In much of the computer software industry, its possible and common to safely release and then iterate on incomplete products to fix bugs until they work. Zenefits did this, and then they fixed it and then they started up again. The Wall Street Journal, which published the glowing article about Theranos early on, ultimately unraveled its myth, thanks to a months-long investigation by reporter John Carreyrou. A new study concludes that successful tech firms are often discovered and not planned., Navigating Corruption: A Case Study from India. In any case, no one demanded the proper data, and this is ultimately the boards responsibility. This podcast will help you understand, as a board member, your role and your role going forward in this type of situation. How data-savvy are you, really? They also had the most prominent law firm in the country on a retainer at their beck and call. 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. 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. The after-effects of any Corporate Governance failures is a resulting wiping-off in billions of stock value. The Theranos board and federal regulators provided insufficient oversight, Carreyrou noted. Now it's under civil and criminal investigation for defrauding investors. As a matter of fact, after the scandal broke, Rupert Murdoch sold back the shares from his $125 million investment back to the company for $1 just to get the tax write-off. Conclusion. If convicted, each faces up to 20 years in prison. But it failed to acknowledge that this vision made patients their ultimate customer. It didn't take long for problems to occur after Theranos was incorporated in 2004. What Theranos Got Right About Risk and Reputation 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. What's the worst case scenario and what do we always need to keep in mind?" She described in a single expression for us the job of a board member as Nose in, hands out. It is alleged that Holmes saw the board as a 'necessary burden' that would lead to further funding and an increase in Theranos' profile. 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. 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. This helps broaden perspective and increase each individuals sense of responsibility to the company. eventually fail to sustain its operations. How did the board never know about the changing faces of leadership at every level within the company? Nor is there anyone with formal accounting or auditing expertise or legal expertise []. More navigation items; Post-mortem on Theranoswhere were the controls? much as was the case with Adam Neumann of WeWork or the well-publicised Elizabeth Holmes of Theranos. Soltani (2014) argued that "the ethical dilemma is coupled with ineffective boards, inefficient corporate governance and control mechanisms moreover, dysfunctional management behaviour" (p. 251). With real journalists, like Ed Silverman, they continue to ask the hard questions that too many seem to ignore. The dance of being on a board, staying independent enough from the CEO, but getting along well enough to get business done, is not to be underestimated. Former US Secretary of States Henry Kissinger and George Schultz, Two US Senators, Army General James Mattis, Navy Admiral Gary Roughead and Former CEOs of Bechtel Corporation and Wells Fargo. Case Study: Violating Disclosure Laws. Carreyrou, a Pulitzer Prize-winning Wall Street Journal reporter, chronicled the downfall of Theranos in his book Bad Blood. As a board member, even if you don't know anything about the science behind the company, any key departure like that should have been investigated. Theranos sold a noble vision to its investors and the world. In this episode, we take up the failures of the Theranos Board of Directors. 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. 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. 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. 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. Elizabeth on the other hand, failed to even recognize who her actual customer was. 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 paranoia went into overdrive., He added, If the culture had been more wholesome, then maybe Theranos would have actually made some headway toward achieving Holmess vision., At the time of this writing, Holmes and Balwani were facing fraud charges, including making false representations to investors, doctors, and patients. Nov. 18, 2022. 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. 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. We touch upon a wide variety of institutional corporate governance controls and other failures of the company which led to its demise. The fishy excuse provided by Holmes was quickly and carelessly accepted and not questioned. They go to the regulators. In 2018, the Securities and Exchange Commission (SEC) charged Theranos, Holmes, and former president Ramesh Balwani with massive fraud. Enron built layers of financial dependencies in a constant push to raise stock prices and led to the Enron collapse. SAN JOSE, Calif. Elizabeth Holmes, the founder of the failed blood-testing start-up Theranos, was sentenced to more than 11 years in prison on Friday for . 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. 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. A board acting to prevent further dilution of the existing investors stake in the company should likely have asked that question. Rather, she says it shows what investigative reporting can do. Elizabeth Holmes, the former CEO and founder of failed blood testing startup Theranos, was found guilty on four charges of defrauding investors, capping off the stunning downfall of a former tech. John Carreyrou, the Wall Street Reporter who broke the story on Holmes and Thernos said She (Homes) is a pathological liar. Im not sure what law you could pass that would catch someone intent on lying, Carreyrou said. When Warren started out his early investment partnerships, he had established very stringent rules about what the investors were allowed to do. And that comes down to the super voting shares that Elizabeth had. 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. Federal prosecutors say the failure rate of the Theranos blood-testing system was 51.3 %. To read a transcript, scroll below. If you start from that place, you're going to avoid a lot of problems. Jan. 6, 2022 5:30 am ET. This isn't unusual, its increasingly common in Silicon Valley, its often used with family-owned business to concentrate power in the family in case there's a takeover, that kind of thing, but 100 per share is quite a lot. 