Zenefits is in trouble. Serious, existential trouble. Some community-based benefit brokers are watching the calamity at Zenefits unfold with a mixture of Schadenfreude and relief. Given the scorn and ridicule Zenefits heaped on these brokers, taking pleasure from its misfortune is hard to resist. Feeling relief, however, misreads the situation and is dangerous to one’s career.
Zenefits could go out of business and several of its employees could be jailed as a result of the business practices reported by William Alden of BuzzFeed News and other journalists. While unlikely, this is a possibility because:
- Zenefits allegedly used unlicensed agents to sell and service 83% of its policies in Washington state. If proven, Zenefits could face up to a $2.75 million fine and some employees could go to prison. Zenefits allegedly used unlicensed agents in other states, too, which could add to these fines.
- Zenefits created software enabling some California employees to lie to regulators concerning the time they spent on pre-licensing training. California law requires those applying for an insurance license to devote 52 hours to this curriculum. Zenefits employees signed a form, under penalty of perjury, that they had done so. Some may not have. Perjury is a felony in California and conviction can result in up to four years imprisonment. If Zenefits cheated in qualifying agents to sell in California, other regulators are no doubt looking into whether the company did this in their states, too.
- If found guilty of violating consumer protection laws, state regulators could revoke Zenefits’ insurance licenses. Without the license Zenefits could no longer sell new policies and insurance companies would likely terminate, for cause, their Zenefits contracts. The insurers would then stop paying commissions to Zenefits even on previously sold policies. License revocation in one state could result in losing their licenses elsewhere. A cascade across the country of revoked licenses and terminated contracts could cost Zenefits tens of millions of dollars.
- If Zenefits loses its licenses, commissions on current policies and ability to sell new ones, then some of its more recent investors may demand their money back. (Let me be clear: I am not accusing anyone at Zenefits of committing fraud or any other crimes. What follows is totally and only hypothetical and speculative.) In May 2015, Zenefits raised $500 million in a capital round led by Fidelity Investments and private equity firm TPG. If Zenefits management knowingly hid legal problems from them (and I’m not accusing anyone of doing so) then Fidelity and TPG could claim inducement by fraud, seek to rescind their contract, and demand Zenefits return their investment. I’m not saying this happened or that investors were misled in any way. Nonetheless, I’d be surprised if Fidelity and TPG lawyers are not also speculating about this.
Zenefits worst case scenario, then, is that the company pays millions of dollars in fines, loses many millions more in revenue, sees employees jailed, can no longer sell insurance, irreparably damages its brand, and must repay some investors.
That’s a pretty scary worst case scenario. Based on we know today, it is also highly unlikely to happen. No regulator has found Zenefits in violation of anything. Regulators are unlikely to impose the most severe penalties available to them if their investigations do not reveal consumer harm. The steps David Sacks, Zenefits’ new CEO, is taking will likely mitigate any penalties imposed on the company. Several employees, including former CEO, Parker Conrad and sales VP Sam Blond have already left the company and more may follow. Zenefits now has its first compliance officer. Mr. Sacks also seeks to change Zenefits values.
I’m skeptical, however, that Zenefits can or will quickly change its culture and core values. I respect Mr. Sacks’ intentions, experience and abilities. He deserves a chance to make his turnaround work. Yet changing a company’s culture usually takes considerable time and Zenefits’ culture is deeply infused with the Silicon Valley ethos of speed, innovation, disruption and risk taking. To transform Zenefits requires a different world view. Yet in announcing Mr. Parker’s resignation, the company added three new board members—all current investors with no domain expertise.
In fact, no current Zenefits board members or executives listed on their site appear to have any experience in running a human resources firm, payroll company, or insurance agency—the services Zenefits delivers. What they share is deep experience in well-known tech companies. Zenefits may be a technology company, but that tech is supposed to accomplish something. Only in places like Silicon Valley would lack at the top of the company of this domain expertise be celebrated. Zenefits seems to exist in a Valley-sized bubble and it’s tough to change what’s in a bubble from the inside.
The Real Lesson of Zenefits
Yet, in spite of these problems and hurdles, Zenefits is likely to survive. They reportedly have enough cash on hand and no need to seek more. The most probable outcome from the various investigations is that, absent findings of intentional and substantial criminal malfeasance, Zenefits will keep their licenses, carriers will continue paying commissions, and investors will keep their money in the company.
We don’t yet know how Zenefits ongoing saga plays out. What we do know are some lessons this scandal teaches, especially to brokers.
Lesson one: consumer protection laws matter. Violate them and there’s a huge price to pay; as there should be.
Lesson two: arrogance is unbecoming and unhealthy. Zenefits is a company whose leaders proclaimed that community-based brokers were fucked, promised to drink brokers’ milkshakes, claimed brokers barely knew how to use email, described their profession as a dead beast lying in the desert and, well, you get the idea. The danger is that arrogance of this magnitude easily morphs into hubris. Zenefits’ hubris was the apparent belief that it could ignore rules if they get in the way of achieving the growth promised investors.
Lesson three: even broken companies get some things right. Zenefits identified a latent customer demand. Clients want more from brokers than help with benefit plans. They want to focus on their businesses and not be distracted by HR and benefit administration. Zenefits success makes clear there’s a disadvantage to only selling and servicing insurance plans. Clients want more from their brokers. Even in the unlikely event Zenefits goes away, this client need will not.
Lesson four: there’s more where they came from. Zenefits’ demise would not mean the end of well-funded tech companies challenging community-based benefit brokers. If Zenefits falls to the way side, others are ready to take their place using the same tactic of giving away software to employers in exchange for being named the employers’ broker of record on benefit policies.
Seeing a bully humbled is always fun and there’s no harm in brokers enjoying the sight of Zenefits in disarray. Those brokers who believe Zenefits predicament means they no longer need to step up the services and value they deliver their clients, however, are making a costly mistake.
Full disclosure: I’m co-founder of a company soon launching NextAgency, a platform enabling benefit brokers to level the playing field against hi-tech competitors and step up the services and value they deliver their clients.
A version of this post is scheduled to appear in the March issue of California Broker magazine.