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. The SEC determined that the board was misled just like the rest of the other people. Getting a . The Theranos scandal highlights the need for transparent corporate governance. The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive, Carreyrou said. She made the decision to go live with her blood testing devices in Walgreens stores in Northern California and Arizona even though her employees told her that the devices were not quite ready. But Holmes created a structure that was unusual in corporate governance. Take our quiz to find out. Federal prosecutors say the failure rate of the Theranos blood-testing system was 51.3 %. Theranos, at one point valued at $9bn (6.5bn), was once the darling of biotech and Silicon Valley. 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. In essence, it kicked the can down the road, hoping that salvation would come at some point. She always flew in private gulf stream jets. If its banking institutions, of course its banking customers. More navigation items; Post-mortem on Theranoswhere were the controls? She made false claims as to who were her clients. The company hyped itself up and secured massive funding, all the while failing to. He was brought back to Apple for the same reason. Theranos sold a noble vision to its investors and the world. I think the public health component of the criminal charges is going to resonate, Carreyrou said. Tom Fox: There's been a lot written about the Theranos case, so lots that both you and I have digested. The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive. 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,. How does such a politically and militarily connected board not know that these claims are being made to investors? Carreyrous first article appeared in October 2015, and revealed: Theranos did less than 10 percent of its tests on Edison machines.. What is clear is that we need to rethink corporate governance to encompass the interests of all stakeholders - not solely . The board knew this was the investors money she was spending right? She assured her investors that projected revenues would be approximately $100 million, when in fact the revenues in 2014 were closer to $100,000. Theranos founder Elizabeth Holmes epitomized Steve Jobs, which attracted Silicon Valley investors who didnt look too closely at the health companys claims, says John Carreyrou, the Wall Street Journal reporter who investigated Theranos. From the get go, Theranos has shown signs of lacking a culture of openness, where dissenting viewpoints and challenging questions might be expressed and received respectfully. Elizabeth Holmes, founder of Theranos (Credit: Vanity Fair) T heranos, the infamous biotech startup, has been the topic of many conversations in media. 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. ", "Are there regular reports by key employees? Volkswagen's share value plunged 30% in the . By Tom Fox 2018-03-22T09:45:00. 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? They didn't have a general counsel for a long time, until I think it was 2015. The health companys plummet carries valuable lessons for Silicon Valley. She described in a single expression for us the job of a board member as Nose in, hands out. Private security is not cheap and neither is bulletproof glass which is what was installed in Elizabeths office. When Warren started out his early investment partnerships, he had established very stringent rules about what the investors were allowed to do. 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. What we continue to learn about Theranos is that the level of deception was unprecedented and that Homes surely belong in jail. It would not be me if I didnt talk about Warren Buffet while I was talking about corporate governance and ethics. Doesnt this happen often in our own lives? 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. International Corporate Governance is an essential text for those . You can always hire them if you have that sort of a litigation on your hands Id assume. Why does a startup founder need that much security? What were their motivations to continue to lie in bed with Theranos? Can We Save Social Media? So Amii, with that incredibly long winded introduction, welcome and thank you for taking the time to visit with me today. 2004-2010: Theranos thrives with early funding. Corporate governance essentially involves balancing the interests of a companys many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community. How companies use AI to reach customers, innovate, Creating change through collaborative participation. 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. It didn't take long for problems to occur after Theranos was incorporated in 2004. This is a BETA experience. By 2007, Theranos's valuation hit $197m after it raised another $43.2m in early-round funding. . Theranos was valued at $9 billion and Elizabeth Holmes had a net worth of almost $5 billion. Some companies, as you know, when they find a problem like this, they self-disclose. They also had the most prominent law firm in the country on a retainer at their beck and call. 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. It also meant that the board did not have a quorum unless she was present. Frankly, when you've got ethical management in place, they would prefer to have an independent investigation as well. A 12-month program focused on applying the tools of modern data science, optimization and machine learning to solve real-world business problems. In some of the emails, the lab director talks about his Hippocratic Oath and how he felt ethically in a very bad spot. Those tests and Walgreens adoption of Theranos technology in its stores led to $750 million in new funding. Carreyrou, a Pulitzer Prize-winning Wall Street Journal reporter, chronicled the downfall of Theranos in his book Bad Blood. 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. Agnishwar Basu. Tom Fox:That's a great tagline. Understanding the sudden rise and fall of Theranos and, more particularly its founder, Elizabeth Holmes, is a must for every entrepreneur, businessperson, and human. Amii:I think so. Once she managed to convince Larry Ellison, the founder of Oracle to become an investor and board member, there was no looking back. 