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ADI IGNATIUS: Welcome to the HBR IdeaCast.<\/em> I\u2019m Adi Ignatius.<\/p>\n What were you do if you were tasked with taking over a company facing shrinking margins, limited cash, and increasing pressure from Wall Street to generate profits?<\/p>\n The Honest Company was founded by Jessica Alba with a mission, and has been a big disrupter in the household and personal products industry.<\/p>\n But when Carla Vern\u00f3n was brought in as CEO in 2023, there was an uphill battle to turn the brand, two years after its IPO, into a profitable long-term business.<\/p>\n Vern\u00f3n, our guest today, drew on her decades of consumer products experience at places like Amazon and General Mills. She set out to build trust, create a shared language for change, and help employees embrace new ways of working. She spoke to me as part of our recent HBR Leadership Summit. Here\u2019s that conversation.<\/p>\n So when somebody comes in from the outside to execute a turnaround, there\u2019s always a lot of urgency, there\u2019s always a lot of uncertainty. When you came into The Honest Company, how did you decide strategically what your initial priorities would be?<\/p>\n CARLA VERN\u00d3N: Well, let me step back and just tell people a little bit more about the Honest products and why the brand is so special and why the turnaround had to be so nuanced. So we are a household personal care company, as you mentioned. We make a lot of products for families with babies, including diapers and wipes. We also make personal care products that people now use in more areas of their house and for a wider audience.<\/p>\n But all of our products are held to a really high standard of clean. There are 3,500 ingredients we do not allow in our products because we want to make sure that they are great for people with sensitive skin and great for people who are really trying to remove some of those things from their lifestyle. So that\u2019s a really specific type of company and brand to run. And as you said, it\u2019s very purpose-driven and mission-driven.<\/p>\n And so when I came in, the company was just exiting that really early founder, that stage of exiting the founder building stage and into the public offering phase. And we were very low on cash. We had less than a quarter of cash in the bank. Gross margins had been declining over time and the business overall sales had been relatively flat.<\/p>\n With all of that ahead of me, what I first turned my attention to was profitability. Because we are a publicly traded company, we\u2019d have very inconsistent results with Wall Street. And one of the things that Wall Street started thinking about for recent IPOs just through the pandemic and after was top line growth is not sufficient. They needed to be healthy businesses both on the bottom and the top. And so I looked at the circumstances and figured out where could we address some of that improvement in the profitability structure immediately to gain that credibility with our investors.<\/p>\n ADI IGNATIUS: Yeah. So that sounds like a very good place to start. But as you say, it\u2019s nuanced. I mean, you have employees, you have customers who really bought into the mission, who probably were skeptical of somebody who said, \u201cI\u2019m here to fix the bottom line.\u201d So how did you navigate that?<\/p>\n CARLA VERN\u00d3N: I\u2019m so thankful that in my career, as you know, I came up through General Mills. I also worked at Amazon. And in those experiences, I got the chance to get to know founder-built brands very well. At General Mills, I ran a number of the founder built brands, things like Annie\u2019s and L\u00c4RABAR and Cascadian Farm and EPIC Bars, and got to know the importance of caring for a business that was built for purpose and that the employee base comes to because they believe in the mission and they believe in the unique products.<\/p>\n That\u2019s one of the reasons I think why I was a very natural fit to come to Honest and say, \u201cWe can do both of these things at the same time.\u201d But I think one of the things you asked about was this notion of trust. And one of the things that I\u2019ve learned is trust is earned through repeatedly doing what you say and sticking to your word and becoming predictable.<\/p>\n We know that from Wall Street investors, it\u2019s really the same for employees. So I tried to lead through transparency. Our brand is called Honest. So it\u2019s a really good north star for us all the time. And I was always trying to be very clear with our employees every step of the way, that this was not to take out any of the heartbeat of the brand. This was to make the brand strong enough to be built to last for a long time.<\/p>\n ADI IGNATIUS: Look, I know from experience you can come in and say all the right things to mean all the right things and still, as you say, you have to earn it or just change is always harder than you anticipate. What\u2019s an example, maybe the biggest hurdle that you have faced during this transformation and how have you tried to respond to it?<\/p>\n CARLA VERN\u00d3N: Well, we do something that I think is a little bit unconventional in companies. You\u2019ve talked about change. And one of the things I learned coming up at old school corporate America is there are all these change management tools. Right? If you Google change management and you go to search for images, you\u2019ll see that age-old valley of despair graphic that\u2019s talking about trying to get people through change.