(2 minutes) The verdict in the criminal trial of Elizabeth Holmes completes a chapter in the tangled tale of Theranos. They decided the company needed to be led by an adult, Carreyrou said. A lack of expertise on the board Theranos' leadership also distinctly lacked the expertise required to develop a sophisticated medical testing technology, Carreyrou said. 5. eventually fail to sustain its operations. 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. This question will be approached in the following way. In this particular case, it was both. He wants board members that are 1) business-savvy, 2) shareholder oriented, and 3) have a special interest in the company. In this podcast episode, former general manager Billy King discusses the decision-making process of assembling a team. No one was truly policing the businesss processes or offerings. 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. Here are two others: A miniaturized blood analyzer that would disrupt. The SEC determined that the board was misled just like the rest of the other people. 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. How transparent is it? 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. 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. Or its new and shiny and seems clean, so all is good with the product or process or company or person. Another key role that's interesting is the lab director. ", and "What kind of access to senior management does the board have? | Reuters/Brendan McDermid What we continue to learn about Theranos is that the level of deception was unprecedented and that Homes surely belong in jail. The evidence needed to back Theranos claims is now absent, rendering the company even more suspect. ", "Are there regular reports by key employees? The Transition of Accounting Principles: A Survey of the Existing Literature. In 2018, the Securities and Exchange Commission (SEC) charged Theranos, Holmes, and former president Ramesh Balwani with massive fraud. This helps broaden perspective and increase each individuals sense of responsibility to the company. Tom Fox:Yeah. Meanwhile, the power that . 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. 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. 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. Elizabeth Holmes, founder of Theranos (Credit: Vanity Fair) T heranos, the infamous biotech startup, has been the topic of many conversations in media. Her words and analogies actually made no sense if you paid attention to what she was saying. 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. See all articles by Lawrence J. Trautman . What Makes Some Health Care Teams More Effective Than Others? As a matter of fact, any time someone spoke up about their disagreements with the decisions being made, they were fired. 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. 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. Preprint. Now, hopefully this is not the case for people who are on this call and who are in corporations or serving on boards. When, in fact only about a dozen or so tests were done. 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. What Silicon Valley Can Learn from the Theranos Fraud Case. www.Knowledge.wharton.penn.edu. She was the queen of networking and managed to propagate a grandiose vision that started with a single influential connection in Tim Draper and a rich genetic lineage to a fraud valued at $700 million. The ones that dont often self-select out. A special opportunity for partner and affiliate schools only. When expanded it provides a list of search options that will switch the search inputs to match the current selection. Nov. 18, 2022. 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. Attribution It also meant that the board did not have a quorum unless she was present. Once she managed to convince Larry Ellison, the founder of Oracle to become an investor and board member, there was no looking back. 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. Summary. We've certainly seen that happen and that's what, as compliance officers, we would advise our corporations to do in the case where there might be some questions around whether management has acted appropriately. In October 2015, a Wall Street Journal investigation exposed Silicon Valley startup Theranos for making fraudulent claims about its breakthrough advancements in blood-testing technologies. This begins by ensuring that the right people are on board. Non-degree programs for senior executives and high-potential managers. The Theranos scandal highlights the need for transparent corporate governance. 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. This would suggest that, as ridiculous as Theranos boardroom may appear, the bigger mistake was perhaps failing to create a system of openness. Were they just purposefully ignorant or were they just that blind to the charisma of Elizabeth? Is it asking these series of questions and becoming perhaps more strident or more demanding or aggressive? Would-be whistleblowers were threatened with lawsuits. If you start from that place, you're going to avoid a lot of problems. March 19, 2018. What types of questions should a board start asking and how early should they start asking those questions? ensure responsible corporate governance both from a CSR and a good governance perspective. Theranos: Biggest failure of corporate governance in history Elizabeth Holmes built her company Theranos on this invention she named the Edison. If convicted, each faces up to 20 years in prison. At the close of the round in April 2015, the company had a valuation of $9 billion. But it failed to acknowledge that this vision made patients their ultimate customer. Corporate governance essentially involves balancing the interests of a companys many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community. Theranos leadership also distinctly lacked the expertise required to develop a sophisticated medical testing technology, Carreyrou said. She specializes in accelerating the success of executives and partners with leaders and teams to help scale their businesses. 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. Now it's under civil and criminal investigation for defrauding investors. Theranos has been criticized for the makeup of its investors and board of directors which featured heavy-hitting investors such as media mogul Rupert Murdoch and former secretary of state Henry. What fast-growing startups and their boards must understand about building culture. 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. In the case of Theranos, we are seeing what can happen when such a board does not exist. 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. 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. So, technically, if you just look at it straight on with that, the board is actually powerless. 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. 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. In a court filing, prosecutors argue Holmes "likely benefitted," from the loss of the LIS. Theranos's fall from grace is one large-scale compliance failure. So why was there no push for a compliance officer at an earlier time? That is about where the similarities ceased. They've got a lot of pressure and the board needs to have a harmonious enough working relationship with the CEO. Tom Fox:Right. 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. 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. 