Three months ago, I became CEO of Zenefits after an internal investigation brought to light deficiencies in the company’s licensing compliance. In my Day 1 memo, I said that we would be transparent about these failings, because in order to fix a problem, you must first admit that it exists. Regulators and the public have an expectation that their rules will be followed, and the new leadership of this company is completely committed to doing that.
Getting compliance right is important for all businesses, but this is especially true for Zenefits. Our software is intended to help customers with their HR and Benefits, so compliance is fundamental to our value proposition. We not only have to be a compliant company, we have to be excellent at understanding compliance and delivering that in our product. We have to be the Compliance Company.
Over the past three months, we have worked hard to become this company. This transformation is still underway and there is still some work to do. But we have brought our licensing into compliance. We have dealt with many other issues as well, including a previous culture that was complacent about cutting corners and dismissive towards long-term planning. We have made a break with this culture and defined operating with integrity as our new number one value.
If there is a silver lining to the difficulties that Zenefits has gone through the past three months, it is that we have turned compliance into a core part of our values, culture, and expertise. In turn, I believe that we will be able to use this experience to improve our product and help our customers with their own compliance needs. This will ultimately make us into a stronger and more differentiated company that provides a much greater level of value to our customers.
I want to thank our customers for sticking by us during this difficult period. The fact that our ARR remains the same today as it was before all of this happened is a testament to the value that small businesses find in our platform.
As I reflect back on these first three months, I think it’s important first to make clear how our compliance issues came to light. We need to close the chapter on what went wrong so we can move forward. Second, I want to describe our remediation efforts in more detail. Finally, I want to tell you about how we are looking forward as a company.
In late November, the company conducted an internal review of our licensing procedures that made me aware of two issues for the first time. First, contrary to what I had been led to believe, the company had engaged in many instances of unlicensed selling. Second, the review uncovered the existence a software program, or “Macro”, that created the perception that employees were studying required online coursework when they were not in fact logged in.
In response, the company initiated two investigations. In December, the company hired a Big Four auditing firm to itemize the licensing failures. After I became CEO in February, we self-reported the findings to all the state departments of insurance. Since then, we have been cooperating with regulators to fully account for all historical violations while instituting new technology and practices to avoid future ones.
Separately, we hired the firm Cooley LLP to investigate the Macro. Cooley reviewed over 15,000 documents and interviewed current and former employees. On January 25, Cooley reported its findings to me. This is when I learned for the first time that founder and former CEO Parker Conrad had written the Macro and that its use violated a state licensing requirement.
I immediately escalated the matter to the Board of Directors. An emergency board meeting occurred on February 1, Parker agreed to resign, and I instructed company counsel to self-report the issue to the California Department of Insurance. All of these actions are described in Cooley’s investigative report to the Board, which we are making public as part of our commitment to transparency.
Since I became CEO on February 8, we have moved swiftly to remediate these issues. As I outlined in my Day 1 memo, this has required not just new policies, procedures, and technology but also sweeping changes to our leadership, governance, values and culture.
a. Macro Remediation
To ensure that something like Macro cannot happen again, we have disabled the underlying technology on our network. More to the point, we have terminated executives who were ringleaders in encouraging and disseminating the Macro. We are committed to operating with integrity, and behavior of this kind will never be tolerated at Zenefits again.
We are also requiring that every broker at Zenefits take 52 hours of coursework created by industry authority NAHU (the National Association of Health Underwriters). Of this, 12 hours consists of ethics training. For each NAHU course, the participant must pass a proctored NAHU test. The program has already begun and will be completed by October 1. You can see our NAHU curriculum here.
b. New Licensing Controls
To bring our licensing into compliance, our engineers have developed sophisticated new controls on the Salesforce.com platform that prevent any current or prospective account from being assigned to a sales rep who does not have a valid license in the correct state. Recently, we integrated this technology with a live feed from a national licensing database, so data on our employees’ insurance licenses is always up-to-date. Zenefits currently has approximately 300 licensed employees with almost 10,000 licenses.
In the words of our Big Four auditing firm, “the processes and controls over the licensing of sales agents are adequately designed to address the risk of sales activity being performed by agents without the appropriate license.” If you’re familiar with the words of auditors, this is about as enthusiastic as their evaluations get. We will be bringing back our auditors in Q3 to verify that the new controls are working as designed.
c. Dedication to Broker Education And Professionalism
Zenefits is not content just to do the minimum broker education required by the state. We have also instituted the following additional education:
Zenefits has established a Zenefits Insurance Advisory Board (ZIAB), consisting of experienced brokers who oversee the training curriculum and have Broker Office Hours to answer additional questions. ZIAB is also active in the company’s emerging compliance structure.
Finally, as a part of our dedication to the broker profession, every producer at Zenefits is a member of NAHU, as well as their associated state and local organizations. Zenefits is encouraging active participation and pays for membership fees.
d. Corporate Governance and Leadership
Zenefits has reconstituted its Board of Directors and Executive Team. Previously, the Board consisted of 4 seats, three of which were controlled by Parker; effectively he had total control. The new Board consists of 6 seats and is balanced: in addition to a CEO seat, there is one founder seat (Laks Srini), one seat for the Series A/B investors (Lars Dalgaard from Andreessen Horowitz), one seat for the Series C investors (Bill McGlashan from TPG), and two outside directors (Antonio Gracias from Valor and Peter Thiel from Founders Fund). We are grateful that prominent investors and industry leaders like Antonio, Bill, and Peter agreed to join the Board when I became CEO.