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. Everyone else is doing it and so it must be okay? The technology simply couldnt deliver as promised. If theres one big thematic lesson from the Theranos scandal, thats it.. Have you looked at the control Tom, in terms of the voting shares? Theranos was incorporated in 2004 but did not hire a compliance officer until 2016, more than twelve years later. I would recommend that CEO's and boards sit down and talk about what their value creation model is, who their stakeholders are. The Theranos issue is just one of the proof that companies need to have a cautious yet. The most powerful expression I took from this class was said by Patty Bedient. (2 minutes) The verdict in the criminal trial of Elizabeth Holmes completes a chapter in the tangled tale of Theranos. 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. When you enter industries where lives are in the balance, you cant really just iterate and debug as youre going. There are fourteen new forensic case analyses critically scrutinising governance failures. 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. Partner Fund purchased 5.6 million shares of Theranos at a price of $17 a share in February 2014. It is a lesson in many things you should look out for and all things you should avoid. Tom Fox:Yeah, Francine McKenna wrote that there were no audited financial statements during this time period. When two would-be whistleblowers told the Theranos board that Holmes had exaggerated revenue projections, the board considered replacing her with an experienced executive. You have to get your product working first.. Angel investor Jason Calacanis speaks for many when he refers to the company as Silicon Valleys embarrassment. Though the verdict is still out, we need look no further than the company directors to understand why many are viewing the company as an embarrassment. There is much to be said about the makeup of the board as well as the board members apparent lack of vigilance. That dream garnered buy-in from numerous leaders in both the business and political fields. Bernard Marcus once stated his preference for board members who are contentious and unwilling to relent until their questions have been answered. Are You Leading with Power Over or Power With? A rigorous, hands-on program that prepares adaptive problem solvers for premier finance careers. Its unclear whether any information that was important got to the board. They need to be the conscience of the company and rein in things that are going to be an unrewarded risk to the company. Tom Fox:So, how does a board begin to take back control? 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. Its getting into new industries, getting into self-driving cars, getting into medicine, Carreyrou said. 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. Keep in mind that one reporter did have the courage to pursue the truth, but what all the other so called journalists? So, prospective board members should ask things like, "What is the senior management and board turnover? How data-savvy are you, really? Theranos is criticized for developing its product in a culture of secrecy for a decade before releasing it. Amii:Well, I advise people to ask before they join a board. Instead, it's my understanding that the lab director was disparaged by Elizabeth, that some pretty rough things were said about him and, frankly, the fact that he'd resigned or how he'd resigned or his concerns never got to the board. 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. 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. 5. Ultimately, it was the accountants, not the scientists, who were left with no choice but to deliver the bitter pill to the Theranos board: The company had even less money than time. Papa John's Pizza:http://fcpacompliancereport.com/2018/07/across-board-episode-21-amii-barnard-bahn/, on a very interesting case study of the oversight role (or lack thereof) of boards. 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? 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. 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. eventually fail to sustain its operations. 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. 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 . John Carreyrou, Carreyrous outside perspective helped him break the story. 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. How about no compliance and ethics officer? In this particular case, it was both. 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. Of course, there's lot of reasons why this lack of a compliance role becomes important later. PDF | On May 16, 2018, Karl J. Lackner and others published The Theranos saga and the consequences | Find, read and cite all the research you need on ResearchGate I hope you will join us again for our next episode of Across the Board. See Theranos founder Elizabeth Holmes charged with $700m fraud. bbc.com. Across the Board is a part of the Compliance Podcast Network. Sports Direct . John Carreyrou, the Wall Street Reporter who broke the story on Holmes and Thernos said She (Homes) is a pathological liar. Mar 2018. The Theranos scandal highlights the need for transparent corporate governance. Complex dependencies that required progressively bigger risks or face complete failure. A systemic failure of corporate governance means the failure of the whole set of regulatory, market, stakeholder, and internal governance. 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. Tom Fox:Right. I really hope that Elizabeth and Sunny Balwani get what they deserve. This is third in a series - let me know what you'd like to hear and I'll do more. 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. Major questions arise with any companys breakdown, Where was the board? 