<\/p>\n And it\u2019s not inspiring. It\u2019s not giving, as they say. So we actually turned to something more out of pop culture that I think was relatable to the kind of employee base we have at Honest. We turned to a Pixar movie, movie Inside Out, which is all about human emotions and honoring the fact that people feel very real things and certain emotions are more intense and more at the front of our mindset at different times than others.<\/p>\n So if you haven\u2019t seen that movie, first of all, please go see it. The stars of the movie are the emotions. So you have fear, you have joy, you have envy, you have anxiety, you\u2019ve got a lot of these things. We started using the Pixar movie Inside Out and those relatable, we call them our emojis, but those characters to let people know as we go through this change as a company, you will feel things. They\u2019re very real to feel.<\/p>\n They\u2019re very natural and you shouldn\u2019t even try to question or change your colleagues\u2019 feelings because they\u2019re just natural. But I want to allow you to have those feelings while you still understand changes that we\u2019re going to make.<\/p>\n And so for example, one of the changes we made was we added a lot more discipline. The company didn\u2019t used to have KPIs and measurable goals that were tracked on a short-term basis to see the progress so that employees can be rewarded by understanding that the things we set out to do, we\u2019re watching ourselves in real time accomplish them.<\/p>\n One example there was days supply inventory on hand. Our inventory had been building and our cash had been dwindling. So one of the opportunities was just to reverse that. Let\u2019s do something, right? The law of supply and demand, let\u2019s sell more than we buy for a while and\u2026 right? And sort of change that balance in our financial structure. And then people could watch that because we were measuring it.<\/p>\n ADI IGNATIUS: So strategy is about focus. If it were easy, we\u2019d all do it really well. It\u2019s not. You have to shut down some things that people love, legacy ways of doing things, long held assumptions, product lines that are maybe profitable but not part of where you end up strategically. Are there examples of that, things that you had to stop to kind of keep your eye on the ball?<\/p>\n CARLA VERN\u00d3N: Today is a perfect day to ask me this. I come to you, I flew in here, threw this jacket on and came to you right after visiting one of our Amazon fulfillment centers in our community here in Minnesota. My board is in town. I wanted to take them to a tour of the Amazon Fulfillment Center so they can see the state-of-the-art latest way that online and e-commerce is happening.<\/p>\n And so it was a really good compare and contrast for us because as you may know, Honest did begin as a direct to consumer digital company and digital is, and e-commerce is a very important part of our ongoing sort of DNA as a company. But we recently shifted our own website, honest.com from being a direct fulfillment and shipping website to really what I call a pass through and information and marketing website. People can come, they can still learn about all of our products, they can get their questions answered about our formulations and then the website will direct them to where they can go buy those items.<\/p>\n But it was a cultural change to think of our identity as shifting from a company where we were fulfilling those orders and shipping them ourselves to putting that in other people\u2019s hands. But it was really a matter of that age-old lesson that what got you here won\u2019t get you there. It was no longer the way that consumers are participating in commerce. They aren\u2019t really coming to brand websites as much anymore to get those individual items. Another big change that we\u2019ve done that\u2019s also really I think still underway for us is everyone thinks of us through our baby heritage.<\/p>\n We obviously became a brand that people knew through our beautiful diapers and wipes. I have increasingly been surprising people by sharing the fact that more than half of our customer base has no kids at all. And so with that knowledge, if we think about that and fold that into our strategy, that unlocks a lot of different avenues, but it does take repeating in order for it to make sense for people because it\u2019s not obvious or intuitive.<\/p>\n ADI IGNATIUS: So this all has to make sense internally. It also has to make sense externally. I guess I\u2019m interested, how do you measure progress and more than that, how do you communicate progress? Investors are not always as patient as you might prefer. So you\u2019re going through significant change. How do you measure and communicate that progress in ways that keep investors along for the ride?<\/p>\n CARLA VERN\u00d3N: I think becoming a mom built new skills in me, one of which is repeating myself. So I- ADI IGNATIUS:<\/p>\n You can say that again.<\/p>\n CARLA VERN\u00d3N: I\u2019m comfortable with repeating myself. We know that idea that sometimes you might have to say something three, four, five, seven times and you know you\u2019ve said it enough when it\u2019s starting to come back to you. Right? So that\u2019s the case with bank analysts, with investors, with my own employees. I don\u2019t mind repeating myself, but I also have established a practice at the company where the most important things that we do are things we will look at all the time.