‘It’s a violation of an implicit psychological contract’: Why DTC culture issues hit hard

Editor’s Note: This story is part of a package on direct-to-consumer brands. Find the rest of the stories here.

ThirdLove. Away. Everlane. All three are DTC brands that have been criticized in mainstream media for having alleged corporate culture issues.

ThirdLove’s troubles, as reported by Vox, centered around allegations about co-CEO David Spector, who some employees described as “condescending” and “bullying.” Employees described long work hours and a lack of comprehensive benefits and salaries.

Away’s problems, as reported by The Verge, also stemmed from assertions about a high profile executive: co-founder and, until recently, co-CEO Steph Korey. The publication reported on employee claims that they were held to impossibly high standards and frequently berated in public if they made mistakes. Employees described a practice wherein conversations were held in public Slack rooms which created “a culture of intimidation and constant surveillance,” according to the publication. Vacations were discouraged and long work hours were regular, employees said.

Everlane likewise came under fire for its treatment of employees after a group of workers publicly criticized the company, according to reporting by Vice. Complaints included a lack of benefits for customer experience employees, who tried to unionize and were then laid off. Customer experience employees described a stressful work environment with low pay, while retail store employees said the company tried to stop them from talking about wages, leading many to quit in frustration.

With so many high-profile cases emerging in a short time span, all three reports surfaced in the second half of 2019, questions have been raised about the sector. According to sources, it may be an indication of deeper problems or it may be a result of DTCs status as the hot topic of retail today, which means their culture issues disproportionately show up in print.

“Do you want to spend time doing an exclusive on a brand that everyone’s heard about or that no one’s heard about?” Alex Song, founder and CEO of the Innovation Department, said. “That’s a fundamental issue in my mind. It’s not that DTC is disproportionately worse.”

Whether the problems are worse at DTC brands or not, public reports of the corporate culture issues at companies that promised something more create stark brand challenges. They gave employees and customers something to believe in — whether it be a female founder, a powerful brand message or radical transparency — and then they disappointed.

A betrayal of trust

Some DTC founders have become synonymous with the brands they started. Tyler Haney of Outdoor Voices was seen as the face of the company she started, making her ousting from the CEO role all the more impactful, especially as it came amid reports of friction between Haney and the rest of the male-leaning board. Haney retained her board seat. 

Employees at ThirdLove were reportedly thrown off by the culture at the brand because they came in with the image of a women-run company.

Authenticity is one of the core promises of the DTC brand, and leadership is a key part of that. Many DTCs were founded by someone who spotted a problem they themselves had and sought to solve it. The set of companies that fall into the DTC cohort are almost at this point expected to be authentic, and younger generations are increasingly looking for companies that practice what they preach, according to Victoria Sakal, managing director of brand intelligence at Morning Consult.

“It becomes this balance of how you look on the outside and how you’re carrying yourself,” Sakal said, noting that external appearance can’t be met with a “cracked shell underneath” of mismanagement or mistreatment of employees. “The authenticity has to come through in all components.”

She noted that Gen Zers in particular are focused on how brands treat their employees and are more likely to choose whether or not to buy with someone based on what they know of the company’s culture. As a result, DTCs have the ability to both engender strong loyalty and face repercussions when they don’t meet the expectations of their loyal customers.

“The community and the cult nature of these brands means a higher high … but also at the same time comes with this risk of a lower low.”

Victoria Sakal

Managing Director of Brand Intelligence at Morning Consult

Sakal described it as hearing something negative about someone that you’ve put your trust in, and how that might impact your relationship.

“The community and the cult nature of these brands means a higher high, so you have a stronger sense of loyalty and real affinity for the brand, but also at the same time comes with this risk of a lower low,” Sakal said. “You’re held to a higher regard so you’re expected to be able to deliver on it not only in your product, in your experience, but also your culture and how you treat your stakeholders.”

The brand mission and strong lifestyle aspect of DTC brands can also mean that workplace challenges hit employees particularly hard because they came in with high expectations, according to Diane Burton, professor and chair of human resource studies at Cornell University.

“It’s a violation of an implicit psychological contract,” Burton said. “Like, you sell this thing, but in reality, it’s fake — and so that’s a violation of expectations. It’s a violation of the psychological contract and people will be more angry about that if it feels false or fraudulent. That’s a huge demoralizer.”

