Zenefits has been making news headlines all year, and not for the reasons it wants to be. The latest scandal coming from Zenefits came to light at the end of February when the story broke that Zenefits was revamping its culture.

What did that mean?

The Silicon Valley company was banning sex and drinking at work. It was shocking to hear for most of the world, where the workplace is boring at best.

Zenefits is a human resource software company, and David Sacks, co-founder of PayPal and Yammer, was recently appointed the CEO, in an attempt to revamp the troubled company.

Sacks took on his role with the company at the start of February, after the co-founder and CEO Parker Conrad, stepped down. It’s speculated Conrad left his position because the three-year-old tech startup was facing problems with regulators, and was even banned in Utah because of state laws prohibiting the provision of insurance rebates to customers.

Now, however, we see it may have been more than that.

Sacks was brought on because he has experience navigating complex financial regulations, as he was PayPal’s COO.

“The fact is that many of our internal processes, controls, and actions around compliance have been inadequate, and some decisions have just been plain wrong. As a result, Parker has resigned,” writes Sacks. “In order for us to move forward as a company, we cannot seek to hide or downplay the problem.”

A few months earlier, in December 2015, Zenefits hired an auditing firm to conduct an independent review of their licensing procedures after news broke they let unlicensed brokers sell insurance through their platform. That audit is ongoing, with Zenefits saying results of the investigation will be released when completed. Zenefits also moved Josh Stein into its chief compliance officer role, and three new board members were added.

While all of these changes started months back, it wasn’t until very recently that the internal culture issues were brought to the world’s attention.

As early as last summer these issues had been addressed within the company, with the Wall Street Journal obtaining a copy of an internal memo written by Emily Agin, the Zenefits direct of real estate and workplace services. Agin asked employees to stop using stairwells “inappropriately” because it could damage their relationship with their landlord. Agin’s note went on to say cigarettes, plastic cups filled with beers and used condoms were also found in the stairwell.

Some analysts and insiders are putting their two cents into the widely publicized issues with Zenefits, and wondering if the culture was a big part of what’s been plaguing the mega-million-dollar startup.

A recent blog in the SiliconBeat, the technology blog of The Mercury News, questioned whether or not this inappropriate culture is the undoing of this company, valued at more than $4 billion.

Sacks highlighted the problems with not only the processes and controls leading to issues with unlicensed brokers, and also addressed the problematic culture of Zenefits, saying the following:

We must admit that the problem goes much deeper than just process. Our culture and tone have been inappropriate for a highly regulated company. Zenefits’ company values were forged at a time when the emphasis was on discovering a new market, and the company did that brilliantly. Now we have moved into a new phase of delivering at scale and needing to win the trust of customers, regulators, and other stakeholders.

Sacks went on to say:

“As part of our commitment to making this a great place to work, we will find other ways for employees to socialize and have fun.”

There are so many elements of this story that are interesting in terms of not just a Silicon Valley company facing scandal and challenges, but also regarding modern ideas of talent management, many of which are built on what we see in Silicon Valley.

It’s really a paradox to see these cultures gone wild, and they often seem more like an episode of Mad Men as opposed to an office setting in 2016. The reason this is a paradox is because Silicon Valley is largely perceived as the most innovative, modern, cutting edge and progressive thinking area in the country, yet according to reports from Zenefits and other tech startups, employees are behaving more like attendees at a raucous college party than employees of companies worth billions.

It’s not just the wild behavior that’s proving to be an ever-growing culture problem. There are also persistent claims of racism and sexism in how these companies hire and manage employees, and there are issues of employees working 15-hour days in many of these organizations.

With the high stress that comes along with working in some of these businesses it’s no surprise the culture can go off the rails quickly, as employees likely feel they need opportunities to blow off steam. Unfortunately, the leaders of these companies have been quick to try and make fun and liveliness seem like part of the culture in an effort to lure in top talent, particularly when the demands are going to be so high on them once they’re hired. This attempt to make these offices seem fun and exciting, even when employees are perpetually stressed, overworked and exhausted, is likely what’s tipping the scales and creating cultures that aren’t fun and informal but are instead highly inappropriate and potentially destructive.

Once you’ve created this type of culture, it’s difficult to put it back in the box, as Sacks is likely going to find out. What’s interesting to note is his quickness to still include the word “fun” in his internal memo addressing the culture nightmare. He’s facing major regulatory compliance issues and an office that’s gone off the rails, yet he still wants employees to strive to find fun in the workplace, even if it they can no longer do it through alcohol and drug-fueled parties.

It’s interesting to note, as companies across America look to Silicon Valley as an example of how to lure in fresh new talent. Is it a sustainable talent management model, or is Zenefits just the first in a line of many that will face a possible implosion as a result?

Continue reading our post on “8 of the biggest talent management mistakes made by startups” to learn more about this topic, and how to avoid a talent nightmare.

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