A board needs to both give a CEO wings to be innovative and to come up with new ideas and to take calculated risks. Those tests and Walgreens adoption of Theranos technology in its stores led to $750 million in new funding. 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 It is the responsibility of the board to identify systemic issues and take the necessary steps to rectify the situation. This could have been an opportunity for that to happen. Now it's under civil and criminal investigation for defrauding investors. When an employee asked why, she said it was because when she made a promise to a customer, she intended to keep it. I would recommend that CEO's and boards sit down and talk about what their value creation model is, who their stakeholders are. Theranos was incorporated in 2004 but did not hire a compliance officer until 2016, more than twelve years later. And that comes down to the super voting shares that Elizabeth had. 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. Home Depots co-founder The Transition of Accounting Principles: A Survey of the Existing Literature. Here are the main takeaways from Carreyrous discussion of the scandal. Amii Barnard-Bahn (amii@barnardbahn.com) is an executive coach and strategic advisor to business executives and directors. The insolvency of the company attributed to the failure of its governance system that led to the inefficiency of the venture. They've got a lot of pressure and the board needs to have a harmonious enough working relationship with the CEO. She used phrases and words that had a magical ring to them. 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. 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. Meanwhile, the power that . Elizabeth Holmes is not Bernie Madoff, Carreyrou said. But there was apparently no one on the board to point out that this approach doesn't work very well for technology startups. Through intellectual rigor and experiential learning, this full-time, two-year MBA program develops leaders who make a difference in the world. It is amazing to me that Elizabeth Holmes got her start when she was invited to deliver a TED MED talk in 2014. apply code of ethics in the business world. 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. The board has an oversight responsibility. Elizabeth Holmes, founder of Theranos (Credit: Vanity Fair) T heranos, the infamous biotech startup, has been the topic of many conversations in media. Corporate governance failures Corporate governance was also touted in many instances as the main reason for corporate failures. 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. In this episode, we take up the failures of the Theranos Board of Directors. Opinions expressed by Forbes Contributors are their own. This question will be approached in the following way. Customers called and complained about faulty blood results that led these families to run to the Emergency Room. Ethical Failure at Theranos. The after-effects of any Corporate Governance failures is a resulting wiping-off in billions of stock value. First, Theronos put powerhouse lawyer David Boies on to its Board of Directors to help navigate the current crisis. A doctoral program that produces outstanding scholars who are leading in their fields of research. The Theranos board and federal regulators provided insufficient oversight, Carreyrou noted. Have you looked at the control Tom, in terms of the voting shares? The Theranos issue is just one of the proof that companies need to have a cautious yet. Listen to article. 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? Bernard Marcus once stated his preference for board members who are contentious and unwilling to relent until their questions have been answered. The reason? Or once you've lost control, is that it? 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. 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. ", Patrick Gitau CFE,CRISC,CERG,GRCP,CFIP,CRICP,CRA, CPMP,CHPC,SRMP,CIA,CPPP,MBA-Finance (With Merit). -0.79 -1.69%. I think they really did try to develop a technology, they just never got to the point where it worked, he said. Theranos's fall from grace is one large-scale compliance failure. 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. In any case, no one demanded the proper data, and this is ultimately the boards responsibility. Quote More recent duties: Strategy development (a debate point), talent management, and investor relations. 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. NameEmail*, Posted by The Bart Organization, anInternet Marketing company, Your email address will not be published. When misconceptions like this propagate within a company and its leadership, it is the responsibility of the board of directors to provide necessary oversight. It wasnt just billionaires who were misled and bamboozled., Perhaps the biggest takeaway from the Theranos story is the expansion of Silicon Valley from its traditional roots to a much broader range of offerings. She is a strategic advisor to boards of directors and executive coach to many C-Suite members. 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? A 12-month program focused on applying the tools of modern data science, optimization and machine learning to solve real-world business problems. The company was criticized for having a board of directorsprimarily composed of former diplomats and military personnel. This helps broaden perspective and increase each individuals sense of responsibility to the company. 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. And then they had no CFO until the final year. 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 . 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? Federal prosecutors say the failure rate of the Theranos blood-testing system was 51.3 %. 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. They decided the company needed to be led by an adult, Carreyrou said. 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. 