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. Elizabeth Holmes built her company Theranos on this invention she named the Edison. A lack of expertise on the board Theranos' leadership also distinctly lacked the expertise required to develop a sophisticated medical testing technology, Carreyrou said. Meanwhile, the power that . Or its new and shiny and seems clean, so all is good with the product or process or company or person. These were speakers that were there to talk about corporate governance. Here are the main takeaways from Carreyrous discussion of the scandal. While Warren acknowledged that he learned a lot from his mentor Ben Graham, he also admitted he was different. 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. 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. When expanded it provides a list of search options that will switch the search inputs to match the current selection. As a consequence, the fact of the failing technology was able to be kept secret, which fostered a negative culture of mistrust and secrecy. 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. Tom Fox:Yeah, Francine McKenna wrote that there were no audited financial statements during this time period. While a lot of tech companies maintain secrecy around their products, this was at a different level. 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. See Theranos founder Elizabeth Holmes charged with $700m fraud. bbc.com. They decided the company needed to be led by an adult, Carreyrou said. You might argue that they are in fact looking out for the investors by protecting the intellectual property but you dont necessarily need a firm on a retainer for that. This was Elizabeth Holmes masterstroke. 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. strong foundation in establishing corporate governance or else the company will. 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. 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. As we say in our business ethics examples homepage introducing . He spoke before an audience in conversation with Michael Callahan, executive director of the Rock Center for Corporate Governance, which cosponsored the event. It is alleged that Holmes saw the board as a 'necessary burden' that would lead to further funding and an increase in Theranos' profile. She is a strategic advisor to boards of directors and executive coach to many C-Suite members. If convicted, each faces up to 20 years in prison. He wants board members that are 1) business-savvy, 2) shareholder oriented, and 3) have a special interest in the company. I came at it from the medical perspective with my East Coast skepticism.. He was brought back to Apple for the same reason. Elizabeth on the other hand, failed to even recognize who her actual customer was. 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. 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. It is our obligation to commit to paying attention to the red flags, beware of the risks, and make wise choices after engaging in ethical decision-making. 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. In Bad Blood, Carreyrou states that employees tried to warn Holmes that the Theranos technology was not ready to go live on humans. Nov. 18, 2022. 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,. Conclusion. A 12-month program focused on applying the tools of modern data science, optimization and machine learning to solve real-world business problems. 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. A full-time MBA program for mid-career leaders eager to dedicate one year of discovery for a lifetime of impact. 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). 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. When it comes to the pharma trade press there is only one publication that pursues the truth; STAT News. Theranos sold a noble vision to its investors and the world. Theranos, a fast-growing private company intent on trailblazing a new technology, set out to attain ambitious goals. 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. Amii:Great question. 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. March 19, 2018. This question will be approached in the following way. A rigorous, hands-on program that prepares adaptive problem solvers for premier finance careers. And you really need to think about it when you're in a highly regulated environment, like blood testing. 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. I would recommend that CEO's and boards sit down and talk about what their value creation model is, who their stakeholders are. 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. Or once you've lost control, is that it? Holmes was seen as the darling of Silicon Valley. 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. 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. A non-degree, customizable program for mid-career professionals. Carreyrou, a Pulitzer Prize-winning Wall Street Journal reporter, chronicled the downfall of Theranos in his book Bad Blood. Attempts at curbing these failures in the form of more stringent legislation and regulation does not appear to have had the desired impact. 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. Theres a limit to that playbook, and it doesnt transfer well to the realm of medicine. Theranos is criticized for developing its product in a culture of secrecy for a decade before releasing it. That it was just a prestige board designed to help get investor money for Theranos, which it did quite well. This is a BETA experience. . Amii:Yeah, and then one near and dear to our hearts Tom. The whole notion that she had dropped out of Stanford without any medical training, any science training really to speak of, and suddenly revolutionized a field of medicine from my experience reporting on health care, thats not really how these things happen, he said. A systemic failure of corporate governance means the failure of the whole set of regulatory, market, stakeholder, and internal governance. This 20-month MBA program equips experienced executives to enhance their impact on their organizations and the world. This button displays the currently selected search type. Narcissistic CEOs Can Mean Big Legal Bills, Big-Data Initiative in Intl. Holmes' company raised $6.9m in early funding soon after its foundation, gaining a $30m valuation. I know you will enjoy it. 