There's a dark underside to this business. It doesn't get talked about enough. I really wanted to try to do something about it, because I honestly felt like I was feeding one company after another into a meat grinder. I spent a lot of time trying to understand why are things the way that they are. And I found out through my own experience and through my own research that so many of the so-called best practices that we use today to build, structure, and govern companies — they're not pillars of capitalism, they're relatively modern inventions. But they're old enough to have a pretty good body of evidence available about how well they work, and the evidence is pretty bad.

So it seems like we're teaching people a set of practices that's almost designed to guarantee they're going to have these malign outcomes. Let's stop following these best practices so blindly. More importantly, we have to develop a new set of practices that allow mission-driven, purpose-driven leaders to create the outcomes they want for their organizations.

[...]

I tell the story in the book of Whole Foods, which went through this self-destruction where it couldn't do what it needed to do. Its stock price fell. Activists came in and basically forced it to be sold. John Mackey's last act of defiance was to sell it to Amazon instead of the person the activists wanted to sell it to. Even in the end, his victory was kind of a form of defeat.

Today, people hear these stories and say, “Well, Whole Foods is still around.” Yes, but the ethos — the thing that made it special — has been lost. Go on the Whole Foods Reddit forum. Go anywhere where customers of Whole Foods are talking about it. You will see the evidence. It fell off the Fortune Best Places to Work list, I think within two years of the acquisition, right away. Something special got lost, even though the activists who did that attack made about $500 million in so-called profit.

I quote an economist who wrote an article right afterwards, the title of which was — forgive my language, but this is literally what he wrote — “The Greedy Bastards Won.” That phrase, the greedy bastards, is what John Mackey called the activists. He just said, “They don't care about the mission of Whole Foods. They're just greedy bastards.” Mackey framed the whole thing as a battle, the good guys at Whole Foods versus the evil villains. The press loves that framing. Even as entrepreneurs and investors, we love to talk about the personal dramas of these companies' success or failure.

[...]

It's a classic confusion in business whether high margins are a liability or a strength. We teach that they're a strength. But then in a different class, in your MBA program, you'll learn Jeff Bezos's famous dictum that your margin is my opportunity.

So their margins were too high. Now here's the really fascinating thing. Do five whys. Why did they refuse to raise prices? Because they were afraid the stock price would go down. But why did they need the stock price to be high? Is that really an operational goal that's important to the company? People say, “Well, of course they want it to be high.” But why? Seriously, why?

Maybe because they're greedy? No — John Mackey had literally donated all his stock options to charity, saying he only wanted to work for the love of the thing itself. His personal greed could not have been the motivation.

“Well, it's important to have a high stock price in case you ever have to raise money.” There's a lot of money-burning startups out there that need it. But Whole Foods — this is the craziest stat to me of the whole story — Whole Foods was profitable every quarter and every year that it was a public company, including 2008 when its stock price dropped 90%. They didn't need it to raise money.

What did they need it for? Maybe they needed it because financial gravity makes you feel like you need it. Because if they ever let the stock price go down, it would allow activists or some acquirer — it makes it cheaper to do the thing that ultimately happened to them. A high stock price is their defense, their moat against this kind of financial manipulation.

[...]

Going back to the “Greedy Bastards” article, the author says Mackey wanted to have it both ways. He wanted to have this lofty rhetoric about conscious capitalism and being a mission-driven company, but he also wanted to work in a bog-standard Delaware C-corp shareholder primacy organization. Obviously those two things — that chasm between the mission statement and the legal purpose — created the conflict that ultimately led to the company's demise. The author saw it as a personal drama, a personal failure. But of course, the question this book asks is, why should Whole Foods have been embodied in such a structure? Are there other or better structures available that would make these questions irrelevant? It turns out there are.

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Costco illustrates the two most important ideas in the book in one story. Sol Price understood ethos — the fiduciary to the customer, the operational commitment to quality, to trustworthiness. That was really what was embodied at FedMart. But what he didn't have was the ability to defend that ethos from attacks from the outside. It was really Jim Sinegal who figured out in Costco how to build what I call a governance fortress, that even to this day protects Costco from outside pressure.

[...]

If you look at the data, Costco comes under attack every few years from raiders who are trying to dismantle this ethos. I quote a bunch of them in the book. Costco, by the way, has the worst possible governance rating scores from these governance rating agencies. It's considered to have bad governance through and through. So every once in a while, some good-governance reformer will try to attack, and they always attack on this basis — that Costco's governance leads to management entrenchment, which leads to poor performance.

Really? Poor performance? Costco's one of the best-performing stocks in the entire stock market the last 40 years. What do you mean by poor performance? This has become an ideological commitment to the idea of shareholder primacy, divorced from the actual on-the-ground realities that a company like Costco embodies.

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Let me tell you one exception story by way of illustrating what is going on here. In the 1920s, a woman named Marie Krogh was diagnosed with a terminal illness — diabetes, at a time when there was no known cure for diabetes. But her husband, August Krogh, had just won the Nobel Prize. They lived in Denmark at the time, and he convinced her, despite her fatal diagnosis, that she should accompany him on a lecture tour of North America. Being the dutiful wife that she was, but also a doctor herself, she went with him.

During the lecture tour, she was sitting at dinner next to one of the other scientists, who told her that in Canada, a series of scientists had isolated insulin for the first time — a potential cure for diabetes. She convinced her husband that they should extend their trip, travel to Canada, and go see this technology for themselves. They did. They instantly grasped the significance of this breakthrough, and they asked the Canadians if they could license the technology and bring it back to Denmark, not just to cure Marie, but to cure a lot of people.

Everyone agrees to do it, but they have a caveat. All four of the people involved are worried because they understand this simple truth about life-saving medicines. Imagine you have a life-saving medicine that I need to live. I have no problem with you making a fair profit by selling it to me. I want you to be in business, to have the money to build the facility to sell it to me. I'm very happy for you to make money. But I would live in fear. What if you wake up one day and say, “Wait a minute, Eric needs this life-saving medicine. I could charge him whatever I want.” I'd be powerless to say no.

So years before Martin Shkreli, they understood this was a problem. They spent the trip going back to Denmark trying to figure out, how can we structure this organization to avoid this outcome? They settled on the structure that is now known as the industrial foundation structure, where the laboratory that they built is a for-profit company — they called it the Nordisk Insulin Laboratorium — but it is owned and controlled by a nonprofit foundation. If the term Nordisk sounds familiar, it should, because this is the origin story of the company Novo Nordisk, one of the world's largest companies.

What's interesting about Novo Nordisk is it defies every inevitability story you can imagine, because it has had the idea of science as a public trust as its motivating principle for more than 100 years. All the betrayals that we've been talking about — people have tried it with Novo Nordisk. I tell a story in the book where the for-profit directors of the Novo Nordisk subsidiary tried to liquidate the whole thing and sell it in the early 2000s, when pharma consolidation was the hotness. The trustees of the nonprofit foundation intervened to stop this from happening.