is a lack of guidance on how to make a company last for a long time, such as a hundred years, and how to protect it from being taken over or stolen from 3m30s.

Eric Reese and the Motivation Behind 'Incorruptible'

• Reese shares a story about a founder, referred to as "the professor," who is building a transformative technology and is trying to recruit talent while promising that the technology will not be used for harmful purposes, highlighting the challenges of balancing profit and values 5m0s.
• The story illustrates the difficulty of maintaining control and protecting a company's values, especially when investors may have different priorities, and the need for a clear understanding of how to navigate these challenges 6m30s.
• The story of a founder who was betrayed and kicked out of his own company is shared, with the founder being honored at an event attended by thousands of people, including former employees, to celebrate his legacy and mourn the loss of his role in the company 10s.

The Problem of Short-Termism and Shareholder Primacy

• The event is described as a wake, rather than a party, as the founder's removal from the company is seen as a loss of the company's original mission and values, with the new CEO being beholden to temporary investors who prioritize profit over the company's mission 2m6s.
• The current state of companies is criticized, with temporary organizations being led by temporary managers on behalf of temporary investors, resulting in a lack of trust and a focus on short-term gains, as evidenced by the dramatically decreased average holding time of stocks and lifespan of companies 2m6s.
• The concept of shareholder primacy is discussed, which prioritizes investor returns over the company's mission and values, and is enshrined in Delaware bylaws, requiring companies to relentlessly pursue profit, with this principle being cited as a key factor in the removal of the founder from his company 2m6s.
• The idea of building an incorruptible company is explored, with the suggestion that founders have choices to make, particularly in the early stages of the company, that can impact the company's trajectory and longevity, and that it is possible to create a company that prioritizes its mission and values over short-term profits 2m6s.
• The importance of founders making intentional decisions about the structure and governance of their companies is emphasized, with the warning that adopting traditional corporate governance practices, such as incorporating as a Delaware CC Corp, can lead to a focus on profit over mission and values 2m6s.
• A company's charter was found to contain a clause that required the company to maximize shareholder value, which could lead to the company being sold to the highest bidder, even if it's an undesirable buyer, and this clause was not clearly understood by the company's founder until it was pointed out by someone else 10s.

Founders Losing Control and the Consequences

• The concept of "this is the way we've always done it" can be a barrier to change, and many people, including lawyers and investors, may try to talk companies out of making changes, but there are ways to address these objections and provide evidence to support alternative approaches 2m6s.
• The Long-Term Stock Exchange is an example of an effort to change the ecosystem and promote long-term thinking, and there is evidence that many so-called "best practices" are actually value-destroying, with the story of Jeff Lawson and Twilio being a notable example 4m42s.
• Jeff Lawson, the founder of Twilio, built the company from nothing to $4 billion in revenue, but was fired after the company's super voting shares expired, despite the company's success, and this was due to a clause that was agreed upon during the IPO process, which allowed for dual class control to sunset after seven years 6m15s.
• The expiration of the super voting shares and the subsequent firing of Jeff Lawson raise questions about the priorities of the company and its investors, and whether the focus on short-term gains is detrimental to the long-term success of the company, with the fact that Lawson was fired just 199 days after the expiration of the protections being particularly notable 10m30s.
• Many companies, including Twilio, have experienced the urge to fire their founders when they make mistakes, with the idea that this will bring accountability, but this approach often leads to negative outcomes, such as a loss of innovation and mission, 10s.

The Mission-Driven Company Model

• The firing of Edwin Lamb from Polaroid is cited as an example, where after his departure, the company never invented anything significant again, and this outcome is attributed to the fact that the mission was closely tied to the founder, 1m42s.
• Instead of building investor-controlled or founder-controlled companies, it is suggested that companies should be built around their mission, with the mission having sovereignty, allowing them to last longer and maintain their purpose, 2m6s.
• Patagonia is mentioned as a company that has successfully implemented a mission-controlled approach, and the story of Saul Price, considered the father of modern retail, is shared to illustrate the importance of prioritizing customers and employees over shareholders, 4m6s.
• Saul Price's company, Fedmart, was founded on the principle of putting customers first, employees second, and shareholders third, a fiduciary hierarchy that is echoed by other successful companies, such as Johnson and Johnson, which prioritizes doctors, patients, and nurses first, employees second, and shareholders last, 6m6s.
• The idea that shareholder value is a byproduct of a well-run company, rather than the primary goal, is emphasized, with the analogy that focusing on shareholder value is like putting the exhaust pipe in the intake, causing the company to lose its sense of purpose, 8m6s.

