The idea was sound, but the secrecy, lies, and toxic culture at diagnostics startup Theranos meant it was held up by a scaffolding of fraud. The gender factor also played a role, as Carreyrou highlighted in his book: There was a yearning to see a female entrepreneur break out and succeed on the scale that all these men have: Mark Zuckerberg, Larry Page and Sergey Brin, Steve Jobs, and Bill Gates before them. As a young, conventionally attractive woman, he adds, Holmes was also able to charm many of the older men who eventually backed her. I also don't mean to suggest that the board should take over day to day responsibility for the corporation because there's definitely a boundary there and they should not be doing that. Theranos was involved in high complexity testing and the lab director quit abruptly one day, before the Carreyrou reporting hit. You may opt-out by. Theranos was a privately held healthcare technology company founded by then 19-year-old Elizabeth Holmes in 2003. They could not know what Warren was investing their money in but he had built a strong level of credibility in the business and had immensely strong character witnesses. At the close of the round in April 2015, the company had a valuation of $9 billion. She lied about the current state of development for her heralded new technology. Sonnenfeld insists that active participation and open dialogue are crucial for a board to fulfill its role: Well be fighting the wrong war if we simply tighten procedural rules for boards and ignore their more pressing needto be strong, high-functioning work groups whose members trust and challenge one another and engage directly with senior managers on critical issues facing corporations. According to Jeffery Sonnenfeld of Yales Executive Leadership Institute, the most deciding factors in a boards effectiveness are, surprisingly, not structural prescriptionssuch as board makeup, procedures, committees, executive sessions, board members age, equity involvement, independence or even credentials. This button displays the currently selected search type. Were they just purposefully ignorant or were they just that blind to the charisma of Elizabeth? Across the Board is a part of the Compliance Podcast Network. Corporate Governance & Control Failures Volkswagen Board Structure In contrast to a conventional English system, where one board is responsible for both management and monitoring of a business,. primarily composed of former diplomats and military personnel. In total, Volkswagen installed defeat devices in 11 million cars across the globe between 2009 and 2015, 500,000 of which were in the U.S. Volkswagen were forced to pay a heavy price for their governance failures in the aftermath of the scandal, most notably a mammoth $18 billion fine from the EPA. What is clear is that we need to rethink corporate governance to encompass the interests of all stakeholders - not solely . They also had the most prominent law firm in the country on a retainer at their beck and call. So, how is it there were significant red flags in not only the rhetoric that Holmes was using throughout her rise, but also in her actions and behavior? In 2006 Henry Mosley, the chief financial officer of Theranos noticed that employees were unhappy after a demonstration of their technology, Edison which analyzed blood samples, to the pharmaceutical company Novartis. In response to the Wharton podcast, Robert Talbot-Stern said in a comment: As for Theranos, There was a toxic mix of an unseasoned, untethered or ethically loose (take your pick) founder in control and a board woefully short of corporate governance skills (whether or not purposely hand-picked by Holmes because of that skill shortage and regardless of their impressive but meaningless credentials for their board role). The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive, Carreyrou said. In this episode, we take up the failures of the Theranos Board of Directors. Ethics and DEI Policy (Diversity, Ethics, and Inclusion), Having Covid Integrity When Sending Your Children to School, Having Resiliency and Overcoming Adversity, White Collar Decisions: Amazon Wishlist for Books, Having Courageous Conversations When Life Gets Hard, Finding Resiliency During Lifes Unexpected Moments of Uncertainty. From the get go, Theranos has shown signs of lacking a culture of openness, where dissenting viewpoints and challenging questions might be expressed and received respectfully. Elizabeth on the other hand, emulated Steve Jobs by attempting to look like him, talk like him and be stubborn like him but was unwilling to demonstrate his most important quality being obsessed with quality. written by AppliedCG 29 February, 2016. Tom Fox:Yeah. You kept your nose in to keep a check on how the company was being run but kept your hands out of it in terms of what needed to happen. Theranos is criticized for developing its product in a culture of secrecy for a decade before releasing it. PDF | On May 16, 2018, Karl J. Lackner and others published The Theranos saga and the consequences | Find, read and cite all the research you need on ResearchGate In July of that year, the company . Text. Initially valued at $10 billion dollars, the company has become an epic fail with Holmes and the president being indicted and charged with wire fraud. But if you put them into a group that discourages dissent, they nearly always start to conform. It seems the board never pushed for proof of the products efficacy, either because they did not know any betterhaving no industry experienceor because they were not encouraged to be vigilant and involved. So far Theranos has raised about $750 million. What really bothers me about all of this is while there was damage done to the reputation of some of these people they will go on to live their lives. This 20-month MBA program equips experienced executives to enhance their impact on their organizations and the world. Fortress Investment Group LLC, a division of SoftBank demanded an independent auditor's opinion on Theranos' 2017 financial statements as a condition of loaning the company $100 million in December 2017, $65 million immediately and the rest if it got a clean audit and met other conditions. This was Elizabeth Holmes' masterstroke. Corporate Governance failures have the capability of inflicting the deadliest attack on Investors' Trust. More navigation items; Post-mortem on Theranoswhere were the controls? She always flew in private gulf stream jets. I really believe, that to a point, mHealth could be the next Theranos. In my consulting work with company boards and CEO's, we work together to build healthy board governance and executive leadership practices. Any employees that raised ethical issues were fired and no questions were allowed. You and I both know that a lot of startups don't necessarily have the funding or resources to have a compliance and ethics officer right off the bat. | Reuters/Brendan McDermid They also could have ordered an independent investigation. Listen to article. In some of the emails, the lab director talks about his Hippocratic Oath and how he felt ethically in a very bad spot. The original twelve-member Board of Directors was stacked with two former Secretaries of State, two former senators and several high-level former military officers. A company that wanted to look into issues would have contacted the person or used the 60 days working notice to interview them about why they were leaving. Preprint. In the spirit of moving fast and breaking things, Theranos, offering to disrupt a massive medical technology industry, was founded in 2003 by Elizabeth Holmes and quickly skyrocketed to a $10 billion valuation by 2013 and 2014, raising over $700 million in venture capital (via Forbes).Theranos promised to simplify and streamline the expensive, arduous process of lab testing blood samples . Silicon Valley was most certainly not lacking on legal talent to represent startups. I hope even more that the board members dont just get to move on. Meanwhile, the power that . Theranos is the perfect example however of what happens when 1) A board does not do its job, and/or 2) A board is incapable of doing its job. It also meant that the board did not have a quorum unless she was present. It clears their name, it shows a good faith effort to comply and not to do anything inappropriate. If its banking institutions, of course its banking customers. Oversight of the leadership was what you did as a board member. Or rather were not allowed to do. In a recent statement announcing the decision to cut its workforce by 40 percent earlier this year, Theranos defended the layoffs as necessary to "marshal its resources most efficiently and. Theranos has been the subject of scathing coverage in The Wall Street Journal, which has relentlessly questioned the reliability and safety of its blood tests, and it is under intense regulatory. If convicted, each faces up to 20 years in prison. As the Founder, she had complete effective control with a dual-class shareholding structure, which essentially meant that for every one vote that a shareholder could make, Holmes had one hundred votes. Enron built layers of financial dependencies in a constant push to raise stock prices and led to the Enron collapse. Amii:Lets start with an acknowledgement of what a board should do, which is to make informed business judgments. What we continue to learn about Theranos is that the level of deception was unprecedented and that Homes surely belong in jail. She specializes in accelerating the success of executives and partners with leaders and teams to help scale their businesses. The company was criticized for having a board of directorsprimarily composed of former diplomats and military personnel. While we see infographics on the numbers behind mHealth physicians still havent bought into the technology and are will not diagnose patients based on the data from devices. An interdisciplinary program that combines engineering, management, and design, leading to a masters degree in engineering and management. Obviously, common sense would demand skepticism