Sonnenfeld insists that active participation and open dialogue are crucial for a board to fulfill its role: Well be fighting the wrong war if we simply tighten procedural rules for boards and ignore their more pressing needto be strong, high-functioning work groups whose members trust and challenge one another and engage directly with senior managers on critical issues facing corporations. Steve jobs was fired from Apple because the board agreed that he needed to go. Furthermore, Theranos maintained extreme secrecy in the name of protecting their proprietary technology. 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. Forbes named her one of the richest self-made women in the world. In the case of Theranos, we are seeing what can happen when such a board does not exist. 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. I represents clients like Nike in the recent Michael Avenatti fiasco. 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. The technology simply couldnt deliver as promised. Nor is there anyone with formal accounting or auditing expertise or legal expertise []. March 14, 2018. Essentially, the board is the CEOs boss figuratively at least. | Reuters/Brendan McDermid View. He was brought back to Apple for the same reason. For Holmes, the dog represented the journey that lay ahead for Theranos. That is about where the similarities ceased. NameEmail*, Posted by The Bart Organization, anInternet Marketing company, Your email address will not be published. Sports Direct . Ms Holmes surely belongs in jail, but will justice be served? If the company had been set up properly around compliance, red flags and had an ethical safety net, they would have looked into this. This question will be approached in the following way. What is weird is that Elizabeth was publicly making claims of the Theranos system being used in battlefields in Afghanistan to get investments. Tom Fox:In addition to no CFO, none of the investors, none of the board had the benefit of audited financial statements. Most people put more trust on glassdoor reviews than what a CEO says in a TV interview before they take a job because usually, people that work in the weeds are the ones that know what a place is really like. In essence, it kicked the can down the road, hoping that salvation would come at some point. Your email address will not be published. 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. Tom Fox: There's been a lot written about the Theranos case, so lots that both you and I have digested. The company hyped itself up and secured massive funding, all the while failing to. When Warren started out his early investment partnerships, he had established very stringent rules about what the investors were allowed to do. 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. 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. Rather, she says it shows what investigative reporting can do. 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. 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. Recently, I have been fascinated with the emergence of Silicon Valleys rising star, Theranos, and its subsequent federal investigation and decline. EBAY INC. 45.98. In this episode, we take up the failures of the Theranos Board of Directors. Those who pushed were usually either fired or marginalized to the extent that they had to leave they had an expression, which was to disappear someone, Carreyrou said. Corporate Governance Failures on the Theranos Board Through these transactions, Lehman Brothers managed to reduce leverage on the right-hand side of the balance sheet and, at the same time, reduce assets some of them undesirable on the left-hand side. 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. You may opt-out by. 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. ", "Are there regular reports by key employees? The most effective boards are also the ones where dissent is welcomed. 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When expanded it provides a list of search options that will switch the search inputs to match the current selection. Elizabeth on the other hand, failed to even recognize who her actual customer was. This would suggest that, as ridiculous as Theranos boardroom may appear, the bigger mistake was perhaps failing to create a system of openness. You might argue that they are in fact looking out for the investors by protecting the intellectual property but you dont necessarily need a firm on a retainer for that. 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. Some companies, as you know, when they find a problem like this, they self-disclose. Elon Musk and Governance post-Tweet at Tesla:http://fcpacompliancereport.com/2018/10/17602/ They briefly had a CFO very early on in the company. 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. This 20-month MBA program equips experienced executives to enhance their impact on their organizations and the world. This begins by ensuring that the right people are on board. What Silicon Valley Can Learn from the Theranos Fraud Case. www.Knowledge.wharton.penn.edu. 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 . 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. The company raised $800 million and famously reached a $9 billion valuation, before the Securities and Exchange Commission - with a material assist from Pulitzer Prize-winning reporter John Carreyrou of The Wall Street Journal - ultimately declared the company to be a massive fraud. This is a BETA experience. 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. 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. 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. By Erin Griffith. As she explained to colleagues at the company's headquarters, in Palo Alto, he was named after the world-famous sled dog . Agnishwar Basu. The Theranos board and federal regulators provided insufficient oversight, Carreyrou noted. She is a strategic advisor to boards of directors and executive coach to many C-Suite members. Theranos sold a noble vision to its investors and the world. 