Customer-Centric Governance and Long-Term Success

• When a company prioritizes shareholder value above all else, product quality, design quality, and customer health can suffer, and this structure is not sustainable in the long term, as seen in companies like Philip Morris, which generates $8 billion in profit but creates $600 billion in costs for others, including $300 billion in direct healthcare costs and $300 billion in lost productivity 10s.
• The concept of fiduciary duty to the customer is essential, as embodied by companies like FedMart, where the founder, Saul, prioritized customer interests and even directed them to competitors if they could offer lower prices, demonstrating that trust is a valuable asset and customers will reward companies that prioritize their needs 2m6s.
• Steve Jobs is another example of a leader who prioritized design and customer experience, even when it meant going against the interests of shareholders, and his obsession with design led to conflicts with engineers, but ultimately drove the company's success 4m30s.
• The story of Saul and FedMart serves as a cautionary tale about the challenges of maintaining a customer-centric approach when faced with pressure from investors, as Saul's efforts to keep prices low and wages high were constantly at odds with the interests of public market investors, leading him to try to take the company private to protect his vision 6m40s.
• The importance of governance and prioritizing customer interests is crucial for the long-term success of a company, and if not done correctly, no other decision will matter, as the company will ultimately be driven by the interests of shareholders rather than customers, leading to a potentially grim future, as illustrated by the tobacco industry, which makes $6,000 from every customer that dies 8m20s.
• The story of Saul Price, the founder of FedMart, is an example of how a company can be destroyed by the pursuit of higher prices, lower wages, and faster growth, as the new board of FedMart prioritized these goals over the well-being of employees and customers, ultimately leading to the company's bankruptcy within seven years 10s.

The Role of Governance and Board Structure

• After being fired from FedMart, Saul Price went on to create a new company called Price Club, which later merged with another company to form Price Costco, now known as Costco, a company that still embodies the idea of being a fiduciary to the customer and is protected by a governance fortress that prioritizes its mission over maximizing returns for shareholders 2m6s.
• The concept of a governance fortress is crucial in protecting a company's mission and ethos from outside attacks and pressures, and it requires a board that understands its job as protecting the mission, rather than just maximizing returns for shareholders 4m42s.
• The formula for creating an incorruptible company is ethos plus integrity, where a company has a higher principle that it is committed to and has the structural integrity to protect that principle from temptation and outside pressure 6m15s.
• Finding the right board members is crucial in creating a governance fortress, and it requires being willing to say no to best practices and being punk rock, as well as having a clear understanding of the company's mission and ethos 8m30s.
• The story of Costco versus Kroger is an example of how a company that prioritizes its mission and has non-standard governance practices can be successful, while a company that follows best practices may not have the same level of success 10m50s.

Investor Influence and Founder Naivety

• Creating selection bias is crucial, where investors and board members choose to be with a company because they believe in its mission, not just for potential financial gain, and it is essential to ensure their interests are truly aligned with the company's goals 10s.
• Founders often make the mistake of being too naive and credulous when choosing long-term partners, such as venture firms, and may not fully understand the incentives and control rights they are giving up, highlighting the importance of carefully reviewing documents like the Limited Partnership Agreement (LPA) 2m6s.
• Becoming a Public Benefit Corporation (PBC) is considered a best practice, as it restores the concept of purposeful incorporation, allowing companies to prioritize their mission and public benefit alongside shareholder value, and is a relatively simple process, especially for companies with only safes and no equity investors 4m42s.
• The concept of PBCs is often misunderstood, being distinct from other certifications like the "B Corp" label, and its purpose is to enable companies to incorporate with a specific mission or public benefit in mind, rather than solely focusing on maximizing shareholder value 6m10s.

Historical Context of Corporate Purpose and Shareholder Primacy

• Historically, companies were incorporated with a specific purpose or mission in mind, and it was not until recently that the idea of maximizing shareholder value became a dominant goal, with many 19th-century companies having charters that outlined their specific objectives, such as building a railroad or canal 8m6s.
• The board of a company has a fiduciary duty to defend and protect the company's purpose, which was the first highest priority, but this responsibility was forgotten when shareholder primacy became the focus 10s.
• A historical example from the 19th century involves a wealthy individual trying to take over the Eerie Canal Company, but the board directors fought against it by any means necessary, and although the fight was intense and involved unethical behavior, it was considered natural for the board to defend the company's purpose 2m6s.
• The concept of general incorporation, which allows anyone to form a company for any reason, was a significant development that was fought for over the course of the 19th century, with Delaware adopting this concept in 1899, but even then, it was assumed that companies would have a specific purpose or mission 4m42s.
• However, over the course of the 20th century, companies were advised to include a general purpose in their corporate charter instead of a specific one, resulting in many founders being unaware of their company's actual purpose, and corporate charters often containing vague language that allows for any legal act or activity 6m30s.
• The use of tactics such as poison pills to defend against takeovers is still relevant today, and companies can choose to include such measures in their corporate charter to protect their purpose, but many are not aware of these options or do not take advantage of them 3m40s.

