Ethical Issue Analysis in Zenefits and Theranos

Overview of Companies 

Zenefits 

Zenefits is a U.S.-based company specializing in the provision of software as a service to various enterprises for the management of their respective human resource operations. In particular, Zenefits primarily focuses on helping existing enterprises in the United States with health insurance. This is attributed to the fact that it is extremely tedious for employers to shop for the appropriate health insurance covers for their employees (Alden, 2015). It is for this reason that the services provided by Zenefits help in bridging such gaps. 

Founded in 2013 by Parker Conrad, Zenefits operates in the human resource management industry with its headquarters based in San Francisco. Besides this, the company also has offices in Chicago, Bangalore, Vancouver, and Atlanta. It should be acknowledged that the company was started by LaksSrini and Parker Conrad with the sole mandate of helping small business enterprises and startups easily manage their employee benefits and find appropriate insurance quotes. Having been launched in early 2013, the company announced in 2014 that it had added flexible spending, commuter spending, and even 401 (k) support with the aim of replacing mundane functions that were being handled by the human resource departments of many companies (Alden, 2015). Through such approaches, the company was able to grow sporadically within a short time to the extent whereby it was able to hold inaugural customer conferences whenever it was launching next-generation products. 

It should be noted that its adopted platform mainly served as the central store for all the required human resources while at the same time allowing developers and third-party apps to integrate with it. Such ventures helped Zenefits to be valued more than $4.5 billion besides receiving more than $583 million in terms of venture capital funding from the investors such as Fidelity, I.V.P, TPG, Venrock, and Andreessen Horowitz. Given its disruptive progress in the market, Zenefits was able to attract a high prospect of investors. It is for this reason that in May 2015, the company was able to raise more than $500 million from investors such as TPG, Fidelity Management, and Comcast Ventures, thus making its valuation to be estimated in the regions of $4.5 billion. Such growth was further reflected in terms of the generated revenue. For instance, Zenefits recorded annual revenue of $20 million in 2015, thus representing more than twenty times growth in revenue compared to when the company started its operations in the market in 2013. The company was able to maintain sustained revenue growth in 2016 despite the scandals that had been attributed to the company. During this period, Zenefits was able to record annual revenue of more than $60 million, thus demonstrating its resilience in terms of financial performance. 

Even though Zenefits was initially launched as a SaaS platform aimed at simplifying the key processes in the administration and management of benefits accrued to small and medium-sized businesses, the company further grew to include core HR functions such as employee record keeping, onboarding and time tracking in its routine market operations. Through such initiatives, Zenefits was able to grow its operations into an all-in-one HR platform. It included an HR app marketplace integrated with more than 17 partners for the purpose of offering comparative shopping experience and shopping (Primack, 2016). Zenefits also had an HR Advisor app that aimed at providing its customers and partners with an extensive library of HR consulting services and content. By 2014, the company had already established itself in the market as the fastest growing company and one of the most innovative entities in healthcare. 

Theranos 

Theranos is a private health technology company that was founded in 2003 by Elizabeth Holmes, who was 19 years old when starting the company (Fiala & Diamandis, 2018). Upon its inception in the market, the company was able to raise more than $700 million from different private investor and venture capitalists, thus making it have a market valuation of more than $10 billion between 2013 and 2014. However, it should be acknowledged that the media and investors hugely hyped Theranos as a breakthrough in the expansive large blood-testing marketed given that the diagnostic industry in the United States has an annual sales of over $70 billion. During this period, Theranos rallied on the claims that it had come up with the revolutionary technology that required small amounts of blood when carrying out medical tests. 

As the founder of Theranos, Elizabeth Holmes came up with the idea of developing an ideal wearable patch with the capability of adjusting to drug delivery dosage and subsequently notifying doctors regarding various variables in the blood of a respective patient. It is for this reason that Holmes developed the lab-on-a-chip technology for conducting blood tests. Her idea was anchored on the principle of making blood testing cheaper, accessible and more convenient to the consumers. Headquartered in Palo Alto, California, Theranos had laboratories across California, Newark, and Scottsdale, Arizona. Holmes served as the company’s CEO since its inception in 2003 up to 2018. In the course of developing the company, Channing Robertson was recruited by Holmes to be the company’s technical advisor and first board member. Sunny Balwani later joined the company in 2009 as the chief operating officer and president. In 2011, George Shultz joined the company’s board of directors (Fiala & Diamandis, 2018). By 2016, the company’s board of directors had been fully constituted and had the capacity to review its proprietary technologies and provide the needed advice regarding Theranos integration into the clinical practice. 

