This is Tom Fox again, I hope you've enjoyed this episode of Across the Board. In conclusion, if you ever want to serve on a board of an organization, you should read this book. When expanded it provides a list of search options that will switch the search inputs to match the current selection. I particularly like "If you don't do an appropriate investigation, you're basically inviting the government to do it for you. See all articles by Lawrence J. Trautman . The Theranos board was very carefully crafted. 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. Mar 2018. Walgreens consultant for the new clinics advised his client to not to proceed working with the in-store clinics, executives at Walgreens dismissed his statement and ignored his concerns. 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. When Walgreens, one of Theranos large clients that spent millions of dollars to set up clinics to showcase the new technology, asked to see the lab with the new technology, Holmes denied them such permission. www.barnardbahn.com@amiibb. Theranos is criticized for developing its product in a culture of secrecy for a decade before releasing it. NameEmail*, Posted by The Bart Organization, anInternet Marketing company, Your email address will not be published. Amii:Great question. For example, Home Depot requires directors to regularly visit stores and engage in the operational review of stores throughout the year.. The Theranos issue is just one of the proof that companies need to have a cautious yet. 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. Volkswagen's share value plunged 30% in the . 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. 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 . EBAY INC. 45.98. 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. ensure responsible corporate governance both from a CSR and a good governance perspective. The company hyped itself up and secured massive funding, all the while failing to expose its technology to thorough testing and peer review. The only problem? 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. That should have been a big red flag to the board to investigate, "Gosh why is our lab director resigning? In my consulting work with company boards and CEO's, we work together to build healthy board governance and executive leadership practices. As lawmakers grill Facebook CEO Mark Zuckerberg this week, it's clear many are wrestling with whether and how the government should regulate tech . When, in fact only about a dozen or so tests were done. With real journalists, like Ed Silverman, they continue to ask the hard questions that too many seem to ignore. If you look at those two people, you've got a smart 19 year old woman who went to college for a year and then dropped out, who had no background in medical or healthcare. 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. But the suspect science behind Theranos and its paranoid, secretive culture of leadership eventually caught up to the business, leading to criminal charges. Jan. 6, 2022 5:30 am ET. I just finished reading Bad Blood by John Carreyrou, the Pulitzer Prize winning Wall Street Journal investigative reporter. A doctoral program that produces outstanding scholars who are leading in their fields of research. So, thank you very much! 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. 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. Today I have back with me, podcast favorite, Amii Barnard-Bahn. We touch upon a wide variety of institutional corporate governance controls and other failures of the company which led to its demise. Theranos is the perfect example however of what happens when 1) A board does not do its job, and/or 2) A board is incapable of doing its job. First, we review the stakeholder approach to corporate governance as an alternative to the shareholder-focused conception of the firm. That it was just a prestige board designed to help get investor money for Theranos, which it did quite well. As company founder Elizabeth Holmes is sentenced to over eleven years in prison and TV adaptation The Dropout earns star Amanda Seyfried an Emmy, we reveal everything you need to know . But Holmes created a structure that was unusual in corporate governance. 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 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. Some companies, as you know, when they find a problem like this, they self-disclose. A lack of expertise on the board Theranos' leadership also distinctly lacked the expertise required to develop a sophisticated medical testing technology, Carreyrou said. I wonder why they're leaving the hottest company in the world that just won all these awards for innovation.". Theres a limit to that playbook, and it doesnt transfer well to the realm of medicine. A miniaturized blood analyzer that would disrupt. Elizabeth Holmes is not Bernie Madoff, Carreyrou said. Of course, in a highly regulated industry like healthcare or financial services, board members need to be aware that there's a greater degree of scrutiny than in other industries where it might not be as high. 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. In this case, the health of patients was not taken into account. In a court filing, prosecutors argue Holmes "likely benefitted," from the loss of the LIS. That made its founder and CEO Elizabeth Holmes, now 32, the richest self-made woman in America. By February 2015 the Theranos fairytale was about to unravel publicly. Its getting into new industries, getting into self-driving cars, getting into medicine, Carreyrou said. How transparent is it? Agnishwar Basu. The company hyped itself up and secured massive funding, all the while failing to. The board has an oversight responsibility. 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. 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. 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. And then you have an older gentleman who had no training in biosciences or medical devices, had business and IT experience in Microsoft and Lotus software, and then became president when he joined in 2009. The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive, Carreyrou said. Corporate Governance failures have the capability of inflicting the deadliest attack on Investors' Trust. I really hope that Elizabeth and Sunny Balwani get what they deserve. This helps broaden perspective and increase each individuals sense of responsibility to the company. The investors in the company were mostly very wealthy individuals and the lost money is a blip in their financial ecosystem so they might not care. She has shaped many company cultures and strategic initiatives as an executive at Fortune 20 companies, smaller business and non-profits, and leading multiple functions, including human resources, legal, IT, communications, and compliance. Through intellectual rigor and experiential learning, this full-time, two-year MBA program develops leaders who make a difference in the world. Take our quiz to find out. 