What Theranos Got Right About Risk and Reputation Management. A lot of people have commented on that that was the case here. Now, hopefully this is not the case for people who are on this call and who are in corporations or serving on boards. This was Elizabeth Holmes' masterstroke. 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. 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. It is the first in a new series assessing organisations against ACG's Golden Rules of corporate governance and applying our proprietary rating tool. Tom Fox:So, how does a board begin to take back control? A doctoral program that produces outstanding scholars who are leading in their fields of research. She was a wannabe prodigy and wanted to mimic Steve Jobs. 5. Option 2: Have the students watch the video (the full video or the shorter version) in class. This board took her at her word, he added. Somehow, Theranos Board of Directors was comprised of politicians, military advisors and influencers such as George Schultz and Henry Kissinger, rather than professionals and medical experts to guide the company to move forward. In some of the emails, the lab director talks about his Hippocratic Oath and how he felt ethically in a very bad spot. Home Depots co-founder Bring a business perspective to your technical and quantitative expertise with a bachelors degree in management, business analytics, or finance. Commentary: Absconding CEOs show how corporate governance gaps can be better plugged. apply code of ethics in the business world. Carreyrou said the companys culture of extreme secrecy and swift retaliation against anyone who went against the grain set the stage for its eventual failure. Is it asking these series of questions and becoming perhaps more strident or more demanding or aggressive? This could have been an opportunity for that to happen. That is about where the similarities ceased. Corporate governance, according to Investopedia, is the system of rules, practices and processes by which a firm is directed and controlled. 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. I just finished reading Bad Blood by John Carreyrou, the Pulitzer Prize winning Wall Street Journal investigative reporter. 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. SAN JOSE - A jury found Elizabeth A. Holmes guilty of one count of conspiracy and three counts of wire fraud in connection with a multi-million-dollar scheme to defraud investors in Theranos, Inc., announced United States Attorney Stephanie M. Hinds; Federal Bureau of Investigation (FBI) Special Agent in Charge Craig D. Fair; Food and Drug Administration (FDA) Acting Commissioner Janet . Theranos' board had very limited access to people and information. March 14, 2018. There are fourteen new forensic case analyses critically scrutinising governance failures. In 2018, the Securities and Exchange Commission (SEC) charged Theranos, Holmes, and former president Ramesh Balwani with massive fraud. Theranos: Biggest failure of corporate governance in history Elizabeth Holmes built her company Theranos on this invention she named the Edison. She assured her investors that projected revenues would be approximately $100 million, when in fact the revenues in 2014 were closer to $100,000. How companies use AI to reach customers, innovate, Creating change through collaborative participation. I am an optimist and I would like to think that this is a healthy watershed moment for startups that have unicorn status, that get all this money, and that boards will be more careful and that CEO's frankly will be more open to being questioned. You can always hire them if you have that sort of a litigation on your hands Id assume. The technology simply couldnt deliver as promised. 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. Can We Save Social Media? She always flew in private gulf stream jets. 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. Lets start with the management team, Tom. Combine that reality with the myth of the brilliant Silicon Valley start-up founder who sees around corners and can never be wrong, as Carreyrou described it, and you have a very dangerous set of circumstances the kind that yield a business story that starts with sky-high valuations and ends in criminal charges. Forbes named her one of the richest self-made women in the world. It didn't take long for problems to occur after Theranos was incorporated in 2004. Just read this quote: Though the media attention may have initially boosted Holmes profile nationwide, Textor says the Holmes story is not a failure for journalism. And you're talking about a very highly regulated business. How about no compliance and ethics officer? It was not unusual for employees and executives to be fired from the company. Would-be whistleblowers were threatened with lawsuits. Most people put more trust on glassdoor reviews than what a CEO says in a TV interview before they take a job because usually, people that work in the weeds are the ones that know what a place is really like. Professor Anat Admati, faculty director of the Corporations and Society Initiative, noted in her introduction for the event that Theranos raises many questions, and that Carreyrou could help the Stanford community by shedding light on what happened and what the audience can learn from this story. The company hyped itself up and secured massive funding, all the while failing to. Obviously, common sense would demand skepticism and a more regulated checks and balances on a Founder. Theranos founder Elizabeth Holmes epitomized Steve Jobs, which attracted Silicon Valley investors who didn't look too closely at the health company's claims, says John Carreyrou, the Wall Street Journal reporter who investigated Theranos. Required fields are marked *. 