How Many Times Must We Live Through The Same Ethical Collapse Signs? Zenefits

The story is always the same. A new company, a darling with double-digit growth that brings the IPO, and more growth. Annual recurring revenue (that magical measurement that software companies love) went from $1 million in the company’s starting year of 2013 to $20 million in 2014 to a projected $100 million in 2015.

Now, let’s think about this — how on earth could a company selling software to small businesses in order to help them manage employee benefits even keep up with hiring the staff it would need to service that much business in a two-year period?

Still, Zenefits’ IPO raised $581 million from investors. However, Zenefits simply could not meet the projected earnings goals. Once the news broke about insurance regulators investigating the company for possible cheating by the company’s brokers in taking the states’ online broker license exams, there was no turning back. Co-founder and CEO is out; and the chief operating officer is now the CEO. The new CEO’s take? Zenefits had become derelict in it “culture and ethics.”

On the “Seven Signs” scale, here’s a summary of what was wrong at Zenefits:

1. Double-digit growth with pledges to increase it even more
2. Pressure on employees to just get the work done. Instead if fixing the software when problems developed, the employees tried temporary fixes on a per-client basis.
3. A weak board caught up in the need for double-digit growth. And too many insiders on the board. And a board not willing to slow things down to get the software fixed.
4. A Yee-Haw culture — beer kegs in its offices in Scottsdale with employees drinking up during the work day. That had to have been an HR nightmare.
5. Employees with stock options and incentives that fueled the exponential growth and clouded judgment.

Classic case, just a series of red flags that would have predicted the company’s ethical collapse. If you apply the tests, you will not invest. These types of start-ups cannot overextend themselves if investors and company leaders take an active interest in managing the company, not just promoting growth. Watch for the signs, and heed their warnings. Get out before the cheating scandal, the decline in revenues, or the kegs appear.

About mmjdiary

Professor Marianne Jennings is an emeritus professor of legal and ethical studies from the W.P. Carey School of Business at Arizona State University, retiring in 2011 after 35 years of teaching undergraduate and graduate courses in ethics and the legal environment of business. During her tenure at ASU, she served as director of the Joan and David Lincoln Center for Applied Ethics from 1995-1999. In 2006, she was appointed faculty director for the W.P. Carey Executive MBA Program. She has done consulting work for businesses and professional groups including AICPA, Boeing, Dial Corporation, Edward Jones, Mattel, Motorola, CFA Institute, Southern California Edison, the Institute of Internal Auditors, AIMR, DuPont, AES, Blue Cross Blue Shield, Motorola, Hy-Vee Foods, IBM, Bell Helicopter, Amgen, Raytheon, and VIAD. The sixth edition of her textbook, Case Studies in Business Ethics, was published in February 2011. The ninth edition of her textbook, Business: lts Legal, Ethical and Global Environment was published in January 2011. The 23rd edition of her book, Business Law: Principles and Cases, will be published in January 2013. The tenth edition of her book, Real Estate Law, will also be published in January 2013. Her book, A Business Tale: A Story of Ethics, Choices, Success, and a Very Large Rabbit, a fable about business ethics, was chosen by Library Journal in 2004 as its business book of the year. A Business Tale was also a finalist for two other literary awards for 2004. In 2000 her book on corporate governance was published by the New York Times MBA Pocket Series. Her book on long-term success, Building a Business Through Good Times and Bad: Lessons from Fifteen Companies, Each With a Century of Dividends, was published in October 2002 and has been used by Booz, Allen, Hamilton for its work on business longevity. Her latest book, The Seven Signs of Ethical Collapse was published by St. Martin’s Press in July 2006 and has been a finalist for two book awards. Her weekly columns are syndicated around the country, and her work has appeared in the Wall Street Journal, the Chicago Tribune, the New York Times, Washington Post, and the Reader's Digest. A collection of her essays, Nobody Fixes Real Carrot Sticks Anymore, first published in 1994 is still being published. She has been a commentator on business issues on All Things Considered for National Public Radio. She has served on four boards of directors, including Arizona Public Service (1987-2000), Zealous Capital Corporation, and the Center for Children with Chronic Illness and Disability at the University of Minnesota. She was appointed to the board of advisors for the Institute of Nuclear Power Operators in 2004 and served on the board of trustees for Think Arizona, a public policy think tank. She has appeared on CNBC, CBS This Morning, the Today Show, and CBS Evening News. In 2010 she was named one of the Top 100 Thought Leaders in Business Ethics by Trust Across America. Her books have been translated into four different languages. She received the British Emerald award for authoring one of their top 50 articles in management publications, chosen from over 15,000 articles. Personal: Married since 1976 to Terry H. Jennings, Maricopa County Attorney’s Office Deputy County Attorney; five children: Sarah, Sam, and John, and the late Claire and Hannah Jennings.
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