<\/p>\n So we articulated our plan on a page or a place mat. That\u2019s what some organizations call it. We call it our manifest. It has everything important on one page about who we are and what we will do. We show that in every meeting at the beginning of every meeting. We will talk about the progress in our town hall meetings with our employees and remind them, \u201cRemember we set out to do this, this is the first quarter.<\/p>\n Let\u2019s tell you how far along we are in that.\u201d And so we just really do try to make that available. We\u2019re also using social media. We\u2019ve always been a social media active brand and company. And as an individual, I\u2019ve always been very pro social media. I\u2019m always out there with my @ everywhere I am. @carlainspired on all of the channels. And so we use all the forms of media to share really cool things about the products, what we\u2019ve launched, but also our quarterly results in ways that I hope are just really like snackable.<\/p>\n ADI IGNATIUS: Building on that, I know you adopted the acronym FEEFA, F-E-E-F-A, which stands for focused, executionally excellent, fast, and aligned. It\u2019s a fantastic company mantra. It\u2019s one thing to tell people that this is what you should do, it\u2019s another to\u2026 How do you ensure that people actually live, accept, are not cynical about and live into those values?<\/p>\n CARLA VERN\u00d3N: FEEFA came to me in the shower one morning when I was getting ready for work in LA. And that\u2019s when my best thinking comes. My team watches out in the morning. They\u2019re like, \u201cOh, here it comes the Slacks.\u201d But I was trying to think of a way early on in the transformation to take an employee base that didn\u2019t know me. We also didn\u2019t have a shared language, right? The company\u2019s relatively new. Sometimes our employees have come from all different sorts of companies. How can we start to create a shared language that we can always sort of tack ourselves to and refer to all the time?<\/p>\n And that\u2019s when I came up with, as you said, it\u2019s not FIFA like the international soccer organization, it\u2019s FEEFA, F-E-E-F-A. And what we do is we\u2019ve put that on that one pager, but we also try to really recognize and reward in real time when someone has done something FEEFA. Like for example, our accounting team, this is so exciting. Let\u2019s celebrate accounting. Accounting has been closing the quarters down faster and faster as has been a goal that we\u2019ve set in our KPIs as we mature as a public company and that\u2019s due in large part to their executional excellence.<\/p>\n They are getting better at being efficient and finding systems that allow them to be more aligned across as an organization. And so we actually will celebrate that in a town hall and say, \u201cThis is an example of FEEFA in practice.\u201d We\u2019ll highlight it and we\u2019ll put people\u2019s names. People want to feel seen and that sometimes is part of the reward people are looking for, just that recognition among their peers and to their boss that they are doing something outstanding.<\/p>\n ADI IGNATIUS: So how is Honest being affected by U.S. policies on everything from consumer product sustainability to tariffs to military operations that affect supply chains, that affect fuel costs? How do you think about that? How do you plan for that? How do you insulate the company from these kinds of external unplanned pressures?<\/p>\n CARLA VERN\u00d3N: As a consumer-packaged goods company, Honest is a little bit unique. We are a publicly traded company, so we have a decent amount of scale. Right? And we\u2019re available in almost every retailer that you could think of that you could shop at. We\u2019re at all of the big players and all, hopefully all your regional stores, but we don\u2019t own our own manufacturing. We\u2019re co-manufactured or third party manufactured for all of our materials.<\/p>\n That\u2019s very different than the model I grew up with as I was training and coming up in my career at General Mills and some of those old legacy CPGs where they own more of their own manufacturing capacity. As a result, Adi, that does mean we have to be really collaborative with our partners end to end and our forecasting has to be very well-connected and really think in advance of what we need to do in case there would to be some disruptions and how we are able to run a steady state business.<\/p>\n What I would say is our teams have done a great job. When tariffs became the new kind of topic of the day a couple of years ago, that wasn\u2019t new for us. We actually, through the pandemic, have been managing through different tariff policies the US government. Our diapers are made in Mexico. Some of our products are made in Asia. And so when the tariffs became much more on the forefront of every corporation\u2019s kind of everyday executive dialogue, we established a team we called Tariff Tacklers and it\u2019s got representatives from all the functions that need to work on whatever might be those key issues.<\/p>\n I\u2019m really proud because throughout all these things that you\u2019re talking about, all these sort of the global challenges, the dynamism of the economy, we have actually strengthened our business model. So throughout it all and even in a time of tariffs, we have added significant margin growth. Our gross margin last quarter reached our all time high of 43.5%. That\u2019s up just under 2,000 basis points from when I arrived. So the interesting thing is with this FEEFA discipline that we have, we\u2019re able to navigate the dynamism times by being such an aligned team and knowing the model we\u2019re trying to run that we\u2019ve been able to really kind of I think ride it out.