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? Earn your MBA and SM in engineering with this transformative two-year program. By Erin Griffith. It clears their name, it shows a good faith effort to comply and not to do anything inappropriate. She owned 55% of the shares of Theranos, but more importantly she had stock that gave her 100 votes per share of Theranos stock. Across the Board is a part of the Compliance Podcast Network. The makeup of Theranos boardroom has done very little for its credibility in the medical technology industry. The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive, Carreyrou said. -0.79 -1.69%. First, we review the stakeholder approach to corporate governance as an alternative to the shareholder-focused conception of the firm. NameEmail*, Posted by The Bart Organization, anInternet Marketing company, Your email address will not be published. As she explained to colleagues at the company's headquarters, in Palo Alto, he was named after the world-famous sled dog . We touch upon a wide variety of institutional corporate governance controls and other failures of the company. The Theranos board and federal regulators provided insufficient oversight, Carreyrou noted. High-performing health care teams focus on functional and cultural change simultaneously, while low-performing teams focus on just one type of change. Theranos and FTX show a broad failure by investors to ask enough questions before handing over cash, . This reminded me of an instance from Warrens biography The Snowball by Alice Schroeder. In a court filing, prosecutors argue Holmes "likely benefitted," from the loss of the LIS. Through intellectual rigor and experiential learning, this full-time, two-year MBA program develops leaders who make a difference in the world. Combine an international MBA with a deep dive into management science. Holmes did nothing to deal with the complaints of customers or issues raised by employees. 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? The company hyped itself up and secured massive funding, all the while failing to expose its technology to thorough testing and peer review. Show abstract. The company hyped itself up and secured massive funding, all the while failing to. The issues that Theranos faced were repeatedly raised internally by employees. 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. International Corporate Governance is an essential text for those . Elizabeths number 2 and boyfriend Sunny threw them out in a fit of rage. Tom Fox:Yeah. 35 Pages Posted: 28 Mar 2022 Last revised: 14 Jan 2023. She used phrases and words that had a magical ring to them. 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. When an employee asked why, she said it was because when she made a promise to a customer, she intended to keep it. ", "What's the CEO's interaction with the board? 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. What is clear is that we need to rethink corporate governance to encompass the interests of all stakeholders - not solely . Tom Fox:In addition to no CFO, none of the investors, none of the board had the benefit of audited financial statements. If theres one big thematic lesson from the Theranos scandal, thats it.. Ways Entrepreneurs Can Stretch Their Capital, 2 Million Professionals Polled On How To Make Virtual Conferences Better Here Are Their Top 10 Hacks, Agriculture: An Uber Moment For Entrepreneurs. The health companys plummet carries valuable lessons for Silicon Valley. Carreyrous first article appeared in October 2015, and revealed: Theranos did less than 10 percent of its tests on Edison machines.. 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. I hope even more that the board members dont just get to move on. But the suspect science behind Theranos and its paranoid, secretive culture of leadership eventually caught up to the business, leading to criminal charges. So, prospective board members should ask things like, "What is the senior management and board turnover? So, technically, if you just look at it straight on with that, the board is actually powerless. If its banking institutions, of course its banking customers. 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? In this case, the health of patients was not taken into account. Those tests and Walgreens adoption of Theranos technology in its stores led to $750 million in new funding. You can always hire them if you have that sort of a litigation on your hands Id assume. It's almost a situation of where to begin, but with regard to the board of directors, where would you suggest we begin? 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. I particularly like "If you don't do an appropriate investigation, you're basically inviting the government to do it for you. Partner Fund purchased 5.6 million shares of Theranos at a price of $17 a share in February 2014. The fishy excuse provided by Holmes was quickly and carelessly accepted and not questioned. In October 2015, a Wall Street Journal investigation exposed Silicon Valley startup Theranos for making fraudulent claims about its breakthrough advancements in blood-testing technologies. So, yeah, could we just agree lots of red flags? She assured her investors that projected revenues would be approximately $100 million, when in fact the revenues in 2014 were closer to $100,000. But Holmes created a structure that was unusual in corporate governance. Tom Fox:Hello everyone. Text. How data-savvy are you, really? In the case of Theranos, we are seeing what can happen when such a board does not exist. 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. One of the most epic failures in corporate governance in the annals of American capitalism. Furthermore, Theranos maintained extreme secrecy in the name of protecting their proprietary technology. She talked about her fear of needles and blood. 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. 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. As I read through the book, I couldnt stop thinking about the business leaders Id had an opportunity to meet in person that served on boards of companies like Suncor Energy, Berkshire Hathaway and Honeywell while I was in business school. Companies headed by overconfident, self-centered risk-takers are more likely to end up in court. However, these changes came too late for Theranos to win the benefit of the doubt when it comes to standards of good governance. That should be the elephant in the room, for boards and CEO's to really sit down and think about, "We've got this great idea, we've got this great business model. 