Tony Hsieh Showed Promise and Perils of Happiness

(Bloomberg Opinion) -- Tony Hsieh, the former Zappos.com chief executive officer who died on Friday from injuries suffered in a house fire, was an unusual — and unusually humane — corporate executive.

In 2009, after he grudgingly agreed to a buyout from Amazon.com Inc., Hsieh could have walked away from the online shoe seller an incredibly wealthy man — something many CEOs would have done. Instead, he negotiated a deal that gave Zappos a high degree of autonomy and stuck with the company for 11 more years, finally departing in August after leading the company for more than two decades.

In 2013, after setting up a call center in Las Vegas, Hsieh decided to move the entire company there. He did so initially because he wanted people answering customer calls to feel fully a part of Zappos. But he also saw it as an opportunity to help revitalize a city down on its luck. By the time he died, he had spent $350 million of his own money on the effort.

Hsieh instituted something called “The Offer” — a means of compensating new employees who quickly concluded that Zappos was not the right place for them. After a week or so on the job, new employees were told that if they wanted to quit, they would be paid for the time they had put in, with an extra $1,000 thrown in for good measure. Thus, people who were unlikely to work out left with some money in their pocket and their heads held high.

There are many other examples: Although Hsieh originally bought a luxury apartment in Las Vegas, he soon moved into a trailer park he helped establish, where he created a close-knit community. He encouraged people working in the call center to take as long as they needed to talk to customers — even when the discussion roamed far afield from shoes. He paid himself $36,000 a year and sat in a cubicle with the rest of the Zappos team.

“His mission in life was to bring smiles and happiness to people everywhere he went,” a former venture partner, Cyan Banister, told Forbes. She added, “Tony was like the leader of a parade. One big happy parade.”

Indeed, Hsieh considered happiness so important that he studied what it took to make people truly happy. He eventually wrote a book about it titled “Delivering Happiness: A Path to Profits, Passion, and Purpose.”

The thesis of the book is that if you work hard at making sure both customers and employees are happy, your company will be successful. In the obituaries and appreciations of Hsieh that I read over the weekend, much was made of the extraordinary attention that Zappos paid to making customers happy. Great customer service was at the heart of the business model Hsieh imposed at the company.

It was also a reason Amazon’s CEO, Jeff Bezos, was so eager to buy Zappos: He saw in Hsieh a leader as devoted to pleasing customers as he was. (Another reason was that by 2009, Zappos had built a billion-dollar business selling shoes online while Amazon’s efforts in the category had largely fallen flat.) “I get all weak-kneed when I see a customer-obsessed company,” Bezos said at the time of the merger. It is also why Bezos decided to give Hsieh and Zappos such an unusual degree of autonomy.

What were largely brushed over in those obituaries were Hsieh’s efforts to create an employee culture of happiness; here, I think, things get a little more problematic.

Hsieh’s first company was an internet ad service called LinkExchange, which he eventually sold to Microsoft. As he would explain later, one of the things that bothered him was that as LinkExchange grew and needed to hire people who were not friends of the original team, its early culture was lost. It got to the point where he hated going to work at his own company. After the sale to Microsoft, he walked away as quickly as he could.

At Zappos, Hsieh wanted everyone to be themselves, to enjoy one another and to have fun. Jennifer Reingold, writing in Fortune magazine, visited Zappos’s Las Vegas headquarters in 2016 and described the scene like this:

The company’s “resident artist,” who started as a Zappos call-center worker, is painting an enormous chrysanthemum on a canvas near the entrance. Red lanterns festoon the lobby of the semicircular 1970s edifice, which once housed the Las Vegas city government, in honor of Chinese New Year. A few hours later, all 1,500 employees of the online shoe and clothing retailer gather in the nearby MGM Grand theater, home to the Cirque du Soleil show Kà, for Zappos’s quarterly All-Hands Meeting, an afternoon of progress reports, music, and fun.

The Zappos culture, Reingold wrote, “embraces the idiosyncrasies of each individual.” Except for one small problem: The culture wasn’t really working for a lot of the people who had long worked at Zappos.

In 2013, Hsieh decided to eliminate the traditional corporate structure of an employee hierarchy — workers reporting to managers, who reported to executives, who reported to the CEO — and replaced it with something he called “holacracy.” This was a radically new system in which there were no managers and no titles, and everyone was deemed to be equal. What could possibly make people happier than having no bosses? And how better to retain a company’s startup vibe than eliminating hierarchy?

Instead, it caused chaos and discontent. Rather than eliminating internal politics, holacracy exacerbated it. While some employees felt empowered, others felt hamstrung, even paralyzed. There were lots of meetings, but if the group couldn’t come to a conclusion, there was no one to make a final decision. Someone who was once your manager could ask you to do something, but you didn’t have to.

In the first year that Zappos became a holacracy, 18% of the staff took buyouts. (In classic Hsieh fashion, the CEO announced before installing the new system that anyone who didn’t like it would receive at least three months’ severance.) Three years later, according to Reingold, the departures had actually accelerated: 29% had taken buyouts in the previous 12 months.

Eventually, Zappos realized that its employees were spending so much time focused on their internal culture they were losing focus on the customers. So over time, old-style management crept back into the company, though with new-age sounding titles. Today, Zappos has turned to a more traditional way of keeping the company nimble and unbureaucratic: It has broken the company up into smaller units that are each responsible for their own bottom line. There is still a lot of communal decision-making but there is also a designated boss.

Does Hsieh deserve credit for trying to find a better way to manage a company — a way that might make employees even happier than they’d been before? Sure he does. But in the end, holacracy didn’t make them more productive — quite the opposite — and companies with unproductive employees don’t succeed, no matter how happy those employees are.

In an article he co-wrote in 2015, Hsieh listed his four principles that drive happiness: A sense of control over your own destiny; the perception that you’re making progress in your life; connectedness with others; and being part of something bigger than yourself.

Virtually from the day he became CEO, Hsieh ensured that all four of those principles were at the heart of the Zappos culture. Every CEO can learn something from that example. What he didn’t understand was that holacracy diminished those principles instead of heightening them. Other CEOs can learn from that example as well.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. His latest project is the Bloomberg-Wondery podcast "The Shrink Next Door."

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