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. How companies use AI to reach customers, innovate, Creating change through collaborative participation. One of the interesting things about Theranos is who was driving the corporation and what support did management have in running an effective corporation. It is also an example of how important it is to. A non-degree, customizable program for mid-career professionals. This is Tom Fox and I'd like to welcome you to episode Across the Board, a podcast that focuses on corporate governance, boards of directors, and management of strategic risk. 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? If you have any questions about any of the topics we discussed, you can reach me at TFox@tfoxlaw.com. Any employees that raised ethical issues were fired and no questions were allowed. Theranos sold a noble vision to its investors and the world. For the media, Elizabeth Holmes story proved irresistible: a bright young woman revolutionizing blood testing, in Silicon Valley no less. Getting a . More recent duties: Strategy development (a debate point), talent management, and investor relations. 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.. In July of that year, the company . 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 . As she explained to colleagues at the company's headquarters, in Palo Alto, he was named after the world-famous sled dog . 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. 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. International Corporate Governance is an essential text for those . 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. 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. Tom Fox:That's a great tagline. This is a BETA experience. A rigorous, hands-on program that prepares adaptive problem solvers for premier finance careers. 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. 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. While diversification of portfolio was an indisputable for Graham, Warren would put most of his money on a single bet if the margin of safety was high enough (More on margin of safety in a future post). They've got a lot of pressure and the board needs to have a harmonious enough working relationship with the CEO. I represents clients like Nike in the recent Michael Avenatti fiasco. 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. In larger organizations, a well-structured, independent corporate governance is critical to making sure an organization stays ethical and follows all laws. It didn't take long for problems to occur after Theranos was incorporated in 2004. She chose to be dishonest with investors and . Tom Fox:Right. 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. I think the public health component of the criminal charges is going to resonate, Carreyrou said. The fishy excuse provided by Holmes was quickly and carelessly accepted and not questioned. 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. Theranos, a fast-growing private company intent on trailblazing a new technology, set out to attain ambitious goals. It's almost a situation of where to begin, but with regard to the board of directors, where would you suggest we begin? strong foundation in establishing corporate governance or else the company will. 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 . 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. Tom Fox: There's been a lot written about the Theranos case, so lots that both you and I have digested. Elizabeth Holmes built her company Theranos on this invention she named the Edison. The reporter entered Silicon Valley not as a tech businessperson or even a tech reporter but as a health care reporter pursuing a tip. | Reuters/Brendan McDermid, 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. He wants board members that are 1) business-savvy, 2) shareholder oriented, and 3) have a special interest in the company. If you start from that place, you're going to avoid a lot of problems. Businesses need to ensure they remain disciplined, transparent, independent, accountable for their actions, responsible, and fair. ", and "What kind of access to senior management does the board have? Are You Leading with Power Over or Power With? Private security is not cheap and neither is bulletproof glass which is what was installed in Elizabeths office. Assign the Jones Unicorn Governance Trap article, and the Ramsey, Business Insider articles to be read prior to class. She talked about her fear of needles and blood. 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. Rashmi Airansmission is to share the need for ethical vigilance and to inspire you to make good ethical choices in all areas of your life. The health companys plummet carries valuable lessons for Silicon Valley. The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive. much as was the case with Adam Neumann of WeWork or the well-publicised Elizabeth Holmes of Theranos. But there was apparently no one on the board to point out that this approach doesn't work very well for technology startups. Companies headed by overconfident, self-centered risk-takers are more likely to end up in court. For Holmes, the dog represented the journey that lay ahead for Theranos. 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. Or once you've lost control, is that it? ", "Who are in the key management roles and what are their qualifications and how's it going? Why does a startup founder need that much security? Holmes did nothing to deal with the complaints of customers or issues raised by employees. 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. More navigation items; Post-mortem on Theranoswhere were the controls? Listen to article. Her words and analogies actually made no sense if you paid attention to what she was saying. Image 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. Zenefits did this, and then they fixed it and then they started up again. The SEC determined that the board was misled just like the rest of the other people. A systemic failure of corporate governance means the failure of the whole set of regulatory, market, stakeholder, and internal governance. A new study concludes that successful tech firms are often discovered and not planned., Navigating Corruption: A Case Study from India. 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. And she wouldnt let anything get in the way of that. However, how do they get penalized for not doing their jobs? Thanks for the positive feedback. 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. 