The Legal and Philosophical Foundations of Shareholder Primacy

• In the 1960s and 1970s, a small group of academics, judges, and legal scholars decided that lawful corporate activity means shareholder primacy, without putting it to a vote or legislative action, and this concept has never been subject to a referendum or legislative action 10s.
• The idea of shareholder primacy was influenced by individuals like Milton Friedman, who wrote that the social purpose of a corporation is to increase its profits, and this notion has been widely accepted as the primary duty of corporate directors 2m6s.
• Despite its widespread acceptance, shareholder primacy is not technically a law, but rather a normative consensus, meaning that everyone agrees that this is how companies should act, and those who violate this principle can face legal consequences, such as being sued 4m42s.
• Many founders and entrepreneurs do not agree with the idea of shareholder primacy, but often do not express their dissent publicly, and instead, there are tools available, such as Public Benefit Corporation (PBC) tools, that allow companies to formally declare their commitment to creating value and capturing less than they create 8m10s.
• The concept of creating more value than one captures is often referred to as the "builder's intuition" and is shared by industry legends like Tim O'Reilly and PG, who believe that the best way to make money is to build something that people want, rather than just pursuing profit without creating value 10m40s.

Structural Solutions for Long-Term Company Stability

• There are many ways to make money in the economy today that do not involve creating value, but many people do not think this is a good or sustainable way to build a business, and instead believe that creating value and capturing less than one creates is a more desirable and long-term approach 12m20s.
• To build a truly long-term solution, it is necessary to look for structural solutions that do not depend on the goodwill of any individual, but rather incorporate checks and balances, similar to a government, to balance faction against faction 10s.
• Becoming a Public Benefit Corporation (PBC) can provide a shield against being removed for not maximizing shareholder value, but it does not work both ways, and directors still have wide latitude to make decisions under Delaware law 2m6s.
• The current best practice of having a combination of investor directors and independent directors can be problematic, as independent directors may have no financial incentive for the mission to endure, but have a financial incentive to be seen as pro-investor, as they often get recommended by investors for director jobs 4m42s.
• Research has shown that independent directors do not accomplish their intended goal due to conflicts of interest, and a potential solution is to create a second entity, such as a two-branch government, where outside trustees have the responsibility of appointing directors 6m15s.
• Investor directors, on the other hand, are doubly accountable to both the company and their Limited Partners (LPs), which is seen as a more effective and transparent system, and a similar approach could be applied to independent directors 8m10s.

The Nordisk Insulin Laboratorium and the Two-Tiered Foundation Model

• Founders need to take a more active role in recommending and appointing directors, rather than relying on investors, to ensure that the board is truly representative of the company's mission and values 9m40s.
• The structure of having a for-profit subsidiary under a nonprofit foundation has proven to be more stable than a single entity, as seen in the case of the Nordisk Insulin Laboratorium, which was established by August and Marie Crowe in Denmark after they discovered the potential cure for diabetes in Canada 10s.
• Marie Crowe, who was diagnosed with diabetes, accompanied her husband August on a lecture tour of North America, where they met scientists who informed them about the isolation of insulin in Canada, leading to their interest in commercializing the technology 2m6s.
• The Canadians and the Crowes were concerned about the potential exploitation of patients who relied on life-saving medicine, and they foresaw the risk of a for-profit company taking advantage of its customers, which led them to establish a nonprofit foundation with trustees and a for-profit subsidiary with directors 4m42s.
• The Nordisk Insulin Laboratorium was able to produce insulin within three months of its establishment, and it eventually became the predecessor company to Nova Nordisk, which has maintained its scientific integrity for over a hundred years 6m15s.
• Despite facing challenges, including the pressure to merge with other companies in the early 2000s, Nova Nordisk was able to resist the temptation to prioritize profits over its mission, thanks to its unique structure, which allowed the nonprofit foundation to have a say in the company's decisions 10m0s.
• The nonprofit foundation's ability to veto a proposed merger allowed Nova Nordisk to maintain its independence and continue to prioritize its mission, demonstrating the effectiveness of its structure in defending against mediocrity and exploitation 12m0s.

The Impact of Governance on Innovation and Company Valuation

• The trustees of Novanorisk played a crucial role in defending the company against a potential merger by ensuring that any decision made was necessary for the company's survival, and they ultimately rejected the merger proposal after careful consideration 10s.
• The decision to reject the merger was significant, as it allowed Novanorisk to continue its research programs, including one that led to the development of the drug GLP-1, which was a difficult and costly project to produce but ultimately became highly valuable 2m6s.
• The intervention by the trustees had a profound impact on the company's valuation, allowing it to reach a market valuation greater than the GDP of Denmark at one point, and cresting at $600 billion, highlighting the importance of prioritizing long-term goals over short-term gains 4m42s.
• The story of Novanorisk serves as a counterfactual example, allowing us to see the potential consequences of prioritizing short-term gains over long-term goals, and the importance of responsible decision-making in business 6m15s.
• Founders and builders have a responsibility to understand their corporate governing documents and take an active role in ensuring that their companies are managed in a way that aligns with their values and goals, rather than delegating this responsibility to others 10m0s.

