The Alan Katz Blog

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Zenefits Adds Domain Expertise to Leadership Team

David Sacks, the new CEO of Zenefits, just announced extensive changes to the company’s leadership team, an important step in his efforts to reshape the company. By adding individuals with backgrounds in the services the company delivers to consumers, this looks to be a move in the right direction.

Previously I’ve criticized Zenefits for a lack of expertise concerning benefits, payroll, or human resources among board members or top executives. While Zenefits is primarily a technology company, the services they deliver–what their customers pay for–are tools to help companies manage these important business operations. That no one among Zenefits most senior leaders had experience in these areas is one reason, I believe, Zenefits faces the problems they do today.

The Zenefits board is still composed only of men with backgrounds in finance and technology. The former executive team, at least those deemed worthy of being listed on their website, shared this narrow expertise, broadened only by the time some of them spent as business consultants. In a post on the company’s blog today, Mr. Sacks announced 14 members of the “new executive team,” three of whom had experience in benefits, payroll or human resources before joining Zenefits:

  • Jeff Hazard, VP of Sales and Agency Principal Agent is in charge of all the company’s sellers. Previously Mr. Hazard was a divisional vice president of sales at ADP.
  • Colin Rogers, VP of Carrier Relations worked at Accenture Consulting helping develop their Consumer Driven Healthcare practice. He was also at Extend Health (now part of Towers Watson).
  • Josh Stein, Chief Compliance Officer served as senior vice president and general counsel at OptumRx, a part of UnitedHealth Group.

It will not be easy for Mr. Sacks to achieve his goal of changing the culture at Zenefits. Expanding his leadership team and include individuals who understand the services the company delivers to customers, however, shows he is serious and off to a promising start.

How Likely is Zenefits to Change?

Zenefits changed CEOs the other day and its new leader declared the company’s old culture inappropriate. He promised to instill new values in the company. All well and good. But is meaningful change really likely at Zenefits?

Founder Parker Conrad is out as Zenefits CEO and David Sacks, until yesterday its chief operating officer, is now in charge. The reason: lax compliance procedures leading to investigations by Washington state and others concerning Zenefits allegedly selling insurance policies through unlicensed agents. If found guilty by Washington regulators, Zenefits could face a criminal fine of as much as $2.75 million, see some employees go to jail and potentially lose millions in commission dollars. While unlikely, that is what’s at stake.

Perhaps this situation is a result of incompetence and naivet√© by the company’s management. Maybe. Then again, it could be the result of a culture that puts growth above adherence to the rules–an “act now and ask for forgiveness later” attitude–an approach sometimes applauded and rarely condemned in Silicon Valley and similar locales; unless, that is, it hurts the bottom line.

Not surprisingly then, Mr. Sacks informed employees on taking over as CEO that “a new set of values are necessary” for the company to continue considerable growth. He ended his letter proclaiming “This is Day 1.”

I don’t doubt Mr. Sacks’ commitment or intentions. But is Zenefits really likely to change its core values? Can it transform its culture? The problem, as I see it, is that the company, its values and culture reflects those of Silicon Valley. That is both a blessings and a curse.

They dream big in the Silicon Valley and Zenefits became big–one of the fastest growing enterprises in American business history. The company is funded by an A-List of Silicon Valley heavyweights. As of May 2015 Zenefits became the single largest investment of Andreeson Horowitz, one of the Valley’s most august venture capital firms. Several of its board members are Silicon Valley royalty.

The Valley values speed, innovation and disruption (“worship” might be a better word). While I’ve questioned whether Zenefits’ business model is innovative, the fact remains, the company has quickly shaken up more than one established industry.

However, being of the Silicon Valley also means Zenefits exists in a bubble (not the stock market crashing kind, but the island of unreality variety). For example, none of the executives listed on Zenefits’ site has any background in human resources, payroll or insurance sales. Yet those are what the company does. Outside the Silicon Valley this would raise eyebrows, maybe even create concern. Not there. Of course, they have direct reports with subject matter expertise, but none of the company’s top eight leaders (nine before Mr. Conrad’s departure) does? Looks like a bubble to me.

Mr. Sacks is a Silicon Valley rock star. In a December 2014 Pando’s article reporting Mr. Sacks joining Zenefits as chief operating officer Mr. Conrad was quoted as saying “When you have an opportunity to hire LeBron, you hire LeBron.” And it was an apt analogy. Mr. Sacks is good. Extremely good. He was the first COO of PayPal and founding CEO of Yammer (purchased by Microsoft for $1.2 billion). He knows how to run a company–a Silicon Valley company.

It’s also true that Mr. Sacks has been COO and a board member of Zenefits for a year now. Doesn’t that make him part of the company’s “old” culture? As chief operating officer, did he have at least some responsibility for knowing of Zenefits’ compliance problems? Maybe he did and he raised the alarm internally months ago. Maybe.

And that’s where Zenefits is at the moment, stuck in a vortex of maybes. Maybe it takes an insider to lead the company outside the Silicon Valley bubble. Maybe it takes someone who has seen the company’s failure to understand what can no longer be overlooked or ignored. Maybe Zenefits can both grow and follow rules. Maybe the company can swagger less and execute better.

Maybe. Who knows? Until we it’s clear Zenefits has the willingness and ability and to change, perhaps a bit of skepticism is in order. Maybe.