<\/p>\n ADI IGNATIUS: I do want to get to some audience questions. This is Sakshi: \u201cHow do you stay focused without becoming resistant to new opportunities?\u201d In other words, how do you stay grounded and decisive when navigating constant ambiguity, constant opportunity for new choices and new products and how do you balance that?<\/p>\n CARLA VERN\u00d3N: I believe it\u2019s always important to begin with well articulated decision principles or frameworks. One of the things that serves us well is to sometimes, for my team, I say, \u201cLet\u2019s not jump into the middle of the pool without having a plan.\u201d And so we have, \u201cI told you about our plan on a page,\u201d but sometimes when we get into conversations about product innovation or talent strategies, whatever it might be, we back up and say, \u201cLet\u2019s try to be objective here.<\/p>\n Let\u2019s not get into the actual tactic of the thing before we decide what is important to us. How does it set up with our strategy?\u201d So I\u2019ll give you an example. In our innovation decision principles, one of our first principles is do the biggest, easiest thing first. There are so many things we can do and our brand, as you can see over here, our brand is relevant on so many categories that we can easily get tempted to add one more thing.<\/p>\n But sometimes that next thing you might do might not actually be as big or drive as much traction as something else that it\u2019s going to steal a resource, be that time, money, or people. So we love to start with these decision principles. It actually then helps you by the time you get to making your choices of what your enterprise is going to do or what any individual team is, you actually get there in a much more unified way. Because if you can agree on the principles you\u2019ll use to make the decision, then when you make the decision, everyone can see why you got there.<\/p>\n ADI IGNATIUS: So Cara, who is a senior director of communications at Dana Hare says she loves hearing a leader so fluidly articulate the need to clearly message your strategy and then repeat, repeat, repeat across channels. The question is, \u201cHow is your team leveraging AI to support and enable this storytelling?\u201d<\/p>\n CARLA VERN\u00d3N: Cara, how aren\u2019t we using AI? What is going on these days, right? We decided that because our origin as a digitally native company is always a piece of our DNA, that we\u2019re going to always think about technology as a tool that we embrace, as something that is we are tech-philic, not tech phobic. As the AI conversations were beginning to sort of heat up and gather steam and momentum, one of the things we said was we don\u2019t want AI to be a distraction.<\/p>\n We\u2019re a very lean company. We\u2019re a lean team, we are spread. Our products are spread across 10 categories. It is always important for us to use our time to be clear. Right? To be focused so that we can be fast. But one of the things that\u2019s been very fun is we started an AI council at Honest and what we did was we designed it so that every member of my direct report leadership team, which of course spans all the functions of the company, every member of my team is on the council, but they were also to pick a lead person, a representative from their function that was excited to start captaining AI for the function and that council now meets regularly.<\/p>\n And what we did was we did a little bit of a Shark Tank type of idea and we said, \u201cTo get the ball rolling, we\u2019re going to ask every function to think of one of the internal AI tools that we\u2019ve allowed inside of our governance to use the tool to develop something that solves a need or a challenge function specific.\u201d So we\u2019re not just out here gallivanting wildly making memes of cats wearing hats, thinking of something and then come back and share it with the council. And then everybody can compare and contrast and can kind of borrow and shop from all of the different ideas.<\/p>\n At the same time, I personally spent my spring break diving headfirst into a couple of the AI tools. We\u2019ve been piloting with Gemini and Claude. We\u2019ve also got some very industry and subject specific AI tools and I think it\u2019s important to lead by example. I don\u2019t know if everybody loves it, but I am all in.<\/p>\n I have built a number of Agentic solutions for myself and I\u2019m sharing those challenges with my board and with my employees and just really sparking the inspiration. One of the things that I do now is for my meetings with my board chair, which are every other week, I have AI prepare a summary of our recent performance results, the outlook as we\u2019re looking ahead, and some key themes that my board chair and I want to pick up every time we talk. Now I don\u2019t have to write that report. AI gives me the first draft.<\/p>\n ADI IGNATIUS: So we\u2019ve got an AI follow-up, Carla. So this is Elena, who is president at EFZ Associates, who talks about the Honest company, the brand is really about authenticity, about very important values, even about sort of diverse values. So the question is, \u201cHow do you guard against AI tools inadvertently homogenizing or even erasing the kind of human and cultural differences that are essential in the brand, essential to earning trust with communities, with multicultural communities? AI is AI and humans are humans. How do you think about this?