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. The company was criticized for having a board of directorsprimarily composed of former diplomats and military personnel. Theranos was incorporated in 2004 but did not hire a compliance officer until 2016, more than twelve years later. The company hyped itself up and secured massive funding, all the while failing to expose its technology to thorough testing and peer review. Recently, I have been fascinated with the emergence of Silicon Valleys rising star, Theranos, and its subsequent federal investigation and decline. ", "Who are in the key management roles and what are their qualifications and how's it going? The other red flag was Elizabeths security detail. Why did no-one ask this question? Theranos founder Elizabeth Holmes charged with $700m fraud, 5 Areas Collegiate Athletics Can Work on to Improve Their Cultures. 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. High-performing health care teams focus on functional and cultural change simultaneously, while low-performing teams focus on just one type of change. Corporate Governance failures have the capability of inflicting the deadliest attack on Investors' Trust. One of the most epic failures in corporate governance in the annals of American capitalism. 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. When expanded it provides a list of search options that will switch the search inputs to match the current selection. You cant do that in medicine, especially with a blood testing machine that patients and doctors rely on for very important medical decisions, Carreyrou said. This button displays the currently selected search type. I think they really did try to develop a technology, they just never got to the point where it worked, he said. The Theranos board and federal regulators provided insufficient oversight, Carreyrou noted. In conclusion, if you ever want to serve on a board of an organization, you should read this book. They briefly had a CFO very early on in the company. More navigation items; Post-mortem on Theranoswhere were the controls? Larry . Earn your MBA and SM in engineering with this transformative two-year program. 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. It would not be me if I didnt talk about Warren Buffet while I was talking about corporate governance and ethics. A systemic failure of corporate governance means the failure of the whole set of regulatory, market, stakeholder, and internal governance. She always flew in private gulf stream jets. They want to look for rewarded risk. The most effective boards are also the ones where dissent is welcomed. Amii:Lets start with an acknowledgement of what a board should do, which is to make informed business judgments. Ethics and DEI Policy (Diversity, Ethics, and Inclusion), Having Covid Integrity When Sending Your Children to School, Having Resiliency and Overcoming Adversity, White Collar Decisions: Amazon Wishlist for Books, Having Courageous Conversations When Life Gets Hard, Finding Resiliency During Lifes Unexpected Moments of Uncertainty. Theranos attracted an all-star board of directors. It was not unusual for employees and executives to be fired from the company. Usually this means finding a new CEO or voting on the right board member to take over. 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 . 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? written by AppliedCG 29 February, 2016. By Erin Griffith. I think the public health component of the criminal charges is going to resonate, Carreyrou said. 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. In total, Volkswagen installed defeat devices in 11 million cars across the globe between 2009 and 2015, 500,000 of which were in the U.S. Volkswagen were forced to pay a heavy price for their governance failures in the aftermath of the scandal, most notably a mammoth $18 billion fine from the EPA. Theranos is a Silicon Valley startup once valued at as much as $9 billion. The only problem? 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. Holmes "chose fraud over business failure. If the company had been set up properly around compliance, red flags and had an ethical safety net, they would have looked into this. Time selected her as one of its 100 Most Influential People. You may opt-out by. 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 . They're really critical to our business.". In fact, it turns out that the lab director had sent hundreds of emails to himself at or around the time of his resignation. 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 . Elizabeth was intelligent but arrogant. The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive. But if you put them into a group that discourages dissent, they nearly always start to conform. She wanted to be a celebrated tech entrepreneur. As she explained to colleagues at the company's headquarters, in Palo Alto, he was named after the world-famous sled dog . While a lot of tech companies maintain secrecy around their products, this was at a different level. 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. But, who was she and what did she promise? Theranos' board had very limited access to people and information. In essence, it kicked the can down the road, hoping that salvation would come at some point. Amii:Warren Buffet has three criteria for board members. And then when they hired a general counsel, she had a political background. They could not know what Warren was investing their money in but he had built a strong level of credibility in the business and had immensely strong character witnesses. Tom Fox:So, how does a board begin to take back control? Tom Fox:In addition to no CFO, none of the investors, none of the board had the benefit of audited financial statements. She said nothing concrete. We touch upon a wide variety of institutional corporate governance controls and other failures of the company. Today I have back with me, podcast favorite, Amii Barnard-Bahn. They go to the regulators. He was brought back to Apple for the same reason. Across the Board is a part of the Compliance Podcast Network. 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. NameEmail*, Posted by The Bart Organization, anInternet Marketing company, Your email address will not be published. As we say in our business ethics examples homepage introducing . 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 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. First, Theronos put powerhouse lawyer David Boies on to its Board of Directors to help navigate the current crisis. 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. Theranos, Holmes and former company president Sunny Balwani were charged with fraud by the SEC in 2018. 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 . A doctoral program that produces outstanding scholars who are leading in their fields of research. Here are the main takeaways from Carreyrous discussion of the scandal. Im pretty certain she didnt drop out of Stanford premeditating a long con. He pointed out how much entrepreneurs have to believe in their product, even if no one else does, especially to recruit investors. 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. 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. Carreyrou, a Pulitzer Prize-winning Wall Street Journal reporter, chronicled the downfall of Theranos in his book Bad Blood. She assured her investors that projected revenues would be approximately $100 million, when in fact the revenues in 2014 were closer to $100,000. The most powerful expression I took from this class was said by Patty Bedient. Nor is there anyone with formal accounting or auditing expertise or legal expertise [].