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. As lawmakers grill Facebook CEO Mark Zuckerberg this week, it's clear many are wrestling with whether and how the government should regulate tech . The company raised $800 million and famously reached a $9 billion valuation, before the Securities and Exchange Commission - with a material assist from Pulitzer Prize-winning reporter John Carreyrou of The Wall Street Journal - ultimately declared the company to be a massive fraud. And you really need to think about it when you're in a highly regulated environment, like blood testing. But it failed to acknowledge that this vision made patients their ultimate customer. It was formed in 2003 by then 19-year-old Elizabeth Holmes, who dropped out of Stanford University to launch the company. 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. She wore black turtlenecks and was extremely stubborn about her vision. Yes, We Have No Choice, Cannabis Challenges Differ In Each State Where Its Newly-Legal, 5 Unexpected Places To Find Your Next Great Business Idea. "In fact, the . She just went full force ahead. The reporter entered Silicon Valley not as a tech businessperson or even a tech reporter but as a health care reporter pursuing a tip. How does such a politically and militarily connected board not know that these claims are being made to investors? To shed some light on how corporate governance failure can lead to disaster, we've taken a closer look at 3 organisations who've practiced improper corporate governance and the lessons to be learned from their mistakes. A miniaturized blood analyzer that would disrupt. Its a perfect example of how easy it is for all of us to make assumptions and believe what we want because of our goals. Furthermore, Theranos maintained extreme secrecy in the name of protecting their proprietary technology. Now, Holmes and former Theranos president Ramesh Sunny Balwani, arefacing federal wire and fraud charges, and the company, valued at $10 billion at its peak,dissolvedat the end of August. Zenefits did this, and then they fixed it and then they started up again. As we say in our business ethics examples homepage introducing . Youregoing to keep that front and center and then if that guides everything you do, you're going to look into an employee complaint, you're going to think about, "Gosh, the lab director just quit. Marketing and Political thought leader Writer- Audiophile, In the report on 60 Minutes John Carreyrou said this is one of the most epic failures in corporate governance in the annals of American capitalism. This reminded me of an instance from Warrens biography The Snowball by Alice Schroeder. In addition to a loss of legitimacy, Theranos risks losing its license to operate labs, and CEO Elizabeth Holmes would likely be forced to exit the industry. Theranosa privately held company valued at $9 billionhas advertised its proprietary medical technology as being transformative, enabling laboratories to run scores of medical tests with merely a finger-prick of blood. | Reuters/Brendan McDermid. Elizabeth Holmes built her company Theranos on this invention she named the Edison. Meanwhile, the power that . How transparent is it? In a normal healthy board, the board could, if they're not educated around labs, in this case for example, they could hire a consultant to be an independent consultant to the board, to help educate them on the types of questions they should be asking in order to fulfill their governance responsibilities. View. But what we also are learning is that the media, for the most part, did not do their job in uncovering the massive fraud and instead decided to promote the hell out of Ms Holmes. The board knew this was the investors money she was spending right? Elizabeth was intelligent but arrogant. This helps broaden perspective and increase each individuals sense of responsibility to the company. The history of the company and its eventual downfall and current vindication and trial of the founder, Elizabeth Holmes, is marred with ethical concerns and issues. The company was criticized for having a board of directors primarily composed of former diplomats and military personnel. It is a lesson in many things you should look out for and all things you should avoid. By 2007, Theranos's valuation hit $197m after it raised another $43.2m in early-round funding. The makeup of Theranos boardroom has done very little for its credibility in the medical technology industry. Holmes and Balwani were also charged with wire fraud and conspiracy, with Holmes being found guilty on four counts in January 2022 and sentenced that November to 11 years and 3 months in prison. She wanted to be rich and famous. Amii Barnard-Bahn (amii@barnardbahn.com) is an executive coach and strategic advisor to business executives and directors. As stated by Fortune senior editor Jennifer Reingold, [W]hile its probably useful to have a retired government official or two toteach and offer good leadership skills, when there are six with no medical or technology experiencewith an average age, get this, of 80one wonders just how plugged in they are to Theranos day-to-day activities. 