Friday, June 11, 2010

A Loss of Control: Running (or Hoping to Run) a Public Company

So... you start a company and want to run it a certain way... and take venture capital fund and go public. Sounds like a logical (though still challenging) goal.

However, there's a few different things I've seen lately that make me think about this idea of public companies (and ones that may hope to become public) and what's expected/required of their leaders.

In a Inc. Magazine book adaptation piece, Tony Hseih wrote "Why I Sold Zappos" about his perspective on what made the company and what then compelled him to agree to a 2009 sale to Amazon (with Hseih still running Zappos as an Amazon owned business).

In short, Hseih built Zappos on the belief that Zappos was primarily a customer service company... and the best way to have great customer service is to have really really satisfied employees. This belief came into some conflict, though, with Sequoia Capital... the source of some $50M in VC funding for Zappos. As a VC firm, Sequoia's charter (presumably) is to maximize return on investments and while satisfied employees can help grow a company, extraordinary expenses around things like employee development and health care can also reduce that return on investment.

It's not a knock on Sequoia, but I took from reading this article (which made me want to read Hseih's book) that the money they provided Zappos both helped fund the company's growth and prevented it's founder and CEO from running it how he wanted to.


Also in this category of running a business (in this case one that's already public) was this DSCC (Democratic Senatorial Campaign Committe) ad against Senate hopeful Carly Fiorina:

As a Democrat (perhaps even a liberal), I hope that Barbara Boxer gets reelected and Forina defeated. Furthermore, as someone that worked at the company she was fired from, I heard a common refrain from people describing her as "great on vision and getting people excited, poor on execution" and don't think this experience (which is what she seems to hang her hat on) is enough to qualify her for work in the Senate).

This said, I viewed the ad as related to the Zappos piece in that Fiorina is criticized for getting tons of money from the company and laying off a large number of employees. While neither thing endears her to me, I don't view them as character flaws, but rather functions of good contract negotiating on her part and following the mandates of the market and board.

In terms of a mandate, she to my knowledge was basically required as the CEO of a public company to have her actions all be towards the ultimate goal of maximizing shareholder value... i.e. bumping up the stock price. One primary way to do that (at least in the short term) is to cut expenses through the form of employee headcount. Doesn't make it fun for the people being pushed out the door, but Fiorina could certainly make the argument that if laying people off looked to drive up the stock, she was compelled in her role as CEO to do so.


Thinking about this topic reminded me of a book I was required to read upon starting business school over a decade ago. From Eliyahu Goldratt, "The Goal: A Process of Ongoing Improvement" is told in parable form and makes the argument that a company exists for one reason... to make money. The concept is that if the company doesn't make money, then any altruistic purposes it may serve don't matter because a money losing company isn't a self-sustaining enterprise.

My thought from this is that the idea may well be true, but perhaps there's an additional statement that could be made about companies that are traded publicly. The presence of shareholders (whether they be of the public corporation or venture capital variety) often compel a leader to take on the singular goal of making as much money as possible. In most cases this is still a fine goal, but starts one down a slippery slope if that's neither the be all end all intent of the business or if the founder/leader wants to invest now in a fashion that shareholders don't agree with.


One avenue that could be pursued to help a leader run a company in a certain way is benefit corporation status (as described in the BusinessWeek piece "New Legal Protections for Social Entrepreneurs"), but this is only going to be applicable in a limited number of cases.


None of this unequivocally says that public companies or the people that work at them are bad places, but it does say to me that people either working at a public company or one aspiring to become public need to have their eyes open about what they're getting into.