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 think they really did try to develop a technology, they just never got to the point where it worked, he said. The reason? What Makes Some Health Care Teams More Effective Than Others? What we continue to learn about Theranos is that the level of deception was unprecedented and that Homes surely belong in jail. The most powerful expression I took from this class was said by Patty Bedient. Quote That should have been a big red flag to the board to investigate, "Gosh why is our lab director resigning? 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. Essentially, the board is the CEOs boss figuratively at least. Its unclear whether any information that was important got to the board. Soltani (2014) argued that "the ethical dilemma is coupled with ineffective boards, inefficient corporate governance and control mechanisms moreover, dysfunctional management behaviour" (p. 251). 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. They didn't have a general counsel for a long time, until I think it was 2015. She chose to be dishonest with investors and . It needs to be proportionate. 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. This board took her at her word, he added. Carreyrou recently visited Stanford Graduate School of Business as part of a program organized by the schools Corporations and Society Initiative. Businesses need to ensure they remain disciplined, transparent, independent, accountable for their actions, responsible, and fair. | Reuters/Brendan McDermid. Corporate Governance Failures on the Theranos Board Through these transactions, Lehman Brothers managed to reduce leverage on the right-hand side of the balance sheet and, at the same time, reduce assets some of them undesirable on the left-hand side. The Indian market-regulator SEBI has taken significant steps in ensuring sufficient controls to manage Corporate Governance standards. 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. 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. Boies Schiller Flexner LLP is not your run of the mill law firm. She made false claims as to who were her clients. eventually fail to sustain its operations. Bring a business perspective to your technical and quantitative expertise with a bachelors degree in management, business analytics, or finance. 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?" I may just have to name the episode that. At the end of the day, the difference between an effective board and a failing board boils down to whether or not there is a social system of respect, trust and candor among members of management. She wore black turtlenecks and was extremely stubborn about her vision. Bad corporate governance could cripple even the best businesses. Usually this means finding a new CEO or voting on the right board member to take over. 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. Of course, Theranos was actively deceiving regulators, too. Keep in mind that one reporter did have the courage to pursue the truth, but what all the other so called journalists? I represents clients like Nike in the recent Michael Avenatti fiasco. What she meant is that as a board member of an organization, you represented the investors of the company. Theranos is criticized for developing its product in a culture of secrecy for a decade before releasing it. And then they had no CFO until the final year. We should look into that. Tom Fox:That's a great tagline. The Theranos board was very carefully crafted. Image She just went full force ahead. Federal prosecutors say the failure rate of the Theranos blood-testing system was 51.3 %. When misconceptions like this propagate within a company and its leadership, it is the responsibility of the board of directors to provide necessary oversight. But, it is also a reminder that business owners often make bad decisions when faced with certain pressures that are perceived to be rigid. 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. . Time selected her as one of its 100 Most Influential People. She wanted to be rich and famous. For Holmes, the dog represented the journey that lay ahead for Theranos. That made its founder and CEO Elizabeth Holmes, now 32, the richest self-made woman in America. 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. I wonder why they're leaving the hottest company in the world that just won all these awards for innovation.". 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. See all articles by Lawrence J. Trautman . 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. 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. What Silicon Valley Can Learn from the Theranos Fraud Case. www.Knowledge.wharton.penn.edu. The insolvency of the company attributed to the failure of its governance system that led to the inefficiency of the venture. In essence, it kicked the can down the road, hoping that salvation would come at some point. Rather, she says it shows what investigative reporting can do. Theranos is a Silicon Valley startup once valued at as much as $9 billion. 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. The device didnt work properly and produced inaccurate results even though the company publicly claimed by 2013 that it could perform hundreds of tests and had started deploying it in Walgreens stores in California and Arizona to raise funds. 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. In my consulting work with company boards and CEO's, we work together to build healthy board governance and executive leadership practices. They also could have ordered an independent investigation. AICPA, audit standards, corporate governance, deontology, entrepreneurship, fake-it-till-you-make-it, fraud triangle, Elizabeth Holmes, shareholder rights, Theranos, utilitarianism, venture capital, virtue ethics. When Warren started out his early investment partnerships, he had established very stringent rules about what the investors were allowed to do. They need to be shareholder oriented, they need to watch out for shareholder value, but then they also should have a special interest in the company. Amii is a frequent author and speaker on leadership, thriving workplace cultures, and reputation risk management. Theranos, Holmes and former company president Sunny Balwani were charged with fraud by the SEC in 2018. 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. Steve Jobs while demanding and difficult to work with at times, was extremely focused and aware of the needs of his customer.