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? 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. Sports Direct . I hope even more that the board members dont just get to move on. Theranos has since changed its board structure to include a smaller board of directors, a new board of counselors and a medical advisory board staffed with physicians and researchers. Contemporary governance failures including BP, VW, Boeing, GM/Tesla, Apple, Purdue Pharma, and Theranos; The ongoing vitality of the diversity of corporate governance across the world . 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. 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. Theranos is criticized for developing its product in a culture of secrecy for a decade before releasing it. He spoke before an audience in conversation with Michael Callahan, executive director of the Rock Center for Corporate Governance, which cosponsored the event. Both Holmes and the board were out of their depth.. Where it became fraud is that she and Sunny lied about the fact that they had succeeded when, in fact, it was still very much a work in progress.. Would-be whistleblowers were threatened with lawsuits. And she wouldnt let anything get in the way of that. Tom Fox:Right. She was a wannabe prodigy and wanted to mimic Steve Jobs. Theranos was incorporated in 2004 but did not hire a compliance officer until 2016, more than twelve years later. 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. No one was truly policing the businesss processes or offerings. 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. Those who pushed were usually either fired or marginalized to the extent that they had to leave they had an expression, which was to disappear someone, Carreyrou said. When misconceptions like this propagate within a company and its leadership, it is the responsibility of the board of directors to provide necessary oversight. The SEC determined that the board was misled just like the rest of the other people. 5. Attribution Bernard Marcus once stated his preference for board members who are contentious and unwilling to relent until their questions have been answered. March 14, 2018. The Indian market-regulator SEBI has taken significant steps in ensuring sufficient controls to manage Corporate Governance standards. 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. It's almost a situation of where to begin, but with regard to the board of directors, where would you suggest we begin? Here are the main takeaways from Carreyrous discussion of the scandal. Bad corporate governance could cripple even the best businesses. The fast-growing startup is now under civil and criminal investigations by the U.S. Securities and Exchange Commission, the Department of Justice and federal health regulators. 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. 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. The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive. The board appears to have been assembled primarily to secure influential government connections, rather than to govern with solid industry insight, product knowledge and operational expertise. For Holmes, the dog represented the journey that lay ahead for Theranos. First, Theronos put powerhouse lawyer David Boies on to its Board of Directors to help navigate the current crisis. She just went full force ahead. Combine an international MBA with a deep dive into management science. The company was criticized for having a board of directorsprimarily composed of former diplomats and military personnel. 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. 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. This reminded me of an instance from Warrens biography The Snowball by Alice Schroeder. 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. 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. He was willing to give credit to his mentor where it was due but had the audacity to be different to become who he is today. 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. In a court filing, prosecutors argue Holmes "likely benefitted," from the loss of the LIS. Today I have back with me, podcast favorite, Amii Barnard-Bahn. 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. What we continue to learn about Theranos is that the level of deception was unprecedented and that Homes surely belong in jail. The health companys plummet carries valuable lessons for Silicon Valley. Commentary: Absconding CEOs show how corporate governance gaps can be better plugged. 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. This button displays the currently selected search type. 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. 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. 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. 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. As a matter of fact, any time someone spoke up about their disagreements with the decisions being made, they were fired. They've got a lot of pressure and the board needs to have a harmonious enough working relationship with the CEO. A doctoral program that produces outstanding scholars who are leading in their fields of research. And you're talking about a very highly regulated business. What is clear is that we need to rethink corporate governance to encompass the interests of all stakeholders - not solely . 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. First, we review the stakeholder approach to corporate governance as an alternative to the shareholder-focused conception of the firm. For example, Home Depot requires directors to regularly visit stores and engage in the operational review of stores throughout the year.. Bleeding out: Theranos oozes with corporate governance lessons | Article | Compliance Week A year ago, Theranos was a Silicon Valley health tech "unicorn" praised for breakthrough advancements in blood testing. 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. 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. The Theranos board was very carefully crafted. 