and a more regulated checks and balances on a Founder. Non-degree programs for senior executives and high-potential managers. The mission of the MIT Sloan School of Management is to develop principled, innovative leaders who improve the world and to generate ideas that advance management practice. ensure responsible corporate governance both from a CSR and a good governance perspective. There was sort of an Omert in that from the early stages of the company and it got worse and worse there was really unethical behavior and employees who would try to raise questions were either fired, or marginalized, or left of their own volition, Carreyrou said. How do they repay for the betrayal of the investors trust in them? International Corporate Governance is an essential text for those . That's interesting in this case as well. They shouldn't just be doing it for a marquis title. Furthermore, Theranos maintained extreme secrecy in the name of protecting their proprietary technology. We should look into that. Holmes did nothing to deal with the complaints of customers or issues raised by employees. What types of questions should a board start asking and how early should they start asking those questions? The company hyped itself up and secured massive funding, all the while failing to expose its technology to thorough testing and peer review. Corporate governance failures Corporate governance was also touted in many instances as the main reason for corporate failures. When two would-be whistleblowers told the Theranos board that Holmes had exaggerated revenue projections . The other red flag was Elizabeths security detail. This reminded me of an instance from Warrens biography The Snowball by Alice Schroeder. No one was truly policing the businesss processes or offerings. Many other employees didnt blow the whistle to regulators, the media, or the board of directors, Carreyrou said, because Holmes forced them to sign airtight non-disclosure agreements and aggressively pursued lawsuits against ex-employees. Carreyrou, a Pulitzer Prize-winning Wall Street Journal reporter, chronicled the downfall of Theranos in his book Bad Blood. Innovators who seek to revolutionize and disrupt an industry must tell investors the truth about what their technology can do today not just what they hope it might do someday, said Jina Choi, director of the SECs San Francisco regional office. Customers called and complained about faulty blood results that led these families to run to the Emergency Room. This could have been an opportunity for that to happen. And you really need to think about it when you're in a highly regulated environment, like blood testing. There are fourteen new forensic case analyses critically scrutinising governance failures. Corporate Governance Background & Duties of BOD Managerial Capitalism, Agency Problem Board of Directors: Elected group of individuals who have a legal duty to establish corporate objectives, develop broad policies, and select top-level personnel to carry out the objectives. Can We Save Social Media? Carreyrous first article appeared in October 2015, and revealed: Theranos did less than 10 percent of its tests on Edison machines.. While diversification of portfolio was an indisputable for Graham, Warren would put most of his money on a single bet if the margin of safety was high enough (More on margin of safety in a future post). ", Patrick Gitau CFE,CRISC,CERG,GRCP,CFIP,CRICP,CRA, CPMP,CHPC,SRMP,CIA,CPPP,MBA-Finance (With Merit). They briefly had a CFO very early on in the company. How about no compliance and ethics officer? Elizabeth Holmes, CEO, Chairman and Founder of Theranos, settled with the Securities and Exchange Commission (SEC) when she was charged with committing $700 million of fraud against its investors and the public. Dec 26, 2022, 10:47 AM SGT SINGAPORE - When crypto exchange FTX filed for bankruptcy in November, its new chief executive John Ray III said he had never seen "such a complete failure of. The SEC determined that the board was misled just like the rest of the other people. Theranos and FTX show a broad failure by investors to ask enough questions before handing over cash, . More recent duties: Strategy development (a debate point), talent management, and investor relations. Until she couldnt and it all came crashing down around her. Did the public, investors, board members, potential customers, and employees ignore obvious red flags? Her 50 percent share of the company was worth $4.5 billion. The Theranos story was supposed to have a very different ending. It is amazing to me that Elizabeth Holmes got her start when she was invited to deliver a TED MED talk in 2014. Theranos: Biggest failure of corporate governance in history Elizabeth Holmes built her company Theranos on this invention she named the Edison. Theranos attracted an all-star board of directors. Carreyrou recently released a book about the scandal entitled Bad Blood: Secrets and Lies in a Silicon Valley Startup, and spoke at MIT on Oct. 2, where he described the red flags that should