It is the responsibility of the board to identify systemic issues and take the necessary steps to rectify the situation. 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? primarily composed of former diplomats and military personnel. It is alleged that Holmes saw the board as a 'necessary burden' that would lead to further funding and an increase in Theranos' profile. The technology simply couldnt deliver as promised. 5. 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. As a result, the company quickly and rather easily raised hundreds of millions of dollars in . It is the first in a new series assessing organisations against ACG's Golden Rules of corporate governance and applying our proprietary rating tool. It is also an example of how important it is to. 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. 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? Amii:Warren Buffet has three criteria for board members. 2004-2010: Theranos thrives with early funding. Would-be whistleblowers were threatened with lawsuits. She said nothing concrete. Federal prosecutors say the failure rate of the Theranos blood-testing system was 51.3 %. I recently did a workshop on how to risk-proof your board search and it's important that board members know what they're getting into. 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 all articles by Lawrence J. Trautman . The board has an oversight responsibility. ensure responsible corporate governance both from a CSR and a good governance perspective. Silicon Valley was most certainly not lacking on legal talent to represent startups. 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This reminded me of an instance from Warrens biography The Snowball by Alice Schroeder. Her 50 percent share of the company was worth $4.5 billion. Ms Holmes surely belongs in jail, but will justice be served? 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. I just finished reading Bad Blood by John Carreyrou, the Pulitzer Prize winning Wall Street Journal investigative reporter. Much is at stake should the company fail to prove the accuracy of its claims, the efficacy of its technologies and its compliance with lab standards. They shouldn't just be doing it for a marquis title. 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. Getting a . 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. The technology being developed by medical diagnostics startup Theranos a novel device allowing a galaxy of blood tests to be performed on one small, finger-prick sample had the potential to revolutionize the industry and launch CEO Elizabeth Holmes into the pantheon of billionaire Silicon Valley tech founders. This is third in a series - let me know what you'd like to hear and I'll do more. But Holmes created a structure that was unusual in corporate governance. Were they just purposefully ignorant or were they just that blind to the charisma of Elizabeth? 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. Theranos was incorporated in 2004 but did not hire a compliance officer until 2016, more than twelve years later. A systemic failure of corporate governance means the failure of the whole set of regulatory, market, stakeholder, and internal governance. Elizabeth Holmes built her company Theranos on this invention she named the Edison. Commentary: Absconding CEOs show how corporate governance gaps can be better plugged. Amii:Great question. How does such a politically and militarily connected board not know that these claims are being made to investors? What we continue to learn about Theranos is that the level of deception was unprecedented and that Homes surely belong in jail. Elizabeth Holmes, founder of Theranos (Credit: Vanity Fair) T heranos, the infamous biotech startup, has been the topic of many conversations in media. Agnishwar Basu. 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. How companies use AI to reach customers, innovate, Creating change through collaborative participation. This was Elizabeth Holmes' masterstroke. Opinions expressed by Forbes Contributors are their own. How transparent is it? 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. 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. They want to look for rewarded risk. They did nothing to verify that her scientific claims were true. Others have emphasised the failure of the market to see through a founder who was celebrated as a 'visionary', . The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive. What Makes Some Health Care Teams More Effective Than Others? 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. 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. So, yeah, could we just agree lots of red flags? She described in a single expression for us the job of a board member as Nose in, hands out. Or once you've lost control, is that it? A new study concludes that successful tech firms are often discovered and not planned., Navigating Corruption: A Case Study from India. 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. 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. In conclusion, if you ever want to serve on a board of an organization, you should read this book. I came at it from the medical perspective with my East Coast skepticism.. Amii is a frequent author and speaker on leadership, thriving workplace cultures, and reputation risk management. 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. 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. Corporate Governance failures have the capability of inflicting the deadliest attack on Investors' Trust. 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. They do not have responsibility for day to day management, but they need to make sure they're informed and in this case they needed to be informed of risk areas and mitigation plans and there's no evidence that that ever took place at Theranos. All of Silicon Valley was like in a trance and easily accepted non-disclosure and lack of specificity, clearly a problem when the technology at issue is intended to be a life-saver in many instances. She assured her investors that projected revenues would be approximately $100 million, when in fact the revenues in 2014 were closer to $100,000. I know you will enjoy it. 