However, Theranos management team was later restructured in 2016 following the departure of Riley Bechtel and Balwani. By early 2017, the celebrity-studded board of counselors that had been adopted by the company initially was scrapped. At this point, Theranos board of directors only included Daniel Warmenhoven, FabrizioBonanni, William Foerge and Elizabeth Holmes. Even though the company was initially based on a rented basement near the Stanford campus during its early years of growth, it was able to attract more than $6 million from venture capitalists and investors. By 2004, it had a market valuation of $30 million. By 2010, it managed to raise additional funding to $45 million with a subsequent valuation of $1 billion (Fiala & Diamandis, 2018). Following the significant news coverage that the company enjoyed from 2013, it was able to raise an additional $400 million from investors and venture capitalists. During this period, it had an estimated market value of $9 billion. By mid-2018, it was reported that the American government and business leaders had lost more than $600 million through their private investment ventures in Theranos. Following such controversies and other scandals that crippled the company, Theranos was liquidated in September 2018, thus rendering all its undertaken investments worthless. 

Ethical or Legal Issues 

Zenefits Ethical and Legal Issues 

The conducted legal investigations internally at Zenefits established that the company had contravened the required licensing procedures. Similarly, it was further established that the company’s CEO, Parker Conrad had created a browser extension with the aim of circumventing the training requirements with regard to selling insurance policies in California. Upon such establishments, the company conducted an internal audit of its operations with regard to its licensing controls whereby the report findings were shared with all states in the United States. It is on the basis of such unethical practices that Parker Conrad was forced to resign as the company’s CEO. 

Another major ethical issue concerning Zenefits is that it allowed employees to consume alcohol at its office premises. This was evidenced when David O. Sacks who replaced Conrad as the company’s CEO banned the consumption of alcohol in the company’s CEO through the memo that was issued to the employees. The previous memo correspondences indicated that plastic cups filled with beer, cigarettes, and the used condoms had been found in the company’s stairwell and building complex. This was a major ethical issue considering that it painted the reputation and image of the company in a negative way. Such controversies stirred the downward spiral of Zenefits. This is because the company ended up retrenching more than half of its employees as a way of dealing with its dwindling business fortunes in the market due to the controversies and ethical issues that were being unearthed by the regulatory bodies. Considering that the company had contravened the established strict regulations regarding licensing in the field of insurance, the company reached a settlement of $62,500 with Tennessee due to its noncompliance to the licensing requirement in the state. Other settlements in terms of fines were later made with Delaware, Arizona, South Carolina, and New Jersey. By the end of 2017, the company was slapped with a fine of $7 million by the insurance regulator in California. Even though this was the largest penalty to be slapped to a startup, it was justified because Zenefits had contravened ethical and legal expectations by flouting the established insurance laws. This is because Zenefits allowed unlicensed employees to sell insurance policies. Furthermore, it circumvented the education requirement mandatory for all insurance agents. Therefore, these are the major ethical and legal issues that instigated the fall of Zenefits. 

Theranos Ethical and Legal Issues 

Theranos faced significant ethical and legal issues when the validity of its technology was questioned through the investigation that had been conducted by The Wall Street Journal. This is because it was established that the company had contravened legal and ethical expectations by using traditional blood testing machines as opposed to its Edison devices. In such a case, Theranos engaged in deceptive business practices by trying to hoodwink the public even despite knowing that it’s much publicized Edison machine for blood testing provided inaccurate results. 

Following such gross ethical and legal violation, Theranos was subjected to scrutiny from all relevant regulatory bodies (Kelley, Lee, Shields & O’Rourke, 2017). For instance, the findings by the Center for Medicare and Medicaid Services established that Theranos, through its established labs did not comply with the expected performance standards and certification requirements. Therefore, the engagement of the company in deceptive business practices greatly jeopardized the safety and health of the patient due to inaccurate blood tests that could lead to wrong doses being administered (Weinstein, Sipala, Turkington & Stromberg, 2016). It is for this reason that Theranos key partners such as Capital BlueCross and Walgreens suspended Theranos blood tests. This was later followed by the suspension of the company’s CEO from owning or even opening any laboratory. Upon establishment that Theranos was engaged in deceptive business practices based on the overhyped media reports, the company was subjected to criminal investigation. Such measures were based on the approach of the company to mislead government officials and the investor about its blood testing technology that was later proved to be ineffective and largely inaccurate. By 2016, the Center for Medicare and Medicaid Services revoked the company’s CLIA certificate (Kelley, Lee, Shields & O’Rourke, 2017). Its operators and owners were later sanctioned from operating or even owning any laboratory. Such measures coupled with heavy fines led to the liquidation of the company by September 2018. 

