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Zenefits Board Of Directors A Case Solution
Like other Unicorn’s startups, Zenefits was privately held and highly valued. The incredible financial success of the company brought growth opportunities and the company began to expand. Unfortunately, in the drive of rapid growth, it loses its grip on the internal controls matters. The board structure consisting mainly of investors, founders, and beneficiaries added to the problem by tilting the control structure in favor of the CEO. The company faced legal and state actions and was made to change its business model which was the cause of its competitive advantage. The new CEO brought many changes to the organization and improved the internal control mechanism. The business model was also shifted. While the major business areas were shuffled the board structure mainly remained internal and lacked any external or independent directors. The analysis has shown that a diverse board of directors with optimal size and independence level is mandatory for a good corporate governance structure in the organization. It can save the business through various problems in the future.
Following questions are answered in this case study solution
Corporate Governance Issues
Case Analysis for Zenefits Board Of Directors A
The corporate governance structure of the company is important in predicting the long term financial sustainability of the business. Issues like the board of director's structure, size, and integrity of leadership significantly influence the company's performance. This is the analysis of the case study of Zenefits that despite its financial success faced multiple regulatory problems because of lack of proper governance structure. The issue has been discussed with multiple perspectives and the major potential corporate governance-related problems have been identified. Some recommendations have been made in the end. The analysis has been supported by relevant academic literature.
3. Problem Statement
Zenefits is a unicorn startup with high expectations and a robust growth rate. The company was among the most valued startups having an estimated value of $4.5 billion. The USP of the company was to provide HR solutions to companies with zero cost software which was incompatible in the market. With potentially high future growth prospects, the company attracted wealthy investors and started to expand aggressively. The operational issues relating to compliance and regulations began to surface soon after. It was found that the software used by the company employees to get the required license for insurance selling has some loopholes.
The company’s CEO and co-founder Conrad steeped down and Sacks took the charge. He changes the culture of the organizations and made them more compatible with regulatory standards by implementing strict controls. As a consequence of legal actions and state involvement, the company had to change the business model and went from zero to a $5 subscription of the software. The company also focused on new product development and building partnerships with the insurance brokers instead of competing with them. With all the changes in the organization structure and business model, one problem remains a matter of concern. The board of director's structure was not very diverse and independent and the lack of a proper corporate governance model.
Zenefits suffered from the classic Unicorn startup's dilemma of the lack of proper governance structure and paid the price for it. It is common among high growth tech companies to ignore the bylaws in the relentless drive for profits and they often suffer the consequences for it. Companies like Theranos and Uber are examples of such phenomenon (Epstein, 2018). Zenefits was another example of the inappropriate corporate governance structure that faced multiple internal issues. The company's 2018 board of directors’ structure is another potential problem as there are several loopholes in the current structure as well.
As per the details mentioned in the case, the post-2017 board of directors consisted of Fulcher, Srini, Sacks, Dalgaard, and Mc Glashan (Exhibit 2). The most pronounced problem here is that none of them is an independent or external director. The board of directors mainly consisted of founders, investors, and the people who have either direct or indirect stakes in the business which can make the board decisions biased and prejudiced. It has been found that independent directors add value and increase the effectiveness of the board of the business (Tam, et al., 2021). It can be because of the unbiased attitude and fewer stakes than the internal directors of the company which can make their presence more effective for the business.
Another important finding is the ethical values of the independent directors. It has been found that the personal moral values of the independent directors are an important factor in driving the ethical decision making in the board (Grant & McGhee, 2017). In other words presence of strong and ethical independent directors can save the company from unethical practices, like the one going on in Zenefits under the name of their internal software macro that was bypassing the regulations in issuing the insurance licenses to its employees. Practices like these can be avoided in the future through the hiring of independent directors who can present their views with unbiasedness and less pressure in front of a board of governance and save the company from future troubles.
Since the company is relying on its board to tackling with future problems and issues it is important to examine the role and potential of the board from various angles. The current size of the board consists of 05 members. While the board is larger and better than before 2016 where there were only 04 members (Exhibit 5a) with the majority of the control was lied with the co-founder and CEO Conrad, it cannot be considered sufficient. It is a fact that independence along with the size of the board of directors is an important factor that influences the performance of corporate governance in any company (Tulung & Ramdani, 2018). The larger board size is negatively related to the performance of the company (Bebeji, et al., 2015). The companies, however, are required to maintain an optimal board structure for better corporate governance and internal control mechanism. The companies with smaller boards are found to be involved in more risky investments and practices (Huang & Wang, 2015). For the sake of risk mitigation, the company should opt to increase its board size and maintain a more suitable structure.
Another factor affecting the board's performance is the influence of existing directors and executives on new hiring. In the companies, new directors are hired through networking mostly from the network of existing directors (Baldacchino, et al., 2020). This can create hurdles for the directors to act with integrity. As per Exhibit 02, the current BOD of Zenefits consists of cofounders and investors who happened to be close acquaintances. Apart from being part of the organizations having their stake in it, this is another risk factor that can create future problems. These people are less likely to stand against each other in case of any conflicting situation and can be blinded by greed or optimism for growth as they have their stakes invested in it. This board structure has inherent flaws and through it can be good for the growth of the company it can impose similar threats of failure of governance structure that as happened before.
Zenefits has recently changed its business model and has undergone a series of changes ranging from the firing of employees to product innovations. The company has also made a shift in its culture significantly making it more compliance-based. Although these achievements are great on the surface they need to continue in the future to sustain the momentum of growth. The company has also achieved financial success with its new software and has plans to grow further in the future. The corporate governance structure has a direct impact on the financial performance of the company (Datta, 2018). To maintain a sustainable competitive advantage the company should diversify its board of directors to improvise the governance structure.
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