have signaled something was amiss at the company. So, yeah, could we just agree lots of red flags? After being ignored again and again, it should come as no surprise that those whistleblowers eventually reported their concerns to external parties, including the primary federal regulator of medical laboratories. He spoke before an audience in conversation with Michael Callahan, executive director of the Rock Center for Corporate Governance, which cosponsored the event. Your email address will not be published. They go to the regulators. It was formed in 2003 by then 19-year-old Elizabeth Holmes, who dropped out of Stanford University to launch the company. In fact, it turns out that the lab director had sent hundreds of emails to himself at or around the time of his resignation. For now and for what it is worth, the board members have my strongest stamp of disapproval and I say SHAME ON YOU for not doing your job. This button displays the currently selected search type. Theranos, a fast-growing private company intent on trailblazing a new technology, set out to attain ambitious goals. It's almost a situation of where to begin, but with regard to the board of directors, where would you suggest we begin? I just finished reading Bad Blood by John Carreyrou, the Pulitzer Prize winning Wall Street Journal investigative reporter. When two would-be whistleblowers told the Theranos board that Holmes had exaggerated revenue projections, the board considered replacing her with an experienced executive. So, Amii, if not in Silicon Valley, certainly near Silicon Valley, you've worked in a wide variety of roles with companies and I guess the question I have, in looking back in hindsight now it may appear clearer what was going on, but what really should a board start asking for a startup, even one that is what you call a "disruptive" or whether you call it "innovative", with technology that is so different, so unique, that really could make a huge change in the marketplace. In 2003, 19-year-old Elizabeth Holmes dropped out of Stanford University to start the company, which promised something revolutionary: accurate diagnoses of health conditions using a single drop of blood. In this podcast with Tom Fox, we explore blood testing startup Theranos, once valued at $9 billion, and the failures of its board of directors to fulfill its oversight responsibilities. I like the simplicity of that. Holmes "chose fraud over business failure. It included a lot of politically connected figures. In this particular case, it was both. Ultimately, it was the accountants, not the scientists, who were left with no choice but to deliver the bitter pill to the Theranos board: The company had even less money than time. Subscribe to receive news and updates: Nor is there anyone with formal accounting or auditing expertise or legal expertise []. Click below for the podcast. Tom Fox:Amii, do you see or do you sense that corporations, in Silicon Valley and perhaps other places where you consult, are beginning to take some of the lessons we have seen from the Theranos', the Uber's, the other companies that have had sustained spectacular growth and perhaps their corporate governance structures had not kept up, is there a recognition that something has to change? Walgreens consultant for the new clinics advised his client to not to proceed working with the in-store clinics, executives at Walgreens dismissed his statement and ignored his concerns. Her words and analogies actually made no sense if you paid attention to what she was saying. If you look with hindsight at how the company was structured, there's evidence that all the decisions were made by Elizabeth and, at least while he was there, her second in command - Ramesh "Sunny" Balwani. Strong companiessuch as GE and Home Depotare known for ensuring their boards do an effective job. Recently, I have been fascinated with the emergence of Silicon Valleys rising star, Theranos, and its subsequent federal investigation and decline. A board needs to both give a CEO wings to be innovative and to come up with new ideas and to take calculated risks. They need to be the conscience of the company and rein in things that are going to be an unrewarded risk to the company. much as was the case with Adam Neumann of WeWork or the well-publicised Elizabeth Holmes of Theranos. Frankly, when you've got ethical management in place, they would prefer to have an independent investigation as well. We identify important steps a board should take to ensure the health and viability of companies in the best interests of investors, employees, and the public. And then when they hired a general counsel, she had a political background. In reality, the company was running its tests on commercial machines produced by a German company and diluting blood samples to make it work, according to John Carreyrou, the Wall Street Journal investigative reporter who firstbroke the Theranos story in 2015. What's the worst case scenario and what do we always need to keep in mind?" Now it's under civil and criminal investigation for defrauding investors. Mar 2018. For example, GE strives for a diversity of board views. The company commits to having a board that represents a range of experience in various areas of expertise that are relevant to the Companys global activities., Another way companies encourage strong boards is through performance evaluations, regular feedback and required involvement outside the boardroom. I think that in this case, with Theranos, there was a huge structural impediment to the board actually being able to do anything. What we've seen here is that if you don't do an appropriate investigation, you're basically inviting the government to do it for you. Theranos is a Palo Alto, Calif.