We also named a new Executive Team after each member was vetted by Cooley to ensure that they had no role in disseminating or encouraging use of the Macro. New Sales leadership has been appointed in both San Francisco and Phoenix. And throughout the company, we have appointed or promoted over 20 new mid-level managers and executives.
e. Creation of Compliance Team
One of my first acts as CEO was to appoint Josh Stein, a former federal prosecutor, in the new role of Chief Compliance Officer, which reports directly to me and to our Board of Directors. One of our key failings under the previous CEO was that we did not have a dedicated compliance department — we have fixed that.
Over the past three months, Josh has done an amazing job standing up a robust compliance organization that works with the Exec Team and managers throughout the company. We have 9 dedicated compliance personnel — up from zero under the previous CEO — with plans to hire 3 more. The team is conducting a top-to-bottom compliance review, and we have established a compliance hotline that allows any employee to report (anonymously, if they desire) any issue that needs to be investigated. Maintaining robust compliance monitoring and remediation is something that we will never stop doing as a company.
f. Change in Culture and Values
Company culture is what guides employees’ decisions when no one is looking. As Warren Buffett has written, “Culture, more than rule books, determines how an organization behaves.” That is why some of the most important changes that we’ve made have been at the level of culture and values. Zenefits declared three new company values on Day 1:
#1 Operate with integrity.
We have empowered our employees to act with integrity and we are seeing amazingly positive results from that. We don’t punish employees who make honest mistakes; we recognize them for tackling the root causes that led to those mistakes. Our employees are spotting issues and bringing them forward, knowing that the company will take their concerns seriously.
Operating with integrity is about more than just compliance, as important as that is. It’s about integrity in everything we do. A key component of that is the integrity of our data and infrastructure. We have declared a War on Errors with a dedicated quality team, and we have created a new Core Service team in Engineering. As a result of these initiatives, key metrics for error rates, site performance and reliability have all improved markedly, improving the experience for our clients and their employees.
We have seen that our problem was not the vast majority of our employees — our problem was fundamentally a failure of tone and leadership from the top. I’m proud of our current employees and inspired by their dedication to doing the right thing.
#2 Put the customer first.
We have made the decision to focus on small businesses because this is where we can be most impactful as a company. These are the businesses that most need a product like Zenefits. Small businesses rarely have an HR department larger than one — many have no one at all, with the heavy administrative burden falling on the business owner.
We have found that many small businesses are offering health insurance for the first time (28% of our new clients) because Zenefits makes it easy to do so. Similarly, many of our small business clients are now able to offer other big company benefits, like commuter benefits or FSAs. This helps our small business clients compete for talent and take care of their employees.
Part of our dedication to small business is a dedication to smart growth. Rather than chasing ever larger accounts, we have re-dedicated ourselves to improving our service with our small business customer in mind. Today we are focused on the quality of our offerings, with important initiatives like our War on Errors. In the near future, look for even more radical changes dramatically expanding the power of our platform for small businesses.
#3 Make this a great place to work.
We have made strides in making Zenefits a great place to work. By “great”, I don’t mean just a fun place to work. Having fun is important, but it’s not the end of the story. Working at Zenefits should be a rewarding experience, where employees believe they are part of making an important change in the world and feel a connection with each other and our customers.
We started by declaring our mission statement, which is to make entrepreneurship easier and more accessible to everyone. We sharpened our focus on small businesses to make winning achievable. We recognize employees who demonstrate our new values at our All Hands meetings through a peer nomination process. We are deepening the connections between our customers and employees with our biweekly “Live Chat” series, which brings in customers to share their experience with Zenefits. This is especially important for our employees who don’t have regular contact with our customers. A rewarding place to work is one where you can see the positive impact you’re making.
And we are catching up on all the other things employees expect from a company they give their all to: a more generous benefits program, a 401k, a thoughtful goal setting and review process, more commuter benefits, manager training, and events to socialize together outside of the office. Today, thanks to our facilities team, employees in San Francisco arrived to a much needed spruce-up of our office space in San Francisco.
III. Moving Forward
Although our work on remediation is not yet done, we have made major progress. We have sent an independent audit to regulators, owned up to our historical issues, and will accept the consequences for our past mistakes. We will continue the partnership with regulators we have forged by self-reporting this issue.
Now it is time to look forward as a company. We need to focus on making small business ownership easier and more accessible. We need to use the deeper understanding of compliance that we now have to help our customers with their own compliance-related needs. This is a value proposition that already undergirds some of our most compelling products.
One example is Onboarding. We offer a simple “Hire” button that, once configured, keeps small businesses in compliance by extending offer letters, running background checks, automatically offering eligible new hires insurance, facilitating completion of I9s, and collecting the information required for W-4s. Our goal is to make hiring a new employee as easy as calling an Uber.
Another example is our ACA Compliance tool. Particularly for companies with part-time or hourly employees, calculating whether you have to provide coverage, and for whom, when, and how much is very complex. And producing the Form 1094-Cs/1095-Cs filings is a significant administrative burden. This tool is free, regardless of whether you make us your broker. But it’s much more powerful when we’re the broker because we can auto-populate so much of the data. This shows how an all-in-one HR and Benefits system drives so much value for small businesses.
Products like these demonstrate the value we deliver as the Compliance Company. Our focus now is to continue executing for small businesses and living up to the great potential of this company.
About David Sacks
David is CEO of Zenefits. He is an Internet entrepreneur who was the founding CEO of Yammer and original COO and product leader of PayPal. He also produced the award-winning independent film Thank You For Smoking. He is an angel investor in tech companies like Facebook, Uber, Airbnb, Houzz, SpaceX, and Palantir.