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Zenefits’ Troubles Don’t Let Brokers Off

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’ Troubles 

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 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 as much as 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.

Maintain Perspective

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 board members—all current investors with no domain expertise.

In fact, no current Zenefits board members or executives listed on the 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 Zenefits is likely to survive. It reportedly has 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 its licenses, carriers will continue paying commissions and investors will keep their money in the company.

We don’t yet know how Zenefits’ 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 dead meat, 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 wayside, others are ready to take its 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.

zenefits

Zenefits Compliance Saga Takes a Turn

Things happen fast in the start-up world.

Early yesterday, I wrote a 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 his job over the situation, I had no idea that Zenefits CEO Parker Conrad would resign later in the day, citing the compliance problems.

In a press release cited by VentureBeat.com announcing Conrad’s departure, Zenefits’ new CEO, David Sacks, who had been COO, 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 the 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 earlier article:

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 affected, too. Not just because, if found guilty of this felony, Zenefits could face a multimillion-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 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 and August 2015. “Soft dollar” costs include a damaged brand because of the bad press, distractions at all levels of the company and the need 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 that Washington can impose means fines of as much as $2.8 million. Financial penalties imposed by other states could add to this figure. While paying a $2.8 million fine is no laughing matter for a company losing money every month, this represents less than 0.5% of what Zenefits has raised from investors. However, the legal fines are, potentially, just the tip of the proverbial iceberg. As 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 he was in violation of contract terms when executing the agreement, carriers may be able to rescind the contract and demand repayment of commissions.

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. Late last year, Zenefits CEO 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 continuing, 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 intentionally violated state law or that consumers experienced actual harm, the Washington State Department of Insurance is likely to conclude that this situation resulted from incompetence. The department might then impose a modest fine on Zenefits and subject the company to enhanced review of its licensing practices for a few years.

Let’s put this in perspective. Richard Nixon resigned the presidency as a 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 it allegedly did. I’m guessing the whole mess has been a bit distracting to management. And the fact remains: Mishandling more than 80% of 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 the lax licensing controls, but that could happen.

As a result of this fiasco, Zenefits has already taken down its controversial broker comparison pages in which the company used carefully selected criteria to compare itself to community-based agents. (I guess the company was 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 search engine optimization rather than an effort to take business from the competition.

Zenefits has paid a small price. The open question is: How large a price will the company ultimately pay?

Why Millennials Are the Best Workers

It has become fashionable to trash Millennials. They lack a strong work ethic, have no grit, aren’t respectful or patient and definitely don’t understand corporate culture. The trashing fits with how people romanticize the 1950s as the golden age of American culture, when everything was just somehow better.

I don’t know whether Gen X is just irritated that they’re getting older or whether people are forming their opinions solely based on Buzzfeed, but I think the stereotype is wrong - dead wrong. In fact, I will go out on a limb and state that Millennials may actually be the best generation of workers we’ve ever seen.

And I say this having hired hundreds of new college grads – and seasoned professionals – over the past 20 years. Here’s why:

1. They’re too big for their britches.

Today’s young job seekers have grown up with a startup mentality. The value of embracing failure has been etched into their psyche by entrepreneurs and tech titans like Steve Jobs and Elon Musk. So, unlike past generations, they are not necessarily looking for stability. They don’t dream of landing a job at GM or IBM. They approach positions with the understanding that they may have to put in 110% to succeed, even with the near certainty that their employer won’t be around five years from now.

Put that in contrast to the stigma of entitlement attached to Millennials. It’s true that many baby boomer parents have raised them with a perspective of possibility. They’ve been encouraged to follow their dreams and passions. And from watching Mark Zuckerberg or President Obama, they’ve learned first-hand that it’s not just dogma; anything really is possible.

So where some see entitlement, I see greater authenticity and audacity.

Millennials will shoot for the stars – and if they fall down, they’ll get right back up and try a different way.

2. They just don’t communicate the way you do.

If you’ve watched “Mad Men,” you’ve seen the fast-paced advertising world struggle to become more connected with innovations like… the speaker phone. Fast forward to today, where first-time job seekers not only understand and embrace collaborative technologies but don’t know anything different.

