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Eric Ries provided a generation of entrepreneurs with a guide, The Lean Startup, on how to build powerful new companies. But he has since realized that was only half of what they needed. He failed to show them how to protect it from the financial forces that could corrode and corrupt their vision.
“I started to feel like I was feeding one company after another into the meat grinder,” he writes in Incorruptible.
Many entrepreneurs start off with a noble vision. They have an idea for a product or service that they feel society desperately needs. But often along with that they want to make sure the people who work with them are amply rewarded and inspired at work, and society receives spin-off environmental or social benefits. But when the rubber hits the road – or, more accurately, the company meets the financial world of venture capitalists, investment bankers and shareholders – it falls apart.
Mr. Ries calls it the Graveyard of Good Intentions. Sears grew into America’s largest retailer through employee profit-sharing and ownership that built strong loyalty and customer service. Cadbury was started by a Quaker businessman as a moral enterprise with a model employee village that featured housing, health care, a good pension plan and profit-sharing. Filene’s had profit sharing, a minimum wage for women, a 40-hour week in the early 20th Century and health clinics.
All of them – and many more companies – ran into gravitational financial forces that wrecked the dream. Sometimes it was friendly fire from shareholders dismantling the ethos of the firm’s golden age, a hostile takeover or boardroom betrayal as directors chose so called “best practices” over the founding beliefs. Failures in succession could also be a problem or temptations to abandon the trust built up long-term in the quest for short-term gains or mission drift.
He tells founders: “The truth is we’re all one acquisition, one IPO, one board meeting away from watching something we love turn into something we hate.”
He still urges entrepreneurs to create something worth protecting. But keep in mind resisting gravity requires an even stronger counter-force, which begins with a magnetic alignment to the founder’s goals and approach. Then develop structures to further protect and preserve the company.
Originally, to gain corporate status, founders had to show the public benefit that would result from their efforts. That disappeared as a regulatory requirement and these days profit maximation – with its ignoring of negative external impact on society – holds sway. Mr. Ries, however, believes the first step in building an incorruptible organization is to reject bottom line thinking and embrace the belief profit is “the maximation of human flourishing.”
Then develop practices that embed your notion of human flourishing into the corporate DNA. Mary Parker Follett, a pioneering researcher-consultant who has been called “the prophet of management,” termed it “the invisible leader” – the common purpose that will guide actions even when no manager is present.
Mr. Ries says too many organizations are “incoherent,” with what gets rewarded contradicting what was proclaimed – the values on the wall being betrayed by daily reality. Instead, actual practices must be aligned with expressed values.
Helping here is adopting the idea of a culture bank. Every action builds or degrades the culture the founder wants to achieve. So the act is either a deposit or a withdrawal from the culture bank.
“By framing trust in banking terms – deposits, withdrawals, balances – we create terminology that can compete with financial metrics in decision-making. When faced with a trade-off between short-term gains and long-term trust, employees now have a familiar framework. Would this be a deposit or a withdrawal?” he writes.
Beyond that, of course, the founding ethos must be protected constitutionally. He suggests members of the board of directors be required to sign a pledge similar to the Hippocratic oath in medicine, committing to support the mission and consider it in every decision. “Evidence shows pledges work. In one study, CFOs who swore integrity oaths reduced earnings manipulation by 15 per cent,” he notes.
Just as tourists aren’t granted voting rights immediately in a country, he argues we need tenured voting in corporations that doesn’t allow a short-term speculator undue power. Perhaps after one year a share is worth one vote, after two years it’s two votes, up to, say, 10 votes for an investor after 10 years.
A supermajority requirement for changing the corporate charter helps build the guarding fortress. At Costco, it’s a requirement of two-thirds of all shares – not just shares voted at the annual meeting – for a change to be approved. Staggering the election of directors, perhaps a third of the board up for re-election each year, helps guard against an outside investor trying to gain quick control.
The best protection comes from what he calls a “spiritual holding company,” a separate entity that safeguards organizational purpose over time. It appoints directors for the business arm and holds them accountable, while they tussle with the more immediate financial issues. “Directors become accountable to both the business and the trustees who guard the mission,” he explains.
The long list of founders who lost control of their dream shows thinking about his ideas at inception is vital.
Cannonballs
- Change efforts are often considered a Hero’s journey, like Star Wars or The Odyssey, with leaders on a quest in which they must be victorious. But change consultant Greg Satell argues just because you have a vision you believe in and are willing to fight for it doesn’t mean it will ever get any traction. In fact, change is a strategic conflict between your future vision and the status quo, which always has inertia on its side and never surrenders its power gracefully.
- In the past 20 years, men have remained steady in their view of how fairly women leaders are treated while women have become considerably more negative in assessing the situation. Comparing a study in 2006 with one using the same questions today, three academics report men and women answered nearly identically two decades ago when asked whether women are judged more critically in executive roles, with approximately 35 per cent of each group agreeing. Today, men still answer at 35 per cent but women answer at 90 per cent. The researchers found 83 per cent of women believe they must be more exceptional than men to succeed, compared with 28 per cent of men seeing that required of women, a significant increase from 2006 for women when 68 per cent agreed with that sentiment, while male agreement dropped from 32 per cent.
- Entrepreneur Seth Godin says if consumers choose you based on price don’t be surprised if they leave the moment someone pulls the same tactic on you. He adds this zinger: Low price is a temporary refuge for a marketer who has run out of useful ways to improve the experience and deliver more value.
Harvey Schachter is a Kingston-based writer specializing in management issues. He, along with Sheelagh Whittaker, former CEO of both EDS Canada and Cancom, are the authors of When Harvey Didn’t Meet Sheelagh: Emails on Leadership.