Amir Goldberg, associate professor of organizational behavior at the Stanford Graduate School of Business, said some startups also build “family” cultures where they stress the emotional rewards of working with the company over material ones. That can be rewarding for some, but for others it can lead to disenchantment as the company grows and potentially exploits that mindset.

Zappos, for some, is an example of an excellent — and strong — work culture. To others, Goldberg said, it was interpreted “almost like a cult” that was rewarding employees with a sense of belonging instead of monetary rewards.

While DTCs may have a closer relationship with their employees and their customers, and therefore higher expectations, culture issues have not always impacted a brand’s standing. For example, although Nike has come under fire for a workplace culture that reportedly discriminates against women, the company is still easily one of the most popular brands in the space (and has the sales numbers to back it up).

It’s not that consumers don’t care about the issues, but that they forget about them after a certain amount of time, sources have told Retail Dive. Zach Weinberg, director of advisory at Gartner, said that workplace culture and founder-related issues at some DTC brands may actually be less impactful in the public eye than for some larger corporations because the founders are not always well-known. 

“The big challenge happens when you’re managing a few dozen people and you start managing several hundred people and then you start managing several thousands of people.”

Amir Goldberg

Associate Professor of Organizational Behavior at the Stanford Graduate School of Business

For Amazon or Microsoft, the bridge between the founders and the companies is much shorter, and customers associate the actions of the founders more directly with the companies themselves, he said.

“When it comes to direct-to-consumer brands, that bridge is not there,” Weinberg said. “And so consumers are really only making the association with the brand itself and with the authenticity that the brand provides. What goes on behind the scenes I don’t think is an implication really on that.”

He added that corporate culture should not have a serious impact on the loyalty relationship DTCs have with their customers, and even a brand’s authenticity doesn’t necessarily have to be tied to the founder’s story.

As an example, many brands in the beauty and lingerie space are run by men, and have been for some time, and many of the new brands challenging them are ultimately run by men. ThirdLove took flak for projecting an image of being women-run when it also had a male co-CEO, but it’s not the only female-focused brand with male leadership at the highest levels. While that may turn off some employees, a brand can build loyalty and an authentic story without the classic DTC founder story, according to Weinberg.

“I completely understand the perspective of the founders or co-founders trying to solve a problem that they themselves have. That lends to the authenticity and that lends to how genuine a brand is perceived by their consumers, and by their target consumers really,” Weinberg said. “But I think what we’re actually talking about here is really just an authentic story, and not necessarily that it has to align, whether it’s gender or not — I think it’s just overall an authentic story.”

Just startup culture?

While they aren’t the startups that get the most funding in retail, direct-to-consumer brands are the most talked-about startups in the space, and some of the culture issues they struggle with speak to that: They’re startups. Startups of all kinds face issues that primarily stem from scaling the business, according to Goldberg.

“The big challenge happens when you’re managing a few dozen people and you start managing several hundred people and then you start managing several thousands of people,” Goldberg said. He noted that investors begin demanding accountability from startup leadership teams, which leads to changes in processes. “Those procedures are very useful tools for large corporations to coordinate activities, and to create clear-cut criteria, but they’re antithetical to the ethos that had emerged up until that moment in a startup, where things were negotiated informally through the norms of the culture.”

In an article published by Inc., Outdoor Voices’ Haney spoke out about mistakes she made as a founder and what she would do differently, given the chance. Top of mind for Haney was operations. She noted in the piece that not having the right operating leader was her “number one regret” and cited challenges with scaling too fast without having a central operating system.

“When you see a lot of success off your story and your product and your value proposition, you kind of neglect the fundamentals. You feel that with enough VC money, you’ll be OK, you’ll always figure it out. But that’s not a business. I almost felt like we were faking it,” Haney said.

“There is an attitude that the only way to succeed is to work 80 hour work weeks and ignore personal responsibilities.”

Jeff Galak

Associate Professor of Marketing at the Tepper School of Business

In recent months, as the company continues to recover from a tumultuous period, Outdoor Voices has shifted to focus more on improving the fundamentals of the business that led to problems in the first place, including through new Chairwoman and interim leader Ashley Merrill. Haney in her account said so far, she and Merrill have cut costs significantly and pulled back on digital marketing.