Stakeholders 

Zenefits Stakeholders 

Employees formed a major part of Zenefits stakeholders. Besides this, other significant stakeholders include the insurance companies that had entered into partnership and arrangements to purchase Zenefits products (Nunan & Di Domenico, 2018). Furthermore, the employees working for the respective insurance companies also comprised part of Zenefits’ stakeholders given that their policies were chosen with the help of Zenefits technology. Given that Zenefits had flouted several insurance policies that were expected to guide its routine market operations, the company was slapped with heavy fines that forced it to wound down its operations. Therefore, this meant that all its employees and associates lost their jobs. Similarly, its investors also incurred significant losses on their investment in the company. 

Theranos Stakeholders 

Theranos stakeholders included its investors, employees and government officials. However, its violation of key ethical and legal standards and subsequent false advertisement of its inaccurate blood testing technology subjected it to heavy fines from the regulatory bodies such as the Centers for Medicare and Medicaid Services and the Department of Health Services (Kelley, Lee, Shields & O’Rourke, 2017). In this case, its close in September 2018 led to job loss among its employees. Furthermore, the company investors also lost a significant portion of their investments. 

Alternatives 

Going by the cases of Zenefits and Theranos, the establishment of the code of ethics, strict regulation, and strict supervision are some of the alternatives that can be explored to help Silicon Valley startup companies behave and operate ethically. In this case, a code of ethics will help in outlining this that can be done and things that cannot be done with regard to the operation of the startup company in Silicon Valley. Therefore this will help provide an appropriate framework of ethics guiding all startup company operations even though it was limit the operations of other companies. On the other hand, strict regulation is another alternative that can help startup companies operate and behave ethically (McCarthy, 2016). In such a case, startup companies going against the set regulations will be slapped with heavy fines. Therefore, the fear of being fined heavy will prompt such startup companies to operate and behave ethically. Furthermore, strict supervision is another alternative that should be implemented. In this case, Silicon Valley should establish a supervisory body whose mandate is to supervise the operations and behavior of each startup company strictly. Such strictness will help companies embrace ethics in all their operations. 

Recommendation of the Best Alternative 

Establishment of the code of ethics is the best alternative that should be embraced to ensure that all the startup companies operate and behave ethically. This is because a code of ethics will outline the specific dos and don’ts of startup companies, thus minimizing the cases whereby such companies deviate from the norm. This can effectively be communicated to internal and external business stakeholders through memos or during the annual general meetings. 

References 

Alden, W. (2015). Startup Zenefits Under Scrutiny For Flouting Insurance Laws. 

Alden, W. (2015). Zenefits Is An HR “Rocket Ship”—But Some Customers Get Left Behind. 

Fiala, C., &Diamandis, E. P. (2018). The meteoric rise and dramatic fall of Theranos: lessons learned for the diagnostic industry. Clinical Chemistry and Laboratory Medicine (CCLM) . Retrieved from: https://www.degruyter.com/view/j/cclm.ahead-of-print/cclm-2018-0353/cclm-2018-0353.xml?intcmp=trendmd 

Kelley, C., Lee, S., Shields, V., & O’Rourke, J. (2017). Theranos, Inc.: Managing risk in a high-flying biotech start-up . The Eugene D. Fanning Center for Business Communication, Mendoza College of Business, University of Notre Dame. Retrieved from: http://sk.sagepub.com/cases/theranos-inc-managing-risk-in-a-high-flying-biotech-start-up 

McCarthy, M. (2016). US officials ban Theranos CEO from running laboratories for two years. BMJ: British Medical Journal (Online) , 354 . Retrieved from: https://search.proquest.com/openview/1722a9879cfbd4b010e9f19b4451cb97/1?pq-origsite=gscholar&cbl=2043523 

Nunan, D., & Di Domenico, M. (2018). Theorizing piratical innovation: regulatory illegitimacy and firm growth. Journal of Small Business Management . Retrieved from: https://onlinelibrary.wiley.com/doi/abs/10.1111/jsbm.12466 

Primack, D. (2016). Will Ex-Zenefits Employees Sue The Company?. 

Weinstein, A., Sipala, A., Turkington, L., & Stromberg, M. (2016). Theranos-A Case Study on Customer Value and Technology. Journal of Marketing Perspectives , 1 , 6. Retrieved from: https://search.proquest.com/openview/ec2f2503bea5743f138dd48170cdef2f/1?pq-origsite=gscholar&cbl=2044542