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 . She is a strategic advisor to boards of directors and executive coach to many C-Suite members. Corporate governance, according to Investopedia, is the system of rules, practices and processes by which a firm is directed and controlled. 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. The company was criticized for having a board of directorsprimarily composed of former diplomats and military personnel. Bring a business perspective to your technical and quantitative expertise with a bachelors degree in management, business analytics, or finance. Sonnenfeld states in the Harvard Business Review that when honest dialogue is not actively encouraged, it is common for groupthink to take over: Directors are, almost without exception, intelligent, accomplished, andcomfortable with power. EBAY. 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. Jan. 6, 2022 5:30 am ET. He wants board members that are 1) business-savvy, 2) shareholder oriented, and 3) have a special interest in the company. He spoke before an audience in conversation with Michael Callahan, executive director of the Rock Center for Corporate Governance, which cosponsored the event. 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. 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. Theranos, a fast-growing private company intent on trailblazing a new technology, set out to attain ambitious goals. 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 . Elizabeth on the other hand, failed to even recognize who her actual customer was. It clears their name, it shows a good faith effort to comply and not to do anything inappropriate. The most effective boards are also the ones where dissent is welcomed. 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 miniaturized blood analyzer that would disrupt the $60 billion lab testing industry dominated by giants LabCorp and Quest Diagnostics. Today I have back with me, podcast favorite, Amii Barnard-Bahn. I know John Carreyrou, the journalist who spent most of his life in the past few years covering Theranos, has said that if he had one thing he could ask Elizabeth (because she never granted an interview to him), he would ask, "How did you justify to yourself the risks that you were taking to patients?" 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 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. The Theranos issue is just one of the proof that companies need to have a cautious yet. I think the public health component of the criminal charges is going to resonate, Carreyrou said. 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. It is amazing to me that Elizabeth Holmes got her start when she was invited to deliver a TED MED talk in 2014. 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. USD. Under scrutiny, the company faced lawsuits from investors, pharmaceutical partners, and the state of Arizona, where it provided blood-testing directly to consumers. Understanding the sudden rise and fall of Theranos and, more particularly its founder, Elizabeth Holmes, is a must for every entrepreneur, businessperson, and human. It's almost a situation of where to begin, but with regard to the board of directors, where would you suggest we begin? A board needs to both give a CEO wings to be innovative and to come up with new ideas and to take calculated risks. How about no compliance and ethics officer? It is never too late to mitigate damage and in recent weeks, Theranos has made at least a few strategic moves. The ones that dont often self-select out. She owned 55% of the shares of Theranos, but more importantly she had stock that gave her 100 votes per share of Theranos stock. Combine an international MBA with a deep dive into management science. In 2016, a detailed report was released by the Business, Innovation and Skills Committee (ISC) which . Conclusion. Soltani (2014) argued that "the ethical dilemma is coupled with ineffective boards, inefficient corporate governance and control mechanisms moreover, dysfunctional management behaviour" (p. 251). strong foundation in establishing corporate governance or else the company will. 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. Usually this means finding a new CEO or voting on the right board member to take over. In any case, no one demanded the proper data, and this is ultimately the boards responsibility. Oversight of the leadership was what you did as a board member. She used phrases and words that had a magical ring to them. Holmes vision for a better blood test was legitimate and the cause was good, Carreyrou said. 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. But it failed to acknowledge that this vision made patients their ultimate customer. For Holmes, the dog represented the journey that lay ahead for Theranos. It included a lot of politically connected figures. What she meant is that as a board member of an organization, you represented the investors of the company. The insolvency of the company attributed to the failure of its governance system that led to the inefficiency of the venture. Also problematic was Holmes attempt to adapt the traditional Silicon Valley business model of fail fast and fake it until you make it to a tech startup developing a product with public health implications, Carreyrou said. 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. In Bad Blood, Carreyrou states that employees tried to warn Holmes that the Theranos technology was not ready to go live on humans. In essence, it kicked the can down the road, hoping that salvation would come at some point. 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. March 14, 2018. 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. Lets start with the management team, Tom. ", and "What kind of access to senior management does the board have? 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. International Corporate Governance is an essential text for those . They also had the most prominent law firm in the country on a retainer at their beck and call. Elon Musk and Governance post-Tweet at Tesla:http://fcpacompliancereport.com/2018/10/17602/ Businesses need to ensure they remain disciplined, transparent, independent, accountable for their actions, responsible, and fair. The company was criticized for having a board of directors primarily composed of former diplomats and military personnel. The health companys plummet carries valuable lessons for Silicon Valley. We should look into that. Earn your MBA and SM in engineering with this transformative two-year program. How do they repay for the betrayal of the investors trust in them? 