“Systems, processes, very unsexy things,” Merrill told Retail Dive she was focused on in July, adding that she wanted to help the company be more intentional in its decision making. “How are we thinking about how we work together? How can we create smoother operational systems, more touchpoints between departments?”

Startups also need to be focused on HR issues like equal pay, health benefits, compliance and management structure as they grow, according to Jeff Galak, associate professor of marketing at the Tepper School of Business at Carnegie Mellon University.

“When you have 5 employees in a basement, those are things you can largely put off, but once you grow to a critical size, all these HR issues are essential to continuing growth,” Galak said in an email.

In addition to procedural challenges, startup cultures characterized by long work hours, similar to employee complaints at Away and Everlane, can also be particularly discriminatory toward women, according to Galak.

“There is an attitude that the only way to succeed is to work 80 hour work weeks and ignore personal responsibilities,” Galak said. “That, however, is more difficult for women to do since they are still considered, in many families, the primary caregiver for their children, making non-stop start-up life difficult if not impossible.”

The founder effect

As many DTC workplace issues have come to the forefront, the founders have been front and center as well. In her post on Inc., Haney said she and other female founders have been “put on the chopping block” at times.

Many exposés have centered on one particular individual. At Away, it was Korey. Korey’s attention to detail, according to the Verge, caused problems for employees by manifesting itself through a high-stress, micromanagement environment — one where employees were freely criticized. While Away made the news for it, a management system characterized by high expectations and micromanagement by a top leader is not unusual. 

Burton, who worked on the Stanford Project on Emerging Companies, defines it as an autocratic system and noted they are “very difficult to scale.” Another system Burton calls the star system, where a company prioritizes the star performers and then uses supporting staff to bolster those performers. Both can cause unique problems as startups scale.

“The founder succession problem is harder in autocratic organizations,” Burton said. “It’s hard in star organizations if the founder/CEO is a star him or herself. That’s a hard transition, but if the CEO is a supporting member, then you can have a more servant leader take over. So some of these models have kind of embedded into them different challenges associated with succession.”

While some issues may arise from the management style or personality of founders — Galak noted that starting a company requires a certain amount of courage, ego and stubbornness, none of which “scream empathy or thought for equality” — much of it arises from inexperience. 

“It just somehow feels worse when it’s a CEO who’s kind of an abusive supervisor than when it’s a shop floor foreman.”

Diane Burton

Professor and Chair of Human Resource Studies at Cornell University

Andrea Hippeau, a principal at Lerer Hippeau, an early stage capital fund, noted they focus on investing in people, and can usually tell if someone wants to treat their employees well. But she also gives founders some grace when it comes to missteps.

“Starting a company and running a company is hard, no matter how successful you may seem on the surface or how well things are going for you. It’s just hard and founders make mistakes,” Hippeau said. “A lot of them are young or have never run a business before and all of a sudden, they’re in a situation where they have hundreds of employees … I think a lot of times what those articles are missing is the grittier and harder side of being a founder and the lonelier side as well.”

Song noted that founders who have been labeled a certain way or exposed for poor workplace management could have trouble with investors. When you’re a proven entrepreneur, “it all goes out the window,” he said. But rising companies looking for funding from investors are more dependent on being well-liked.

Issues with startup founders, or in the workplace culture of startups more generally, may also come to the forefront more because large corporations have processes built in to handle them better, including more experienced HR professionals, according to Burton.

“Inexperienced management is inexperienced management. I think it’s more vivid in the startup sector because we tend to be drawn to these young people who are creating things, but of course, they’re very inexperienced,” Burton said. The hierarchy of startups is also smaller since there are fewer employees, meaning larger corporations with poor middle-managers won’t necessarily get highlighted for their behavior, even though it might impact a similar number of people. “It just somehow feels worse when it’s a CEO who’s kind of an abusive supervisor than when it’s a shop floor foreman.”

The high brand affinity of DTCs places them more heavily in the spotlight than some other companies — and founders are hurt by that as well — but the nature of the retail industry may also impact how companies treat their employees. It is not a particularly forgiving space.

“In small margins businesses, it’s actually more difficult to be generous towards your employees because you need to really reduce costs,” Goldberg said. “It often creates pressure on these companies to sell a narrative of purpose and belongingness, but at the same time also be very stingy about their bottom line. I think it’s easier to be kind in Google than it is to be kind in retail, when you’re awash with money.”