\u201d<\/p>\n CARLA VERN\u00d3N: Elena, what a beautiful question. Thank you for that and thank you for caring that people are still at the center. Listen, we\u2019re a company that was founded to care for people\u2019s most delicate humans in their lives, babies. Right? And now we\u2019ve expanded to caring for all the delicate parts in life. And so we want to be heart-centered all the time. One example of a thing we\u2019ve done is we have an internal policy and it says, to the best of our ability, we will not use AI generated human faces, human bodies in the work we bring forward or we present to the world.<\/p>\n Now, sometimes maybe somebody\u2019s generated something AI from a third party and a partner that we have and it was in a presentation and I won\u2019t know if it was AI generated. But in our own teams, we really hold ourselves to that, which means we still have a photo studio on our premises. We bring babies and moms, real babies and real moms to our ad shoots. Our own employees are in some of our ad shoots. But this is one of the things we\u2019ve said our brand meaning is so important. It\u2019s the brand is called Honest.<\/p>\n And so that guides everything that we do, including our culture, our talent strategy, how we work, how we talk to investors, everything. So I\u2019m sure it\u2019s going to continue changing and the landscape will continue to change, but we have no desire to become generic. Design and beautiful design is also a key piece of what we do. We try to make products where it\u2019s the fragrances in them, the patterns on the diapers, the patterns on our flushable wipes packaging should bring you a little joy in your day because we\u2019re humans, there\u2019s a lot stressful going on in the world. We need that joy. And so we just keep all of that humanity center in the work we do at Honest.<\/p>\n ADI IGNATIUS: So this next question has a lot of upvotes from people who are watching. This is from Christy, learning effectiveness strategist at Lilly. The question, \u201cHow do you create space for experimentation without somehow compromising, undermining operational stability?\u201d<\/p>\n CARLA VERN\u00d3N: Oh, experimentation \u2013 I think when you\u2019re an early stage company, almost everything is an experiment. And what\u2019s really cool about Honest is the company is 14 years old. We\u2019ve only been public for five years. So almost all of us came to Honest from somewhere else or this was the first place we worked. We love to refer to ourselves as butterflies. I\u2019m wearing a butterfly and obviously that\u2019s our company logo, but that\u2019s also really a mindset for us.<\/p>\n And so I love butterflies are pollinators. Right? And so we really have a kind of an idea pollination culture and mindset. We have two locations. We have a Minneapolis location and an LA location and those have different kinds of people from different backgrounds and different cultures and tribes.<\/p>\n And so I think what we do is we try to make sure we stay agile and flexible minded. When someone wants to bring an idea forward or something into the discussion that might, especially because we\u2019re moving so fast, that might bear some resistance. I like in my meetings to leave a lot of room for silence because sometimes you have to allow people little time to figure out what they\u2019re uncomfortable about, what\u2019s happening, or for introverts to have that chance to let the question clarify and crystallize for themselves so that the discussion and dialogue always remains flexible.<\/p>\n ADI IGNATIUS: This is from Carrie, who is Deputy General Counsel at Transamerica. And really, Carrie wants to know more about the leadership team. So the question is, \u201cIs your leadership team decentralized? And if so, what tools and tactics do you use to stay collaborative and connected?\u201d<\/p>\n CARLA VERN\u00d3N: Well, we use every kind of tool known to man. Somebody could leave me a Post-it note on my backpack if they want to. Our leadership team is, I think decentralized is a good way to say it because we have two different offices. We\u2019ve got senior vice presidents and vice presidents in both locations. We hold ourselves to being an in-person culture. So there is a mandatory couple of days in the office in every week so that we can be together. And then we are agnostic.<\/p>\n So we will travel to either location for certain important events. We are always all together for our town halls. We\u2019re always together for earnings week. There are special holidays that we like to celebrate where we try to make sure we celebrate them in both locations. And so we do that, but we use a lot of Slack. We text each other. We try to make it not always all so serious because we want to be humans, want to hear people\u2019s good news. We want to hear about their babies. If you\u2019re coming down with a cold and you have allergies, how can we help you that day? We\u2019re very human, but the dialogue is sort of like all points, bulletin, and like anywhere.<\/p>\n ADI IGNATIUS: Carla, I want to thank you for joining us. Thank you for your inspiration. It\u2019s really great to have you here today.<\/p>\n CARLA VERN\u00d3N: What a pleasure. Thank you.<\/p>\n ADI IGNATIUS: That\u2019s Honest Company CEO Carla Vern\u00f3n, speaking to me as part of the recent HBR Leadership Summit.<\/p>\n On Tuesday, Alison speaks with IMD\u2019s Michael Watkins about how the transition from manager to leader is changing.<\/p>\n