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 doctoral program that produces outstanding scholars who are leading in their fields of research. But Holmes created a structure that was unusual in corporate governance. Partner Fund purchased 5.6 million shares of Theranos at a price of $17 a share in February 2014. USD. Theranos was valued at $9 billion and Elizabeth Holmes had a net worth of almost $5 billion. Amii:Yeah, and then one near and dear to our hearts Tom. Or once you've lost control, is that it? Silicon Valley was most certainly not lacking on legal talent to represent startups. 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? Just three years later, in 2010, the company was valued at $1bn. In my consulting work with company boards and CEO's, we work together to build healthy board governance and executive leadership practices. Preprint. Listen to article. 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 . Are You Leading with Power Over or Power With? Soltani (2014) argued that "the ethical dilemma is coupled with ineffective boards, inefficient corporate governance and control mechanisms moreover, dysfunctional management behaviour" (p. 251). How did the board never know about the changing faces of leadership at every level within the company? It's a fascinating exploration of a case that's literally torn from the headlines. . Subscribe to receive news and updates: 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. 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,. 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. This is third in a series - let me know what you'd like to hear and I'll do more. It is never too late to mitigate damage and in recent weeks, Theranos has made at least a few strategic moves. In this episode, we take up the failures of the Theranos Board of Directors. What we continue to learn about Theranos is that the level of deception was unprecedented and that Homes surely belong in jail. Jan. 6, 2022 5:30 am ET. Tom Fox:Hello everyone. And you really need to think about it when you're in a highly regulated environment, like blood testing. 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. The Theranos board and federal regulators provided insufficient oversight, Carreyrou noted. Tom Fox:Yeah. I know John Carreyrou, the journalist who spent most of his life in the past few years covering Theranos, has said that if he had one thing he could ask Elizabeth (because she never granted an interview to him), he would ask, "How did you justify to yourself the risks that you were taking to patients?" I wonder why they're leaving the hottest company in the world that just won all these awards for innovation.". The only problem? Many other employees didnt blow the whistle to regulators, the media, or the board of directors, Carreyrou said, because Holmes forced them to sign airtight non-disclosure agreements and aggressively pursued lawsuits against ex-employees. 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). For the media, Elizabeth Holmes story proved irresistible: a bright young woman revolutionizing blood testing, in Silicon Valley no less. I think the public health component of the criminal charges is going to resonate, Carreyrou said. 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. Theres a limit to that playbook, and it doesnt transfer well to the realm of medicine. In the face of corruption in India, wise business leaders must decide what is negotiable and what isnt. Today I have back with me, podcast favorite, Amii Barnard-Bahn. First, we review the stakeholder approach to corporate governance as an alternative to the shareholder-focused conception of the firm. Im not sure what law you could pass that would catch someone intent on lying, Carreyrou said. A lot of people have commented on that that was the case here. Tom Fox:Yeah, Francine McKenna wrote that there were no audited financial statements during this time period. It's almost a situation of where to begin, but with regard to the board of directors, where would you suggest we begin? That should be the elephant in the room, for boards and CEO's to really sit down and think about, "We've got this great idea, we've got this great business model. I hope even more that the board members dont just get to move on. 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. Keep in mind that one reporter did have the courage to pursue the truth, but what all the other so called journalists? The health companys plummet carries valuable lessons for Silicon Valley. Potentially they would have looked into the lab issues, found serious problems, and they would have potentially shut down the lab. And then they had no CFO until the final year. Would-be whistleblowers were threatened with lawsuits. What we continue to learn about Theranos is that the level of deception was unprecedented and that Homes surely belong in jail. Everyone else is doing it and so it must be okay? Once she managed to convince Larry Ellison, the founder of Oracle to become an investor and board member, there was no looking back. One of the US senators was a heart transplant surgeon but he obviously spent more time on policy than medicine by the time Theranos came along. The firm which was once valued at $9 billion . Its a perfect example of how easy it is for all of us to make assumptions and believe what we want because of our goals. 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. That it was just a prestige board designed to help get investor money for Theranos, which it did quite well. Doesnt this happen often in our own lives? 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. 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 . A 12-month program focused on applying the tools of modern data science, optimization and machine learning to solve real-world business problems. 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. 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. A lack of expertise on the board Theranos' leadership also distinctly lacked the expertise required to develop a sophisticated medical testing technology, Carreyrou said. Case Study: Violating Disclosure Laws. 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. Its unclear whether any information that was important got to the board. much as was the case with Adam Neumann of WeWork or the well-publicised Elizabeth Holmes of Theranos. I really hope that Elizabeth and Sunny Balwani get what they deserve. It is the first in a new series assessing organisations against ACG's Golden Rules of corporate governance and applying our proprietary rating tool. Why did no-one ask this question? 