The Business World's Cultural Icon Has a Real Culture Problem In a move for a better culture at Zappos, CEO Tony Hsieh has watched great employees leave. That's bad culture management.

By Ray Hennessey

Opinions expressed by Entrepreneur contributors are their own.

If almost one out of every five of your employees left your company, would you think that's a problem?

How about more than a third of people tasked with one of your most vital projects?

That's the key question surrounding Zappos, the Amazon-owned retailer that has prided itself on being a paragon of corporate culture. CEO Tony Hsieh has been the country's best-known purveyor of positive corporate culture, once making Zappos one of the most sought-after places to work.

But Hsieh is being hoist by his own petard thanks to holacracy, the flat business structure where there are no managers, just happy people working all together for the common goal. To date, 18 percent of the company's workforce have taken a buyout offer for those who didn't feel comfortable working in a holacratic environment.

Worse, a full 38 percent of people working on Zappos' switchover to Amazon's cloud platform -- a major project that was supposed to be completed last year -- left, pushing the project past its deadline.

For its part, Zappos -- where employees have been known to dress as fuzzy animals in meetings -- sees the rainbow amid the marshmallow clouds. "While we have lost a number of folks, it is important to note that we have a significant group of highly talented individuals who will be staying to help move Zappos forward," company COO Arun Rajan said in a memo.

When a company watches nearly 20 percent of its workforce leave, and so many key personnel at that, executives generally take a step back and re-assess strategy. After all, companies aren't simply a collection of brands and products. Companies are a community of employees. Those employees provide service to customers. Businesses know that employee happiness leads to productivity and higher profits.

Actually, it's that knowledge of the vital importance of employees that gave rise to the whole focus on company culture in the first place. In order to attract the best of the bunch, companies promoted great working environments, buy-in, colleagueship, communication and innovation. Categories like this form the basis of what we see as top company cultures nowadays. Culture derives from a combination of employer intention and employee enthusiasm.

Zappos has half of that. By imposing holacracy, it is showing what it intends its culture to be. Hsieh is sharing his vision for what he wants from his company, which is his right. His team, though, is saying it doesn't share that vision and so people are leaving and it is affecting the business itself.

Tony Hsieh has a culture problem, which is the management equivalent of the Pope forgetting the words in Hail Mary.

Holacracy itself may not be the problem, though one wonders whether a company with the size and history of Zappos is the perfect lab for it to work. I've questioned holacracy in the past at Zappos, and I was struck that almost all of the people arguing with me were consultants and coaches whose practices focused on introducing holacracy at organizations. The jury is still out on whether in the long run this is a good or bad move.

But you can't blame holacracy for this. You can only blame Hsieh. Culture is a cult with Hsieh now, with its own vocabulary and odd onboard and offboarding processes. You have to be a good cultural fit to join Zappos in the first place. 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."

Even with that rigorous screening process, the likes of which the lads of Skulls and Bones couldn't replicate, Hsieh still got a company where a large percentage of people didn't feel a strong enough affinity for his cultural revolution.

But, like all good cults (and gym memberships) just try getting out. When he first announced the buyouts for people who disagreed with holacracy, he also set up requirements designed to make you think twice. You had to first sit through a movie from Frederic Laloux, author of Reinventing Organizations, and you had to read his book. If that last-ditch psychological programming didn't keep you, you were allowed to leave.

It is, in short, bizarre. Sure, Zappos is different, and Hsieh is a wizard when it comes to cultural innovation. But holacracy and, more importantly, the march toward a more positive culture isn't working at Zappos. A major project has suffered. Good team members have left.

The cultural icon of corporate culture is stumbling, and its culture is the culprit.

Ray Hennessey

Former Editorial Director at Entrepreneur Media

Ray Hennessey is the former editorial director of Entrepreneur.

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