When Doing Right Turns Out to Be Very Wrong
Just because you want to do what's good doesn't mean you are doing what's correct.
All entrepreneurship provides some amount of social good. Startups solve problems for customers, stimulate the economy and, best of all, create jobs for other people. Many entrepreneurs start and manage businesses out of a sense of mission, driven not by cupidity but by a true desire to do good in the world.
Sometimes, it's precisely that instinct that gets them into trouble.
Three companies, different in size, sector and stage of development, have all stumbled to varying degrees recently, and there's just one common thread: A desire to do what the CEOs thought was right turned out to be disastrously wrong.
Zirtual was the darling of the virtual-assistant space. It had a driven CEO in Maren Kate Donovan, who evangelized her company and its mission passionately and was a master of content marketing.
It also had a loyal employee base, which shouldn't have been surprising. While many virtual-assistant companies were part of the gig economy, matching freelancers with time on their hands with professionals who needed services, Zirtual's "ZA's" were employees of the company itself, allowed to work from home while still receiving employee benefits. On Glassdoor, Zirtual was routinely rated as one of the best places to work by its own employees.
Hiring staff, rather than paying freelancers low wages without the cost of health care and other benefits, seemed like the right thing to do, particularly since startups are oft-criticized for low pay, no benefits and a heavy reliance on freelancers. CEOs benefitting off the backs of workers, and all that. Donovan became a standard bearer of the idea that hiring a full-time staff on a business built from a freelance model wasn't the worst idea after all.
Until Zirtual ran out of money.
It's tough to manage a great work environment for employees when you're out of business. Zirtual shut down abruptly, firing all of its 400 ZAs.
The reason? The employees themselves. "In total we raised almost $5 million over the past three years, but when we moved from independent contractors (ICs) to employees, our costs skyrocketed," Donovan explained in a blog post. "(Simple math is add 20–30 percent on to whatever you pay an IC to know what it will cost to have them as an employee)."
Employee pay and benefits were crushing. As Barnaby Lashbrook, CEO of rival Time Etc., points out, based on the numbers Donovan provided the public, Zirtual's average revenue per assistant was around $25,000, which was entirely unsustainable. (For the record, Lashbrook was just trying to be helpful and said he was "heartbroken" by his competitor's collapse -- so much so that he bought a Promoted Tweet for his blog post, replete with a deal for Zirtual members to switch, undoubtedly so they could form a bereavement group of some sort. Smart, aggressive marketing, with a soupçon of unseemly.)
Zirtual's assets were later purchased by startup.co, but the employees will almost certainly not be hired back, at least not full-time with their past compensation. If anything, given the company's collapse, it will first have to build up its customer base to get back to level where it can expect to hire workers again.
A freelance model, as dirty as that might be in some circles, at least keeps people working.
First, in the interest of full disclosure, I know and like Dan Price, CEO of Gravity Payments. I'm personally fascinated by what appears to be his sincerity about changing the world, one processed credit-card payment at a time. He was the winner of our Entrepreneur of 2014 award, mostly because of the way he led his company to disrupt the payments business. He is a smart, charismatic guy.
But he made a dumb move. Price made headlines for setting a minimum salary for his employees of $70,000, to much fanare. He was the "kind" CEO, the one (the only one, as some in the mainstream media seemed to wrongheadedly suggest) who cared about his employees so much that, not only did he pay them a big salary irrespective of their work position, but he also condescended to give himself the same minimum, from his previous take of $1 million per annum.
No sooner were we sweeping up the confetti from this noble undertaking than we found there were much darker consequences. For one thing, Price's own brother, a partner in the business, filed a lawsuit against him and suggested the pay move was done to deflect allegations Dan Price had hidden profits and paid himself an undue salary, to be detriment of other partners.
Worse, Price ended up losing some customers and some of his most valued employees left, noting that new employees who hadn't yet proved their worth shouldn't have the same value as those who had toiled to help Price grow the company over the years.
Price's drive for fairness was the most unfair move he had made. Enamored by the idea -- and concomitant media attention -- of fixing what he felt were systemic income and wealth inequities turned into an iniquity for him and his company. Over time, it bears watching how much damage was done.
Zappos, the shoe and clother retailer, routinely shows up among the most-cited companies with the best corporate culture. If there were a Mount Rushmore of culture, CEO Tony Hsieh's face would be the first carved. He is the high priest of corporate happiness, and, from his perch in Las Vegas, he's worked hard to transform Sin City into a virtual Mecca of virtue.
Chief among his initiatives: holacracy, that flat business structure where there are no managers, just happy people working all together for the common goal. It defines culture, and preserves the happy Zappos culture, where -- no lie -- people are even encouraged to dress up as fuzzy animals. It's great! It's fun! Come join!
Oh wait, not so fast. Joining, you see, has a process, which requires the company deciding if you are a good cultural fit. As The Wall Street Journal described it, potential employees have to first join a social-media network called Zappos Insiders, "where they will network with current employees and demonstrate their passion for the company—in some cases publicly—in hopes that recruiters will tap them when jobs come open." It is a way to see if you "fit in," a process developed not at Harvard Business School but at middle-school cafeteria tables around the country, but with a seemingly noble purpose of discrimination for the common good.
If you think getting in is hard, try leaving. When Zappos accelerated its move into holacracy earlier this year, more than 200 employees quit, but first had to sit through a movie from Frederic Laloux, author of Reinventing Organizations, and read his book. Nothing says great culture like homework.
Between an onboarding process that seeks to enforce hegemony (in what one might argue a discriminatory way) and an exit process that is akin to getting out of a timeshare contract, Zappos' view of Utopia is more Aldous Huxley than Thomas More. It is Culture, with a capital "C" and crossing out of the "ure." When a company watches 14 percent of its workforce walk out the door, it's a sign of concern most managers would seek to remedy. When that company is routinely held up as an example of the perfect office culture, it should be seen as a crisis. But, to Zappos, it is the price of cultural progress and "doing good" for the organization. After all, you can't make an omelette without alienating 14 percent of your workforce, or something like that.
None of the above examples should dissuade business leaders from striving for doing good. Capitalism and free markets demand an ethical approach to business, and companies that are committed to good practice often do the best in the marketplace. There is, after all, a moral case for capitalism, and it rests on good business. But you have to be smart about it. The key is to balance doing good with doing well.
The reason we have cliches in this world is that the issues underlying them are universal laws. That's why we know how the road to Hell is paved. And that particular blacktop can tar the image and prospects for companies of all shapes and sizes.
Ray Hennessey is the former editorial director of Entrepreneur.