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 . Some companies, as you know, when they find a problem like this, they self-disclose. But she crossed a line when she began to grossly misrepresent what shed achieved in her efforts to raise the support she needed to truly reach that point. 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. 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. As she explained to colleagues at the company's headquarters, in Palo Alto, he was named after the world-famous sled dog . 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. The health companys plummet carries valuable lessons for Silicon Valley. This would suggest that, as ridiculous as Theranos boardroom may appear, the bigger mistake was perhaps failing to create a system of openness. 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. They shouldn't just be doing it for a marquis title. I would recommend that CEO's and boards sit down and talk about what their value creation model is, who their stakeholders are. The lab director is core to their business. One of the US senators was a heart transplant surgeon but he obviously spent more time on policy than medicine by the time Theranos came along. With real journalists, like Ed Silverman, they continue to ask the hard questions that too many seem to ignore. I know you will enjoy it. The Theranos story was supposed to have a very different ending. Enron built layers of financial dependencies in a constant push to raise stock prices and led to the Enron collapse. What Silicon Valley Can Learn from the Theranos Fraud Case. www.Knowledge.wharton.penn.edu. More navigation items; Post-mortem on Theranoswhere were the controls? Holmess passion for the venture and Steve Jobs-like image (black turtlenecks and all) gained her the support of luminaries like Oracle founder Larry Ellison and former Secretary of State Henry Kissinger. See Theranos founder Elizabeth Holmes charged with $700m fraud. bbc.com. Theranos and FTX show a broad failure by investors to ask enough questions before handing over cash, . Holmes was seen as the darling of Silicon Valley. We touch upon a wide variety of institutional corporate governance controls and other failures of the company. Its unclear whether any information that was important got to the board. Fortune magazine put her on their cover. That it was just a prestige board designed to help get investor money for Theranos, which it did quite well. 35 Pages Posted: 28 Mar 2022 Last revised: 14 Jan 2023. Here are two others: Tom Fox:Yeah, Francine McKenna wrote that there were no audited financial statements during this time period. It needs to be proportionate. So, thank you very much! She wanted to be a celebrated tech entrepreneur. Tom Fox:Hello everyone. Holmes promised that more than two hundred tests would be conducted with her new technology. This 20-month MBA program equips experienced executives to enhance their impact on their organizations and the world. Steve Jobs while demanding and difficult to work with at times, was extremely focused and aware of the needs of his customer. This button displays the currently selected search type. Amii:Lets start with an acknowledgement of what a board should do, which is to make informed business judgments. She owned 55% of the shares of Theranos, but more importantly she had stock that gave her 100 votes per share of Theranos stock. Theranos leadership also distinctly lacked the expertise required to develop a sophisticated medical testing technology, Carreyrou said. When two would-be whistleblowers told the Theranos board that Holmes had exaggerated revenue projections . Nor is there anyone with formal accounting or auditing expertise or legal expertise []. The SEC determined that the board was misled just like the rest of the other people. John Carreyrou, Carreyrous outside perspective helped him break the story. Both Holmes and the board were out of their depth.. Using a "nanotainer" (a small device designed to draw, retain, and analyze a . If you look at those two people, you've got a smart 19 year old woman who went to college for a year and then dropped out, who had no background in medical or healthcare. Holmes "chose fraud over business failure. Subscribe to receive news and updates: When Elizabeth pitched the Theranos investment to Rupert Murdoch, she told him that she was looking for a long term investor that didnt care about immediate returns and that the company was planning to stay private for the longhair. ", Patrick Gitau CFE,CRISC,CERG,GRCP,CFIP,CRICP,CRA, CPMP,CHPC,SRMP,CIA,CPPP,MBA-Finance (With Merit). Originally published at worldofdtcmarketing.com on May 21, 2018. 