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. In some of the emails, the lab director talks about his Hippocratic Oath and how he felt ethically in a very bad spot. much as was the case with Adam Neumann of WeWork or the well-publicised Elizabeth Holmes of Theranos. The Theranos board and federal regulators provided insufficient oversight, Carreyrou noted. The Theranos scandal has dominated headlines, and both fascinated and appalled readers worldwide, since John Carreyrou's shattering report first broke in 2015. When it comes to the pharma trade press there is only one publication that pursues the truth; STAT News. 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 story was supposed to have a very different ending. Here are the main takeaways from Carreyrous discussion of the scandal. 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. 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. However, these changes came too late for Theranos to win the benefit of the doubt when it comes to standards of good governance. Preprint. Theranos was a privately held healthcare technology company founded by then 19-year-old Elizabeth Holmes in 2003. . If you're business-savvy, you're going to appreciate the trials and tribulations, the risks, and the heavy burden that a CEO carries because they work their tails off. Both Holmes and the board were out of their depth.. I really believe, that to a point, mHealth could be the next Theranos. Criticism of leadership or practices was unwelcome. 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. Click below for the podcast. One of the interesting things about Theranos is who was driving the corporation and what support did management have in running an effective corporation. Barring a plea deal, which seems unlikely, Elizabeth Holmes, the founder and CEO of failed blood testing company Theranos, and president/COO Ramesh Balwani are scheduled for trial on multiple counts of criminal fraud in August 2020. Everyone else is doing it and so it must be okay? I get that. There's a lot of evidence that the two of them comprised the executive committee of the board and that there was no other group in charge. The reporter entered Silicon Valley not as a tech businessperson or even a tech reporter but as a health care reporter pursuing a tip. A lack of expertise on the board Theranos' leadership also distinctly lacked the expertise required to develop a sophisticated medical testing technology, Carreyrou said. As Wayne Guay and James Angel discussed in this podcast for Wharton School of Business, Theranos was an example of corporate governance failure that defrauded investors of $700 million. 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. 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. Doesnt this happen often in our own lives? Text. Meanwhile, the power that . 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. (2 minutes) The verdict in the criminal trial of Elizabeth Holmes completes a chapter in the tangled tale of Theranos. The culture at Theranos was toxic, Carreyrou said. Carreyrou recently visited Stanford Graduate School of Business as part of a program organized by the schools Corporations and Society Initiative. In this podcast episode, former general manager Billy King discusses the decision-making process of assembling a team. -0.79 -1.69%. Carreyrou, a Pulitzer Prize-winning Wall Street Journal reporter, chronicled the downfall of Theranos in his book Bad Blood. Subscribe to receive news and updates: It was not unusual for employees and executives to be fired from the company. Elizabeth was intelligent but arrogant. So Amii, with that incredibly long winded introduction, welcome and thank you for taking the time to visit with me today. When an employee asked why, she said it was because when she made a promise to a customer, she intended to keep it. Some companies, as you know, when they find a problem like this, they self-disclose. 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.. She lied about the current state of development for her heralded new technology. 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. Corporate executives are often criticized for doing just that and here we had a company that was burning through cash and spending money on entirely unnecessary expenses. Theranos: Biggest failure of corporate governance in history Elizabeth Holmes built her company Theranos on this invention she named the Edison. Or rather were not allowed to do. There are fourteen new forensic case analyses critically scrutinising governance failures. 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. Take our quiz to find out. I particularly like "If you don't do an appropriate investigation, you're basically inviting the government to do it for you. Enron built layers of financial dependencies in a constant push to raise stock prices and led to the Enron collapse. Another key role that's interesting is the lab director. The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive, Carreyrou said. This was Elizabeth Holmes masterstroke. By then, Theranos and CEO Elizabeth Holmes were accused of making false claims about the blood testing technology. . The board was a whos who of big names including Kissinger and current Secretary of Defense Jim Mattis that boosted Theranoss reputation and Holmess credibility, but was a make-believe board, Carreyrou said, due to Holmess voting control. Theranos leadership also distinctly lacked the expertise required to develop a sophisticated medical testing technology, Carreyrou said. Case Study: Violating Disclosure Laws. A rigorous, hands-on program that prepares adaptive problem solvers for premier finance careers. In larger organizations, a well-structured, independent corporate governance is critical to making sure an organization stays ethical and follows all laws.