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. The corporate culture was one of fear and secrecy, not one of transparency and commitment to a conversation around compliance. The after-effects of any Corporate Governance failures is a resulting wiping-off in billions of stock value. Rather, she says it shows what investigative reporting can do. 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. Conclusion. The Theranos scandal has dominated headlines, and both fascinated and appalled readers worldwide, since John Carreyrou's shattering report first broke in 2015. 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. As a consequence, the fact of the failing technology was able to be kept secret, which fostered a negative culture of mistrust and secrecy. 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. The most powerful expression I took from this class was said by Patty Bedient. Potentially they would have looked into the lab issues, found serious problems, and they would have potentially shut down the lab. It is a lesson in many things you should look out for and all things you should avoid. A vision to give normal people the ability to test and access their own health data by making blood tests cheap and accessible. The Theranos board and federal regulators provided insufficient oversight, Carreyrou noted. Holmes promised that more than two hundred tests would be conducted with her new technology. This 20-month MBA program equips experienced executives to enhance their impact on their organizations and the world. 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. This could have been an opportunity for that to happen. The technology simply couldnt deliver as promised. Theranos attracted an all-star board of directors. Steve Jobs while demanding and difficult to work with at times, was extremely focused and aware of the needs of his customer. But, somehow, Holmes was able to get away with it. Usually there's at least a general counsel at some point to serve in a dual-hatted role. The Theranos board and federal regulators provided insufficient oversight, Carreyrou noted. Theranosa privately held company valued at $9 billionhas advertised its proprietary medical technology as being transformative, enabling laboratories to run scores of medical tests with merely a finger-prick of blood. As a matter of fact, any time someone spoke up about their disagreements with the decisions being made, they were fired. Im not sure what law you could pass that would catch someone intent on lying, Carreyrou said. They didn't have a general counsel for a long time, until I think it was 2015. But theres a line between that and hyping so much you cross over into outright lies, Carreyrou said such as when Holmes misrepresented the sources of finger-stick tests, most of which were done on Siemens machines rather than her companys. 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. But what we also are learning is that the media, for the most part, did not do their job in uncovering the massive fraud and instead decided to promote the hell out of Ms Holmes. Across the Board is a part of the Compliance Podcast Network. "In fact, the . That is about where the similarities ceased. The board knew this was the investors money she was spending right? That dream garnered buy-in from numerous leaders in both the business and political fields. A full-time MBA program for mid-career leaders eager to dedicate one year of discovery for a lifetime of impact. 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. 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. It also meant that the board did not have a quorum unless she was present. When Warren started out his early investment partnerships, he had established very stringent rules about what the investors were allowed to do. Just three years later, in 2010, the company was valued at $1bn. Notably, Boies was already connected to Theranos (as an . Attempts at curbing these failures in the form of more stringent legislation and regulation does not appear to have had the desired impact. In this podcast episode, former general manager Billy King discusses the decision-making process of assembling a team. Theranos is a Silicon Valley startup once valued at as much as $9 billion. Another key role that's interesting is the lab director. Theranos, at one point valued at $9bn (6.5bn), was once the darling of biotech and Silicon Valley. 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. 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. Discussion questions about corporate governance The reason? Commentary: Absconding CEOs show how corporate governance gaps can be better plugged. Tom Fox:Well, Amii, unfortunately we're near the end of our time, but I hope that companies will certainly take your message to heart and, more importantly, I hope you will continue to spread this message. A lot of people have commented on that that was the case here. 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. Tom Fox:Hello everyone. Tom Fox:Yeah. She had been on Hilary Clinton's staff and had done some litigation, but she had no healthcare expertise. Elizabeth Holmes, founder of Theranos (Credit: Vanity Fair) T heranos, the infamous biotech startup, has been the topic of many conversations in media. 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. 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. After high-profile startup failures like FTX or Theranos, investors, employees, customers, and policymakers all ask what might have been done differently to ensure accountability and . Usually this means finding a new CEO or voting on the right board member to take over. In 2018, the Securities and Exchange Commission (SEC) charged Theranos, Holmes, and former president Ramesh Balwani with massive fraud. 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. Keep in mind that one reporter did have the courage to pursue the truth, but what all the other so called journalists? Silicon Valley was most certainly not lacking on legal talent to represent startups. 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. Or rather were not allowed to do. What is clear is that we need to rethink corporate governance to encompass the interests of all stakeholders - not solely . The firm which was once valued at $9 billion . Why did no-one ask this question? He was brought back to Apple for the same reason. Have you looked at the control Tom, in terms of the voting shares? What we continue to learn about Theranos is that the level of deception was unprecedented and that Homes surely belong in jail. Meanwhile, the power that . Boies Schiller Flexner LLP is not your run of the mill law firm. 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. This begins by ensuring that the right people are on board. 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. 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.