The Failures of Shareholder Primacy and the Need for Change

• The current system of shareholder primacy has had its limitations and failures, and there is a growing recognition of the need for a new approach that prioritizes building and creating value over short-term gains, with the younger generations being particularly eager for change 14m20s.
• The idea that companies should prioritize shareholder value above all else has led to institutional collapse and weakness, and has been economically destructive, making a strong economic argument for a new approach to business and management 18m30s.
• Companies with a two-tiered foundation structure, such as the Novo Nordisk style, are six times more likely to survive to their 50th year, with a 60% probability compared to 10% for other companies 10s.
• The traditional corporate form, such as a Delaware CC Corp, is not the only option available to founders, and there are other structures like the industrial foundation structure that can provide more longevity and stability 42s.
• The standard 10-year venture capital fund structure can create pressure on companies to go public or return funds quickly, which may not be in the best interest of the company, and this structure is no longer suitable for today's business environment 2m6s.

Alternative Corporate Structures and Their Benefits

• Companies like Stripe are resisting the pressure to go public, and founders are advocating for more control, but the current tools and structures, such as dual class shares, may not be effective in providing long-term protection 4m6s.
• Dual class shares can be defeated, and having voting control is not the only factor that matters, as investors can still exert influence and pressure on founders, and the perception of being invincible can lead to hubris syndrome, a psychological condition that makes individuals less generous and more selfish 6m6s.
• Founders can write alternative structures into their documents, such as the Novo Nordisk Industrial Foundation structure, to provide a backup plan in case founder control is defeated, and this can be done at the seed stage 8m6s.
• The current system and structures can lead to mental health issues, such as hubris syndrome, in founders and billionaires who have a lot of power and control, and this can result in mental breakdowns and unhealthy behavior 10m6s.

The Psychological and Ethical Implications of Founder Control

• Creating a company that outlives its founder is a profound reason to start a business, and this goal is part of what makes entrepreneurship an awesome career, as it allows individuals to create something that will last longer than they will 10s.
• The concept of a Public Benefit Corporation (PBC) is mentioned as a potential structure for companies that want to prioritize their mission over profit, with the example of Vicarius, an AI lab started by Scott Phoenix, which aimed to create Artificial General Intelligence (AGI) without being forced into a "paperclip maximization world" 1m30s.
• The design of the long-term benefit trust for Anthropic is discussed, with the company's success being attributed to its strong mission and ethos, which attracts top talent and allows it to maintain its focus and integrity, even in the face of external pressures 2m40s.

Anthropic and the Long-Term Benefit Trust Model

• The importance of having a strong structure in place to protect a company's mission is highlighted, particularly in the context of advanced technologies like AGI, which could be worth trillions if they work, and therefore pose a significant incentive for takeover 4m10s.
• The story of Anthropic's founding team, including Daario and Daniela, is mentioned, with their commitment to AI safety and their ability to recruit top talent being key factors in the company's success, despite the challenges they faced, including the unexpected turn of events with investor Sam Bankman-Fried 5m20s.
• The unusual situation of Anthropic's stake being sold at auction in a bankruptcy auction is noted, highlighting the unpredictability of events and the need for companies to have robust structures in place to protect their mission and values 7m0s.
• Anthropic, an AI lab, established a long-term benefit trust, also known as a perpetual purpose trust, which is a different legal category, allowing outside trustees to appoint directors to the for-profit board, and this structure has given them the strength to stand up for what they believe 10s.
• The long-term benefit trust was finally established during the series C, after two years of defending the idea and writing it into term sheets, and it has enabled Anthropic to act consistently with their own values, which are consistent with human flourishing 42s.
• Anthropic's decision to turn down a $200 million contract is an example of them doing the right thing, acting consistent with their values, and this decision led to counterintuitive benefits, such as people showing appreciation and support for the company, with the sidewalks around their headquarters filled with people saying thank you 2m6s.
• The company's courageous actions, such as turning down the contract, have contributed to their success, with one of their products, Claude, reaching number one, and the early returns are promising, showing that taking the time to set up a thoughtful structure has been incredibly valuable 2m6s.
• The story of Anthropic serves as a message for YC founders to hear and pay attention to, emphasizing the importance of setting up a strong structure and standing up for what they believe, even in the face of challenges and turmoil 2m6s.