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). Corporate governance, according to Investopedia, is the system of rules, practices and processes by which a firm is directed and controlled. The ones that dont often self-select out. Combine an international MBA with a deep dive into management science. Time selected her as one of its 100 Most Influential People. Theranos attracted an all-star board of directors. So far Theranos has raised about $750 million. When misconceptions like this propagate within a company and its leadership, it is the responsibility of the board of directors to provide necessary oversight. This Enron case study presents our own analysis of the spectacular rise and fall of Enron. I came at it from the medical perspective with my East Coast skepticism.. 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. Some of the systems that would have been in place if they'd had an effective compliance and ethics program, would have brought a lot of these issues to light a lot earlier. 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. 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. Home Depots co-founder 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. In reality, the company was running its tests on commercial machines produced by a German company and diluting blood samples to make it work, according to John Carreyrou, the Wall Street Journal investigative reporter who firstbroke the Theranos story in 2015. 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 . 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. Since corporate governance also provides the framework for attaining a companys objectives, it encompasses practically every sphere of management, from action plans andinternal controlsto performance measurement and corporatedisclosure. Homes company Theranos clearly lacked an effective corporate governance that balanced Homes aspirations with the transparency needed for customers, suppliers, government, financiers, and the community. | Reuters/Brendan McDermid Customers called and complained about faulty blood results that led these families to run to the Emergency Room. When, in fact only about a dozen or so tests were done. Thanks for the positive feedback. If the company had been set up properly around compliance, red flags and had an ethical safety net, they would have looked into this. Can also assign Skeet article on Snap IPO to compare similar issues in another company. Why does a startup need the best law firm in the country representing them? 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. She said nothing concrete. 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. So, yeah, could we just agree lots of red flags? In this episode, we take up the failures of the Theranos Board of Directors. 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. 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. Theranos' board had very limited access to people and information. And you really need to think about it when you're in a highly regulated environment, like blood testing. Tom Fox:Hello everyone. Theranos also exploited a regulatory loophole: Laboratory-developed tests like those the business offered didnt (and still dont) fall under the exclusive purview of the Food and Drug Administration or other health care-focused agencies. In my consulting work with company boards and CEO's, we work together to build healthy board governance and executive leadership practices. High-performing health care teams focus on functional and cultural change simultaneously, while low-performing teams focus on just one type of change. First, Theronos put powerhouse lawyer David Boies on to its Board of Directors to help navigate the current crisis. Silicon Valley was most certainly not lacking on legal talent to represent startups. Elizabeth Holmes built her company Theranos on this invention she named the Edison. 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. She had been on Hilary Clinton's staff and had done some litigation, but she had no healthcare expertise. Theranos is a Silicon Valley startup once valued at as much as $9 billion. He wants board members that are 1) business-savvy, 2) shareholder oriented, and 3) have a special interest in the company. 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. So why was there no push for a compliance officer at an earlier time? For Holmes, the dog represented the journey that lay ahead for Theranos. By then, Theranos and CEO Elizabeth Holmes were accused of making false claims about the blood testing technology. In conclusion, if you ever want to serve on a board of an organization, you should read this book. Theranos founder Elizabeth Holmes charged with $700m fraud, 5 Areas Collegiate Athletics Can Work on to Improve Their Cultures. Elizabeth was intelligent but arrogant. 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. 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. I wonder why they're leaving the hottest company in the world that just won all these awards for innovation.". 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. So, technically, if you just look at it straight on with that, the board is actually powerless. What we continue to learn about Theranos is that the level of deception was unprecedented and that Homes surely belong in jail. Any employees that raised ethical issues were fired and no questions were allowed. 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. It is never too late to mitigate damage and in recent weeks, Theranos has made at least a few strategic moves. 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. Nov. 18, 2022. A miniaturized blood analyzer that would disrupt the $60 billion lab testing industry dominated by giants LabCorp and Quest Diagnostics. Amii:Warren Buffet has three criteria for board members. 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. Is it asking these series of questions and becoming perhaps more strident or more demanding or aggressive? 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. In the face of corruption in India, wise business leaders must decide what is negotiable and what isnt. It is very easy to notice here how none of these people have any affiliation to medical science.