While many offices struggle to get their workforce to embrace services like Yammer or Basecamp, Millennials have been doing those things for years. They’ve been learning with social classroom tools and chatting on Facebook, Twitter and Instagram every waking hour. As a result, they actually conceive of communication in a one-to-many paradigm, which is a huge plus for companies that are spread out globally and interact primarily in a virtual environment.

3. They expect things to happen instantly.

I don’t know anyone over the age of 50 who doesn’t complain about how fast the world is moving these days. However, in the case of job performance, that’s a very very good thing. Think about it. Thirty years ago, everything took a lot more time. The data you needed to make critical business decisions was delivered weeks later by a mail truck. Someone had to physically be sitting in a predetermined location at the right time for you to call on the phone.

Our expectations for accomplishing tasks were, naturally, based on the resources and structures we had in place. Simply put, we moved much slower. And, God bless them, there are many professionals out there who still work the same way.

Not Millennial workers. With the pace of news, communication and responsiveness nearly instant, that’s how they approach work. They know nothing else. Plus, they have the necessary tools to support them. Give a Millennial employee a research assignment on your competitors, and you’ll get the project back in 24 hours. Twenty years ago, the same project might have taken a month. One piece of advice: Just make sure you attach a deadline to the assignment.

4. They expect too much.

Studies show that young job seekers today are passionate about how their jobs affect the world. In fact, they value job fulfillment over monetary reward. Many balk at the traditional model of doing charitable good only when you have reached a certain level of economic wealth or solely in your free time. They want to reach financial well-being and achieve social good simultaneously .

What does that mean for employers? I would hope it could open the doors to two things. First, we have the ability to retain skilled and valuable Millennial workers by creating environments where social impact is lauded. That will reduce employee turnover and save companies thousands of dollars each year in recruiting, hiring and lost productivity.

More important, Millennials are a driving force toward significant, scalable and lasting social change that will benefit everyone, whether it’s about the environment, socioeconomic diversity or just a healthier work-life balance. In case you’ve forgotten, the U.S. ranks the worst among all modern economies in vacation time and pay.

5. They think differently from you.

Millennials are the most diverse generation in U.S. history. Minorities, roughly a third of the U.S. population today, are expected to become the majority by 2042. So Millennials don’t just embrace diversity on the job; they expect it.

From race and religion to gender and sexuality, they’ve come of age with a greater comfort of multiplicity of all kinds. They’ve entered adulthood with an African-American president and been the catalyst for many states legalizing same-sex marriage. Female leaders like Hillary Clinton and Sheryl Sandberg have shaped their views on gender equality.

Imagine how that translates in the workplace. The payoffs touch every single area of a business by opening the doors to increased creativity, agility and productivity, new attitudes and language skills, a more global understanding, new solutions to difficult problems, stronger customer and community loyalty and improved employee recruitment and retention.

6. They are obsessed with technology.

Today even the industries that historically have been slow to innovate are finally adopting a web- and mobile-first philosophy. Century-old brick-and-mortar stores are fighting to keep Amazon at bay; healthcare finds itself transformed by the Affordable Care Act. Job seekers with coding and programming skills from Java to Ruby to SQL are desperately needed at all types of companies right now. Big data analytics, video game design, app development, software architecture – the list goes on and on for highly sought Millennial workers with tech expertise. But the issue isn’t just about the hard skills they bring.

If you’ve spent any time with a child lately, you’ve probably noticed that they can master an iPad within minutes. It’s mind-blowing – and a little frightening – to imagine how future generations of consumers will interact with technology.

Millennial workers are the bridge to that future, through social media, mobile, the cloud and other real-time technologies that haven’t even been invented yet. They are graduating with both academic skills and innate behavioral skills that companies will need to engage with customers in much more meaningful (and profitable) ways.

It’s the way Millennials think about technology, and their relationship with it, that is changing everything. So, having Millennial employees on staff to advise on your customer relations strategy or spearhead innovative new mobile and social media programs is invaluable for any business of any size, place or industry.