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. The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive, Carreyrou said. 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. Usually there's at least a general counsel at some point to serve in a dual-hatted role. 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. This button displays the currently selected search type. EBAY. The after-effects of any Corporate Governance failures is a resulting wiping-off in billions of stock value. It is very easy to notice here how none of these people have any affiliation to medical science. Earn your masters degree in engineering and management. Text. 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. Is It Time To Change Director Board Compensation In Private Real Estate Firms? 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 a matter of fact, after the scandal broke, Rupert Murdoch sold back the shares from his $125 million investment back to the company for $1 just to get the tax write-off. 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. Tom Fox:So, how does a board begin to take back control? Can We Save Social Media? How data-savvy are you, really? In 2016, a detailed report was released by the Business, Innovation and Skills Committee (ISC) which . Why does a startup founder need that much security? Required fields are marked *. Getting a . 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. You can always hire them if you have that sort of a litigation on your hands Id assume. 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. They need to be the conscience of the company and rein in things that are going to be an unrewarded risk to the company. Theranos was a privately held healthcare technology company founded by then 19-year-old Elizabeth Holmes in 2003. One of the most epic failures in corporate governance in the annals of American capitalism. Or once you've lost control, is that it? Holmes vision for a better blood test was legitimate and the cause was good, Carreyrou said. At the close of the round in April 2015, the company had a valuation of $9 billion. She described in a single expression for us the job of a board member as Nose in, hands out. When an employee asked why, she said it was because when she made a promise to a customer, she intended to keep it. The company was criticized for having a board of directors primarily composed of former diplomats and military personnel. How about no compliance and ethics officer? (2 minutes) The verdict in the criminal trial of Elizabeth Holmes completes a chapter in the tangled tale of Theranos. In fact, it turns out that the lab director had sent hundreds of emails to himself at or around the time of his resignation. She said nothing concrete. Until she couldnt and it all came crashing down around her. It needs to be proportionate. "In fact, the . The ones that dont often self-select out. Elizabeths number 2 and boyfriend Sunny threw them out in a fit of rage. How do they repay for the betrayal of the investors trust in them? She used phrases and words that had a magical ring to them. Meanwhile, the power that . | Reuters/Brendan McDermid. But Holmes talked her way out of the decision and prevented subsequent intervention by multiplying the voting rights of her shares to give her 99% of total voting rights. Summary. I know you will enjoy it. When two would-be whistleblowers told the Theranos board that Holmes had exaggerated revenue projections . 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. primarily composed of former diplomats and military personnel. Elizabeth was intelligent but arrogant. The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive. When expanded it provides a list of search options that will switch the search inputs to match the current selection. She was a wannabe prodigy and wanted to mimic Steve Jobs. That made its founder and CEO Elizabeth Holmes, now 32, the richest self-made woman in America. When Elizabeth pitched the Theranos investment to Rupert Murdoch, she told him that she was looking for a long term investor that didnt care about immediate returns and that the company was planning to stay private for the longhair. The Theranos scandal highlights the need for transparent corporate governance. 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. Did the public, investors, board members, potential customers, and employees ignore obvious red flags? It was formed in 2003 by then 19-year-old Elizabeth Holmes, who dropped out of Stanford University to launch the company. Take our quiz to find out. The reporter entered Silicon Valley not as a tech businessperson or even a tech reporter but as a health care reporter pursuing a tip. Theranos leadership also distinctly lacked the expertise required to develop a sophisticated medical testing technology, Carreyrou said. Holmes did nothing to deal with the complaints of customers or issues raised by employees. 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. -0.79 -1.69%. In this particular case, it was both. The company was criticized for having a board of directorsprimarily composed of former diplomats and military personnel. I think that in this case, with Theranos, there was a huge structural impediment to the board actually being able to do anything. Corporate governance essentially involves balancing the interests of a companys many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community. And she wouldnt let anything get in the way of that. 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.. 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. 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. | 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. To read a transcript, scroll below. First, Theronos put powerhouse lawyer David Boies on to its Board of Directors to help navigate the current crisis. What really bothers me about all of this is while there was damage done to the reputation of some of these people they will go on to live their lives. 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.
