One of the interesting things about Theranos is who was driving the corporation and what support did management have in running an effective corporation. Major questions arise with any companys breakdown, Where was the board? If the technology of Theranos turns out to be not what it claims, investors would almost certainly seek to sue the chief executive, Ms. Holmes, and the company, as well as the board that allowed. You could argue that if the culture at Theranos hadnt been so toxic, they could have made better progress and maybe even gotten there, Carreyrou said. So, what lessons, you've detailed several different points, but are there some overall lessons you might suggest to a high flying startup now to either, for the board to get their hands around the controls, get their hands around the audited financial statements, or perhaps even go in a different direction? Or rather were not allowed to do. much as was the case with Adam Neumann of WeWork or the well-publicised Elizabeth Holmes of Theranos. So, yeah, could we just agree lots of red flags? So, thank you very much! This question will be approached in the following way. Earn your MBA and SM in engineering with this transformative two-year program. Her 50 percent share of the company was worth $4.5 billion. The most effective boards are also the ones where dissent is welcomed. Opinions expressed by Forbes Contributors are their own. Now, hopefully this is not the case for people who are on this call and who are in corporations or serving on boards. Tom Fox:Yeah. Earn your masters degree in engineering and management. Mar 2018. They also had the most prominent law firm in the country on a retainer at their beck and call. The issues that Theranos faced were repeatedly raised internally by employees. When misconceptions like this propagate within a company and its leadership, it is the responsibility of the board of directors to provide necessary oversight. Until she couldnt and it all came crashing down around her. Commentary: Absconding CEOs show how corporate governance gaps can be better plugged. 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. ensure responsible corporate governance both from a CSR and a good governance perspective. Theranos leadership also distinctly lacked the expertise required to develop a sophisticated medical testing technology, Carreyrou said. 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. More recent duties: Strategy development (a debate point), talent management, and investor relations. EBAY. If theres one big thematic lesson from the Theranos scandal, thats it.. Usually there's at least a general counsel at some point to serve in a dual-hatted role. Customers called and complained about faulty blood results that led these families to run to the Emergency Room. 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. 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. Jan. 6, 2022 5:30 am ET. Then I also look for, as a former compliance officer, does the board of management take its responsibility for ethical behavior and internal control seriously or do they view such things as red tape? You cant do that in medicine, especially with a blood testing machine that patients and doctors rely on for very important medical decisions, Carreyrou said. As a consequence, the fact of the failing technology was able to be kept secret, which fostered a negative culture of mistrust and secrecy. Theranos: Biggest failure of corporate governance in history Elizabeth Holmes built her company Theranos on this invention she named the Edison. How does such a politically and militarily connected board not know that these claims are being made to investors? Subscribe to receive news and updates: 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. Business is about taking risks and so by no means am I suggesting that a board is there to be a cop, but they do need to also have this dual role of giving the CEO wings, but also telling them when something is too risky and pointing it out. The Theranos issue is just one of the proof that companies need to have a cautious yet. She has shaped many company cultures and strategic initiatives as an executive at Fortune 20 companies, smaller business and non-profits, and leading multiple functions, including human resources, legal, IT, communications, and compliance. Amii Barnard-Bahn (amii@barnardbahn.com) is an executive coach and strategic advisor to business executives and directors. And you're talking about a very highly regulated business. Listen to article. Here are the main takeaways from Carreyrous discussion of the scandal. Combine an international MBA with a deep dive into management science. First, we review the stakeholder approach to corporate governance as an alternative to the shareholder-focused conception of the firm. -0.79 -1.69%. This button displays the currently selected search type. Holmes did nothing to deal with the complaints of customers or issues raised by employees. Due to the various causes of corporate failures, corporate governance failures . Non-degree programs for senior executives and high-potential managers. She said nothing concrete. March 14, 2018. Summary. 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? She used phrases and words that had a magical ring to them. The board has an oversight responsibility. It wasnt just billionaires who were misled and bamboozled., Perhaps the biggest takeaway from the Theranos story is the expansion of Silicon Valley from its traditional roots to a much broader range of offerings. 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. There were so many red flags for shareholders and investors and clients, but they were ignored because of some blanket that was pulled over their eyes by Holmes. 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 was the queen of networking and managed to propagate a grandiose vision that started with a single influential connection in Tim Draper and a rich genetic lineage to a fraud valued at $700 million. She made false claims as to who were her clients. A miniaturized blood analyzer that would disrupt the $60 billion lab testing industry dominated by giants LabCorp and Quest Diagnostics. I like that last question because it demonstrates whether in fact senior management is open to suggestions from the board or whether this is a rubber stamp board, and if I join, am I expected just to go along with everything or am I going to be allowed to do my job representing shareholders, and patients in this case, in asking the right questions. I like the simplicity of that. Click below for the podcast. The firm which was once valued at $9 billion . A board needs to both give a CEO wings to be innovative and to come up with new ideas and to take calculated risks. 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. So, that's something that a board would normally want to look into. The fishy excuse provided by Holmes was quickly and carelessly accepted and not questioned. But it failed to acknowledge that this vision made patients their ultimate customer. What Silicon Valley Can Learn from the Theranos Fraud Case. www.Knowledge.wharton.penn.edu. Forbes named her one of the richest self-made women in the world. Doesnt this happen often in our own lives? Your email address will not be published. Lets choose collective intelligence over the madness of mobs, MIT Sloan research on AI and machine learning, Report details the business benefits of responsible AI, Bad Blood: Secrets and Lies in a Silicon Valley Startup. Truth be told as Brandon states in his article, amazingly Walgreens didnt want to be left out or miss out on the new technology that everyone was raving about. This is a BETA experience. Theranos, Holmes and former company president Sunny Balwani were charged with fraud by the SEC in 2018. That should have been a big red flag to the board to investigate, "Gosh why is our lab director resigning? So, if you can imagine operating a company that had taken 700 million dollars from investors, and that had been valued at 9 billion dollars without a CFO, that's something a healthy board would be interested in. They want to look for rewarded risk. What is clear is that we need to rethink corporate governance to encompass the interests of all stakeholders - not solely . Theranos was incorporated in 2004 but did not hire a compliance officer until 2016, more than twelve years later. Or its new and shiny and seems clean, so all is good with the product or process or company or person. 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.. Were they just purposefully ignorant or were they just that blind to the charisma of Elizabeth? It is the first in a new series assessing organisations against ACG's Golden Rules of corporate governance and applying our proprietary rating tool. Volkswagen's share value plunged 30% in the . 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. Amii is a frequent author and speaker on leadership, thriving workplace cultures, and reputation risk management. 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. The reporter entered Silicon Valley not as a tech businessperson or even a tech reporter but as a health care reporter pursuing a tip. When two would-be whistleblowers told the Theranos board that Holmes had exaggerated revenue projections . Tom Fox: There's been a lot written about the Theranos case, so lots that both you and I have digested. She is a strategic advisor to boards of directors and executive coach to many C-Suite members. 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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.