-headquartered health care and medical laboratory testing company that has asserted that it has developed proprietary technology focused on disrupting blood testing. Zenefits did this, and then they fixed it and then they started up again. EBAY. Today I have back with me, podcast favorite, Amii Barnard-Bahn. According to John Carreyrou, who recently published his book titled Bad Blood, Secrets and Lies in a Silicon Valley Startup, Holmes was a Stanford University student who dropped out of college to launch her company, promising to make blood tests as convenient as the iPhone. Time selected her as one of its 100 Most Influential People. It is the responsibility of the board to identify systemic issues and take the necessary steps to rectify the situation. | Reuters/Brendan McDermid. But, it is also a reminder that business owners often make bad decisions when faced with certain pressures that are perceived to be rigid. He continued: Be mindful of a companys culture and if you feel the culture is really going off the rails and becoming toxic, then perhaps its not the place that you want to keep working at.. Criticism of leadership or practices was unwelcome. Steve jobs was fired from Apple because the board agreed that he needed to go. Similar attestations were made by Bill Ayer, the ex CEO of Alaska Airlines and a board member at Honeywell as well as Charlotte Guyman, a board member at Brooks Running, The Space Needle and Berkshire Hathaway. They decided the company needed to be led by an adult, Carreyrou said. The company was criticized for having a board of directors primarily composed of former diplomats and military personnel. A lot of people have commented on that that was the case here. When, in fact only about a dozen or so tests were done. The investors in the company were mostly very wealthy individuals and the lost money is a blip in their financial ecosystem so they might not care. A vision to give normal people the ability to test and access their own health data by making blood tests cheap and accessible. Theranos founder Elizabeth Holmes epitomized Steve Jobs, which attracted Silicon Valley investors who didnt look too closely at the health companys claims, says John Carreyrou, the Wall Street Journal reporter who investigated Theranos. So, technically, if you just look at it straight on with that, the board is actually powerless. As company founder Elizabeth Holmes is sentenced to over eleven years in prison and TV adaptation The Dropout earns star Amanda Seyfried an Emmy, we reveal everything you need to know . Theranos was valued at $9 billion and Elizabeth Holmes had a net worth of almost $5 billion. Im pretty certain she didnt drop out of Stanford premeditating a long con. He pointed out how much entrepreneurs have to believe in their product, even if no one else does, especially to recruit investors. A miniaturized blood analyzer that would disrupt the $60 billion lab testing industry dominated by giants LabCorp and Quest Diagnostics. I particularly like "If you don't do an appropriate investigation, you're basically inviting the government to do it for you. The issues that Theranos faced were repeatedly raised internally by employees. Amii:Well, I advise people to ask before they join a board. The after-effects of any Corporate Governance failures is a resulting wiping-off in billions of stock value. Federal prosecutors say the failure rate of the Theranos blood-testing system was 51.3 %. For example, the valley is replete with mantras like fake it until you make it and fail fast. As Carreyrou noted, Holmes grave error was to channel this culture, especially the fake-it-until-you-make-it part. Applying such maxims to a medical product with life-and-death implications was a key driver of the Theranos downfall. The insolvency of the company attributed to the failure of its governance system that led to the inefficiency of the venture. Last month, The Wall Street Journal revealed complaints from Theranos employees that most of the 235 tests the company offers are not performed using its revolutionary technology but rely instead. However, how do they get penalized for not doing their jobs? Soltani (2014) argued that "the ethical dilemma is coupled with ineffective boards, inefficient corporate governance and control mechanisms moreover, dysfunctional management behaviour" (p. 251).