Zenefits Compliance Problems Cost Them a CEO — and Perhaps Millions

Things happen fast in the start-up world. Earlier today I wrote a LinkedIn post on how Zenefits’ compliance challenges in Washington state could cost the company millions of dollars in lost commissions. While noting that it was only a matter of time before someone at Zenefits lost their job over the situation, I had no idea at the time that Zenefits CEO Parker Conrad would resign today citing the compliance problems.

In a press release cited by VentureBeat.com announcing Mr. Conrad’s departure, Zenefits new CEO (and until now, its COO) David Sacks, declared” I believe that Zenefits has a great future ahead, but only if we do the right things. We sell insurance in a highly regulated industry. In order to do that, we must be properly licensed. For us, compliance is like oxygen. Without it, we die. The fact is that many of our internal processes, controls, and actions around compliance have been inadequate, and some decisions have just been plain wrong. As a result, Parker has resigned.” (The entire press release is worth reading).

The loss of a founder and CEO is another cost Zenefits will pay for their alleged failure to comply with states’ insurance laws. I don’t believe they’re done paying for their mistake, however.

What follows is a slightly edited version of my my earlier LinkedIn article I had prepared for posting on this blog tomorrow morning under the title:

A Zenefits Felony Conviction Could Cost Company Millions in Commissions

Washington regulators are investigating Zenefits’ alleged use of unlicensed agents selling insurance policies in the state. This is not only embarrassing for a company as brash and boastful as Zenefits, but the company’s finances could be substantially impacted, too. Not just because, if found guilty of this felony, Zenefits could face a multi-million dollar fine. The far greater risk to Zenefits is the prospect of losing commission income — a lot of it.

William Alden at BuzzFeed News has done a great job pursuing the story of Zenefits’ unlicensed sales. Now Mr. Alden is reporting that, based on public records it seems “83% of the insurance policies sold or serviced by the company through August 2015 were peddled by employees without necessary state licenses ….”

The potential fallout is quite substantial even though only a small number of sales are involved–just 110 policies out of 132 sold or serviced by Zenefits in Washington between November 2013 through August 2015. “Soft dollar” costs include a damaged brand due to the bad press, distractions at all levels of the company, and needing to address whether the company is ignoring other consumer protections.

Then there are the hard costs. 110 policies times the maximum $25,000 per violation Washington can impose means fines of up to $2.75 million. Financial penalties imposed by other states could add to this figure. While paying a $2.75 million fine is no laughing matter for a company losing money every month, this represents less than 0.5% Zenefits has raised from investors. However, the legal fines are, potentially, just the tip of the proverbial iceberg. As Mr. Alden points out, the fallout from this investigation could result in carriers dumping Zenefits and that could cost the company far more than any criminal fines.

Carriers require agents to meet several requirements before contracting with them and agents must continue to meet these requirements to keep the agreement in-force. Common provisions include being appropriately licensed, maintaining adequate errors and omissions coverage, and not committing felonies or breaching fiduciary responsibilities. Fail to meet any of these requirements and agents can find their contract terminated for cause.

Terminations for cause usually allow insurance companies to withhold future commissions from the agent and, depending on the specific terms of the contract, from the agent’s agency as well. If an agency or agent knows or should have known they were in violation of contract terms when executing the agreement, carriers may be able to rescind the contract and demand repayment of commissions already paid out.

Being found guilty of a felony in Washington state could allow a carrier–any carrier, anywhere in the country–to terminate Zenefits’ agent contract for cause. Rumor has it that only about half of Zenefits’ revenues now come from insurance commissions. Late last year Zenefits CEO Parker Conrad claimed the company was on track to earn $80 million in 2015. So, let’s see, millions times 50% … carry the one … yeah, this hurts. A lot.

A nuclear outcome is highly unlikely. The Washington state investigation into Zenefits is ongoing and Zenefits, to date, has been found guilty of nothing.

Even if Washington regulators find Zenefits committed a felony, for reasons described in a previous post, the outcome is highly unlikely to be a fatal blow to the company. Insurance regulators have considerable leeway in determining fines and penalties. Absent proof that Zenefits knowingly and intentionally violated state law or that consumers experienced actual harm, the Washington State Department of Insurance is likely to conclude this situation resulted from incompetence. They might then impose a modest fine on Zenefits and subjected the company to enhanced review of their licensing practices for a few years.

Let’s put this in perspective. Richard Nixon resigned the presidency as the result of what started off as a two-bit break-in. That kind of cascading escalation is extremely rare. What we’re seeing unfold in Washington state is probably not Zenefits’ Watergate moment.

Zenefits has already paid a small price for what they’ve allegedly done. I’m guess the whole mess has been a bit distracting to management. And the fact remains: mishandling more than 80% of their sales in a state is a sign of immense ineptitude, arrogance, or both. Having this reality aired publicly is not good for Zenefits’ brand and resources will need to be expended to make sure it doesn’t happen again. I’m not aware the company has fired anyone as a direct result of their lax licensing controls, but that could happen.

As a result of this fiasco, Zenefits has already taken down their controversial broker comparison pages in which the company used carefully selected criteria to compare themselves to community-based agents. (I guess they were reluctant to add “being investigated for multiple felonies” as one of the comparison points). This is a small sacrifice as the comparison page was likely an attempt to enhance their search engine optimization rather than an effort to take business from their competition.

Zenefits has paid a small price. The open question is, how large a price will the company ultimately pay? For that, it will be well worth following Mr. Alden’s future stories.