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Encouragement for Zenefits’ New CEO

One of the best ways to become a better corporate leader is to study other corporate leaders -- especially when they respond to a crisis as constructively as David Sacks has as the new CEO of Zenefits (photo from his blog).

You can use their experience as a gut-check for your own business. Zenefits has had a rough ride these past few weeks, and there's a lot to learn from their story. 

First, you need to know a little background.

Disrupting an Industry

Zenefits was launched by one of Silicon Valley’s most prestigious startup accelerators, Y Combinator, in February 2013.

They had a radical business plan: offer Human Resources software for free, and generate revenue on commissions by selling insurance policies to their customers.

The HR department is one of the most highly regulated parts of business and must ensure compliance with laws governing everything from paid time off to sexual harassment. Businesses loved having a free solution that -- they believed -- helped them comply. Over ten thousand signed up.

People loved working there. Free food, playroom-like offices, and an outspoken CEO made Zenefits one of those quintessential tech startups that the media loves to fawn over.

Things were going so well that Zenefits set a January 31, 2016 revenue target of $100 million.

But exuberance can make gut-checks difficult. If there were employees worried about the future -- and without a doubt, there were -- they were overwhelmed by those celebrating all the new business.

Venture capitalists added to the exuberance by tripping over each other to invest. They poured $500 million into the company. It reached a valuation of $4.5 billion.

The Counterpunch

Then things started going wrong. 

The first body blow came late last year. One of their major investors and partners, the insurance giant Fidelity, marked down its investment by nearly half.

The second blow came just a couple weeks ago. Zenefits biggest client, the online merchant Jet.com, switched to a different provider. 

And the third blow came just last week. This one sent the company reeling, and knocked out the CEO.

As it turns out, in their zeal for expansion, Zenefits let unlicensed people handle some of the insurance business. Washington state was one of the first to investigate, and they discovered that 83% of their state's insurance deals were closed by employees who didn’t have the right licenses.

Which means, of course, that the companies who bought those policies may not be in compliance.

Now other states and the federal government are circling. Not good. 

Getting It Right the Second Time

Tragically, the CEO resigned. As one of Zenefits’ founders, Parker Conrad certainly loved his company and certainly feels terrible that he put his customers at risk. Sure, there’s a lesson to learn there.

But we learn a lot more from what happened next.

This part of the story is all about David Sacks, a tech legend. He cashed in on PayPal when eBay bought it for $1.4 billion. He sold Yammer to Microsoft for $1.2 billion.

He also invested in Zenefits and sits on the Board. But what impresses me most is this: long before this crisis, he took a day job as the company’s COO. He’s not the sort of guy who sits back and counts his money. 

He's a leader. Now he’s the CEO.

Sacks immediately identified the company’s missteps in an email he sent out to employees:

Our culture and tone have been inappropriate for a highly regulated company... 

Saying right off that the problem has to do with culture takes a lot of courage, and this is where we can learn the most from this whole mess.

As I've written elsewhere, a company’s culture is not some magical thing that arises by itself.

Culture is created by leadership. Leadership can change it. 

That's what Sacks is doing. He explained that the culture under Parker was too narrowly focused on expansion. 

So Sacks outlined what his new culture would be like. At RESULTS.com, we call these Core Values:

Effective immediately, [Zenefits’] values are:

#1 Operate with integrity.

#2 Put the customer first.

#3 Make this a great place to work for employees.

The third one is particularly good. He doesn't point fingers or chastise people for the way they acted. 

He looks forward, not backwards. Remember those employees who might have raised alarms but were drowned out by narrowly focused celebrations?

Here he says, in essence, "Hey, we're all trying to build a great company, so everyone needs to be heard and respected." 

I can assure you, from twenty years experience working with CEOs worldwide, that this alone has the potential to protect Zenefits from all sorts of problems as it tries to recover.

Twenty-twenty Foresight

As every CEO knows, whenever things go wrong you can almost always identify the turning point when you should have made a change -- but didn’t.

In our experience, most CEOs have a sixth sense for these things. When they explain why disaster struck, they usually tell us, over and over: “I should have listened to my gut.”

Right now, your gut might be saying something to you.

For Zenefits, I’d bet that Conrad and Sacks -- and probably a lot of other people -- had that “gut check” moment last year with the Fidelity writedown.

Things might have turned out differently if they did then what you can do right now: listen.

Take a fresh listen to what your vendors, partners and regulators are saying.

And listen to your employees. Especially, listen to the ones who might have identified problems coming your way. Let them express themselves fully before you judge the merit of what they're saying. 

Let the people around you help you, because if you do, this is what you'll find out:

Your gut check and your Core Values are the same thing.