From getting certified as a B Corporation in 2012, to its proposal for a social safety net for gig economy participants, to its expansive parental leave policy and other generous employee benefits, the online handicrafts marketplace Etsy has made a point of positioning itself as a socially responsible business that takes good care of both its employees and the users who rely on it to sell their creations. Since going public two years ago, however, Etsy’s growth has stalled and its stock price has fallen considerably as investors balked at a business philosophy that appeared to them insufficiently profit-minded. Now, Max Chafkin and Jing Cao report in a recent Bloomberg Businessweek feature, activist investors are stepping in to push the company in a more pro-growth direction, which means rethinking some elements of its culture and particularly spending less money on compensation and employee perks:
The answer, as [tech investor Seth Wunder] saw it, was that the company had been careless with its spending—Etsy’s general and administrative expenses amounted to 24 percent of total revenue. (EBay and MercadoLibre.com, the Latin American online marketplace, each spend about 10 percent of revenue on such expenses.) Etsy had been hiring like crazy, having increased its staff 55 percent since the end of 2014, and doling out all manner of perks: an elegant Brooklyn headquarters with Manhattan views, art installations, and a “breathing room,” along with salaries and benefits common at much, much more profitable tech companies. Wunder’s Black-and-White Capital began buying Etsy stock, eventually acquiring 2 percent of the company. The stake is relatively modest—Black-and-White is Etsy’s 16th-largest shareholder—but it was more than enough to launch an activist campaign.
In early May, … Etsy announced that it was laying off 80 employees—about 8 percent of its staff—and that [CEO Chad] Dickerson had been fired by the board. Among the departed were engineers, as well as employees from some of Etsy’s more far-out groups, including the “office hackers,” a group responsible for developing cool stuff for Etsy employees like a paint-by-numbers mural and a system for tracking office waste, as well as the “values aligned business” group, which is in charge of making sure that Etsy stays true to its beliefs.
This story is a notable illustration of a trend we have been exploring in our recent research at CEB (now Gartner): namely, the growing interest investors are taking in organizational culture and other talent-related issues. Our analysis of investor calls over the last several years (which CEB Corporate Leadership Council members can read in full here) found that mentions of culture have increased 7 percent since 2010. Culture is also the most discussed talent topic on investor calls, by far.
Etsy seems to be an interesting example where efforts around “culture” are cause for investor concern: Quartz’s Oliver Staley compares the Etsy investors’ intervention to the hit Walmart’s stock price took in 2015 after it announced that increasing investments in its workforce would eat into its profits that year (even though it ultimately credited those investments for improving its earnings in the first half of last year), as well to the reaction from American Airlines investors to the announcement of a wage hike for crew members last month. But the investors pushing for change at Etsy appear less concerned with the company paying talent before shareholders and more with it spending beyond its means to do so. Weaving looms? Yoga classes? Whether or not this is wise spending doesn’t seem like an unfair question.
This story raises an important question about what business leaders should do when shareholders’ vision for their company’s culture and business model diverges from their own. In particular, it indicates the importance of engaging investors before making a change in rewards. Investors are generally disinclined to favor progressive rewards strategies, because their focus is on increasing shareholder value, not employee value. Executives must consider shareholders’ interests in making these decisions; that doesn’t necessarily mean capitulating to investors’ demands, but they must be prepared to explain to investors why they are making investments in talent and how they expect these investments to pay off. (American Airlines CEO Douglas Parker’s response to investors’ complaints about his decision to raise wages is a teachable moment in this regard.)
Ultimately, stories like these also strengthen the call to action for heads of HR to better support their CEOs in communicating investments in talent and culture more effectively. If unusual investments really are helping to attract the best people and create a culture that adds value to the organization, we must be able to communicate that to shareholders (or barring that, stay private). If we can’t explain the value, maybe it’s time to rethink the yoga classes.