Corporate Culture Could Cripple Zynga

| About: Zynga (ZNGA)
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Zynga (NASDAQ:ZNGA) had been a tricky stock for the market to price. The general excitement over social networking has been counterbalanced by concern over the reliance on Facebook and sustainability of a virtual goods model. Recently the stock received a boost on news of plans to move into the legal gambling sector. These issues have already been extensively covered by analysts and popular media.

Zynga faces another major negative that has been largely overlooked by analysts - the abysmal state of employee relations. Prior to the IPO reports surfaced of efforts to force employees to hand back unvested stock. Other news articles have explored the harsh corporate culture - the New York Times reports that Zynga has had major acquisition offers rejected due to concerns over Zynga's treatment of employees.

This situation has become worse, not better. On, a website which allows for employees to anonymously review the company they work for, the majority disapprove of CEO Mark Pincus. With an overall satisfaction rating of 2.6 out of 5, Zynga falls well below major technology companies such Facebook (4.3), Google (NASDAQ:GOOG) (4.0), and Apple (NASDAQ:AAPL) (3.9). With the IPO over incentives for talented early employees to remain at Zynga are fading fast.

Those who have studied business management or social psychology will be familiar with the 80-20 rule, which states that it is typical in high skill fields such as software for 20% of the workforce to contribute 80% of final value. Software companies live and die by their ability to attract and retain such top talent. In the current Silicon Valley environment elite applicants have their choice of technology companies to work for, and with Zynga's relatively poor reputation it is unclear how it will be able to attract the best.

Zynga can muddle along with current management practices, and can certainly attract a sufficient quantity of programmers to get products out the door. But strong long-term growth requires a strong talent pool. Even if Zynga were to make major changes in corporate culture, a negative reputation is very hard to change. There is substantial risk that brain drain will prevent Zynga from becoming a major player in social gaming markets.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.