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. 2004-2010: Theranos thrives with early funding. But, Holmes was worried about saving face and she did not want to disappoint her investors with the truth and was also worried about her commercial partners. Notably, Boies was already connected to Theranos (as an . 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. For Holmes, the dog represented the journey that lay ahead for Theranos. I hope even more that the board members dont just get to move on. She chose to be dishonest with investors and . 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. Volkswagen's share value plunged 30% in the . She described in a single expression for us the job of a board member as Nose in, hands out. Your email address will not be published. Why didnt directors demand a better accounting of the companys direction and well-being? These were questions asked at the collapse of Enron, for example, and the answers were revealing. The Theranos scandal has dominated headlines, and both fascinated and appalled readers worldwide, since John Carreyrou's shattering report first broke in 2015. Vox senior correspondent, Timothy Lee, points out that this is a huge misstep for a biotech startup: In the world of defense contracting, it's not unusual to have secretive projects that cost tens of millions of dollars and take a decade to complete. Holmes' company raised $6.9m in early funding soon after its foundation, gaining a $30m valuation. Today I have back with me, podcast favorite, Amii Barnard-Bahn. But Holmes talked her way out of the decision and prevented subsequent intervention by multiplying the voting rights of her shares to give her 99% of total voting rights. Narcissistic CEOs Can Mean Big Legal Bills, Big-Data Initiative in Intl. Theranos has been criticized for the makeup of its investors and board of directors which featured heavy-hitting investors such as media mogul Rupert Murdoch and former secretary of state Henry. Attempts at curbing these failures in the form of more stringent legislation and regulation does not appear to have had the desired impact. In July of that year, the company . In conclusion, if you ever want to serve on a board of an organization, you should read this book. It is alleged that Holmes saw the board as a 'necessary burden' that would lead to further funding and an increase in Theranos' profile. In the face of corruption in India, wise business leaders must decide what is negotiable and what isnt. 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. They briefly had a CFO very early on in the company. One of the interesting things about Theranos is who was driving the corporation and what support did management have in running an effective corporation. In this episode, we take up the failures of the Theranos Board of Directors. This begins by ensuring that the right people are on board. 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. They go to the regulators. Theranos - When Corporate Governance Fails - sanjogpatel.com If you are a new company and in need of legitimacy and capital infusion, having oversight from a board comprised of influential people would be great for your reputation. So why was there no push for a compliance officer at an earlier time? It is very easy to notice here how none of these people have any affiliation to medical science. 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. Theranos's fall from grace is one large-scale compliance failure. These were speakers that were there to talk about corporate governance. Steve jobs was fired from Apple because the board agreed that he needed to go. 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. Since corporate governance also provides the framework for attaining a companys objectives, it encompasses practically every sphere of management, from action plans andinternal controlsto performance measurement and corporatedisclosure. Homes company Theranos clearly lacked an effective corporate governance that balanced Homes aspirations with the transparency needed for customers, suppliers, government, financiers, and the community. 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. Jan. 6, 2022 5:30 am ET. Image We touch upon a wide variety of institutional corporate governance controls and other failures of the company which led to its demise. By February 2015 the Theranos fairytale was about to unravel publicly. A board needs to both give a CEO wings to be innovative and to come up with new ideas and to take calculated risks. She used phrases and words that had a magical ring to them. So I look forward to our next conversation, whether it be on Theranos or yet another something that has come up in the public record. Are You Leading with Power Over or Power With? It's almost a situation of where to begin, but with regard to the board of directors, where would you suggest we begin? The reporters who had interviewed Elizabeth Holmes over the previous two years accepted the way she framed herself as heir to the throne of Steve Jobs, he said.