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. The evidence needed to back Theranos claims is now absent, rendering the company even more suspect. The Transition of Accounting Principles: A Survey of the Existing Literature. That dream garnered buy-in from numerous leaders in both the business and political fields. Summary. A lack of expertise on the board Theranos' leadership also distinctly lacked the expertise required to develop a sophisticated medical testing technology, Carreyrou said. Thats how John Carreyrou described the high-profile plummet of health technology business Theranos from heralded Silicon Valley unicorn to disgraced cautionary tale, with founder Elizabeth Holmes and President and COO Ramesh Sunny Balwani facing multiple current fraud charges. Is it asking these series of questions and becoming perhaps more strident or more demanding or aggressive? She talked about her fear of needles and blood. Rashmi is anethics speakerand consultant fighting to create a culture of conversation and bringethical issues in businessto light, to promote integrity, to enhance commitment to fiduciary duty, to build ethical leadership, and to shift the paradigm of ethics standards through ethics training. A systemic failure of corporate governance means the failure of the whole set of regulatory, market, stakeholder, and internal governance. The lab director is core to their business. Amii:Yeah, and then one near and dear to our hearts Tom. We touch upon a wide variety of institutional corporate governance controls and other failures of the company. Why did no-one ask this question? Rare is the company that has failed so spectacularly or so famously as Theranos, the biotech startup that purportedly could divine your health through revolutionary new blood-testing devices that. The company has claimed it has been able to use a finger-prick test to draw blood from patients instead of the traditional, more invasive venipuncture. International Corporate Governance is an essential text for those . If you have any questions about any of the topics we discussed, you can reach me at TFox@tfoxlaw.com. 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. She assured her investors that projected revenues would be approximately $100 million, when in fact the revenues in 2014 were closer to $100,000. Subscribe to receive news and updates: How transparent is it? Home Depots co-founder We've certainly seen that happen and that's what, as compliance officers, we would advise our corporations to do in the case where there might be some questions around whether management has acted appropriately. In Bad Blood, Carreyrou states that employees tried to warn Holmes that the Theranos technology was not ready to go live on humans. 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 . She used phrases and words that had a magical ring to them. The reason? Debabrata Mitra. They decided the company needed to be led by an adult, Carreyrou said. 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. To this date, most people in the media are not being held accountable for their part in building up Ms Holmes without asking tough questions. By February 2015 the Theranos fairytale was about to unravel publicly. The other red flag was Elizabeths security detail. Through intellectual rigor and experiential learning, this full-time, two-year MBA program develops leaders who make a difference in the world. The corporate culture was one of fear and secrecy, not one of transparency and commitment to a conversation around compliance. So, thank you very much! After only 2 semesters at Stanford, she decided she knew enough about the chemistry of blood testing and business to drop out and start Theranos. One of the most epic failures in corporate governance in the annals of American capitalism. Patty was a long time executive at Weyerhauser and currently serves on the board of Suncor Energy and Alaska Airlines. She is a strategic advisor to boards of directors and executive coach to many C-Suite members. Non-degree programs for senior executives and high-potential managers. I like the simplicity of that. Or its new and shiny and seems clean, so all is good with the product or process or company or person. 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. In larger organizations, a well-structured, independent corporate governance is critical to making sure an organization stays ethical and follows all laws. The firm which was once valued at $9 billion . Carrie H. Cohen, Christine Wong, and Kate Driscoll partnered with Corporate Directors Forum and Bavan Halloway, corporate board member at Topgolf Callaway Brands, T-Mobile, and TPI Composites, Inc. to present "Lessons from the Theranos Trials: Navigating Ethical Decisions in the Boardroom." The Theranos trials have served as case studies on ethics and corporate governance, including the . A 12-month program focused on applying the tools of modern data science, optimization and machine learning to solve real-world business problems. ", Patrick Gitau CFE,CRISC,CERG,GRCP,CFIP,CRICP,CRA, CPMP,CHPC,SRMP,CIA,CPPP,MBA-Finance (With Merit). Time selected her as one of its 100 Most Influential People. Why does a startup need the best law firm in the country representing them? Attempts at curbing these failures in the form of more stringent legislation and regulation does not appear to have had the desired impact. She always flew in private gulf stream jets. Private security is not cheap and neither is bulletproof glass which is what was installed in Elizabeths office. Holmes promised that more than two hundred tests would be conducted with her new technology. It included a lot of politically connected figures. This is Tom Fox again, I hope you've enjoyed this episode of Across the Board. 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. George Schultz even went as far as straining his relationship with his grandson who worked at Theranos by supporting and believing Elizabeth over his own grandson. Just three years later, in 2010, the company was valued at $1bn. She specializes in accelerating the success of executives and partners with leaders and teams to help scale their businesses. Tom Fox:That's a great tagline. I think they really did try to develop a technology, they just never got to the point where it worked, he said. 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. That should have been a big red flag to the board to investigate, "Gosh why is our lab director resigning? This question will be approached in the following way. Of course, there's lot of reasons why this lack of a compliance role becomes important later. 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.