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. It didn't take long for problems to occur after Theranos was incorporated in 2004. Tom Fox: There's been a lot written about the Theranos case, so lots that both you and I have digested. Usually this means finding a new CEO or voting on the right board member to take over. I represents clients like Nike in the recent Michael Avenatti fiasco. What we continue to learn about Theranos is that the level of deception was unprecedented and that Homes surely belong in jail. The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive, Carreyrou said. By 2007, Theranos's valuation hit $197m after it raised another $43.2m in early-round funding. As a result, the company quickly and rather easily raised hundreds of millions of dollars in . Attempts at curbing these failures in the form of more stringent legislation and regulation does not appear to have had the desired impact. Mar 2018. Amii:Lets start with an acknowledgement of what a board should do, which is to make informed business judgments. The firm which was once valued at $9 billion . 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. 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. When, in fact only about a dozen or so tests were done. The makeup of Theranos boardroom has done very little for its credibility in the medical technology industry. What we're going to focus on today is the failures at the board level. The Theranos scandal highlights the need for transparent corporate governance. They also had the most prominent law firm in the country on a retainer at their beck and call. Im not sure what law you could pass that would catch someone intent on lying, Carreyrou said. The most effective boards are also the ones where dissent is welcomed. 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. Forbes named her one of the richest self-made women in the world. A lack of expertise on the board Theranos' leadership also distinctly lacked the expertise required to develop a sophisticated medical testing technology, Carreyrou said. A lot of people have commented on that that was the case here. Youregoing to keep that front and center and then if that guides everything you do, you're going to look into an employee complaint, you're going to think about, "Gosh, the lab director just quit. Theranos, a fast-growing private company intent on trailblazing a new technology, set out to attain ambitious goals. 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. Corporate governance essentially involves balancing the interests of a companys many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community. But if you put them into a group that discourages dissent, they nearly always start to conform. Others have emphasised the failure of the market to see through a founder who was celebrated as a 'visionary', . A board acting to prevent further dilution of the existing investors stake in the company should likely have asked that question. Obviously, common sense would demand skepticism and a more regulated checks and balances on a Founder. In this particular case, it was both. And then when they hired a general counsel, she had a political background. Rare is the company that has failed so spectacularly or so famously as Theranos, the biotech startup that purportedly could divine your health through revolutionary new blood-testing devices that. Steve jobs was fired from Apple because the board agreed that he needed to go. As lawmakers grill Facebook CEO Mark Zuckerberg this week, it's clear many are wrestling with whether and how the government should regulate tech . This reminded me of an instance from Warrens biography The Snowball by Alice Schroeder. What were their motivations to continue to lie in bed with Theranos? Case Study: Violating Disclosure Laws. Essentially, the board is the CEOs boss figuratively at least. Oversight of the leadership was what you did as a board member. As we say in our business ethics examples homepage introducing . I hope even more that the board members dont just get to move on. She wanted to be rich and famous. 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). In essence, it kicked the can down the road, hoping that salvation would come at some point. USD. The board appears to have been assembled primarily to secure influential government connections, rather than to govern with solid industry insight, product knowledge and operational expertise. Are You Leading with Power Over or Power With? They briefly had a CFO very early on in the company. Non-degree programs for senior executives and high-potential managers. 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. 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. He was brought back to Apple for the same reason. Or once you've lost control, is that it? 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. In 2018, the Securities and Exchange Commission (SEC) charged Theranos, Holmes, and former president Ramesh Balwani with massive fraud. 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 . 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. A vision to give normal people the ability to test and access their own health data by making blood tests cheap and accessible. Tom Fox:That's a great tagline. When expanded it provides a list of search options that will switch the search inputs to match the current selection. So why was there no push for a compliance officer at an earlier time? I think that in this case, with Theranos, there was a huge structural impediment to the board actually being able to do anything. 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. Assign the Jones Unicorn Governance Trap article, and the Ramsey, Business Insider articles to be read prior to class. More navigation items; Post-mortem on Theranoswhere were the controls? I really believe, that to a point, mHealth could be the next Theranos. In the case of Theranos, we are seeing what can happen when such a board does not exist. 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. She described in a single expression for us the job of a board member as Nose in, hands out. John Carreyrou, the Wall Street Reporter who broke the story on Holmes and Thernos said She (Homes) is a pathological liar.