When expanded it provides a list of search options that will switch the search inputs to match the current selection. The company hyped itself up and secured massive funding, all the while failing to expose its technology to thorough testing and peer review. Today I have back with me, podcast favorite, Amii Barnard-Bahn. As we say in our business ethics examples homepage introducing . Amii:I think so. Boies Schiller Flexner LLP is not your run of the mill law firm. Steve Jobs while demanding and difficult to work with at times, was extremely focused and aware of the needs of his customer. Frankly, when you've got ethical management in place, they would prefer to have an independent investigation as well. The whole notion that she had dropped out of Stanford without any medical training, any science training really to speak of, and suddenly revolutionized a field of medicine from my experience reporting on health care, thats not really how these things happen, he said. March 14, 2018. If you have any questions about any of the topics we discussed, you can reach me at TFox@tfoxlaw.com. When expanded it provides a list of search options that will switch the search inputs to match the current selection. 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. Elizabeth was intelligent but arrogant. It is amazing to me that Elizabeth Holmes got her start when she was invited to deliver a TED MED talk in 2014. But, somehow, Holmes was able to get away with it. He spoke before an audience in conversation with Michael Callahan, executive director of the Rock Center for Corporate Governance, which cosponsored the event. That it was just a prestige board designed to help get investor money for Theranos, which it did quite well. This reminded me of an instance from Warrens biography The Snowball by Alice Schroeder. 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. (2 minutes) The verdict in the criminal trial of Elizabeth Holmes completes a chapter in the tangled tale of Theranos. This Enron case study presents our own analysis of the spectacular rise and fall of Enron. Time selected her as one of its 100 Most Influential People. In the case of Theranos, we are seeing what can happen when such a board does not exist. 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. If the company had been set up properly around compliance, red flags and had an ethical safety net, they would have looked into this. Jan. 6, 2022 5:30 am ET. Now it's under civil and criminal investigation for defrauding investors. www.barnardbahn.com@amiibb. 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. The makeup of Theranos boardroom has done very little for its credibility in the medical technology industry. So far Theranos has raised about $750 million. 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. For the media, Elizabeth Holmes story proved irresistible: a bright young woman revolutionizing blood testing, in Silicon Valley no less. . 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. Narcissistic CEOs Can Mean Big Legal Bills, Big-Data Initiative in Intl. However, these changes came too late for Theranos to win the benefit of the doubt when it comes to standards of good governance. 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. I hope you will join us again for our next episode of Across the Board. 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. 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. Amii:Until January 2015. They've got a lot of pressure and the board needs to have a harmonious enough working relationship with the CEO. Why did no-one ask this question? Until she couldnt and it all came crashing down around her. Why does a startup founder need that much security? What she meant is that as a board member of an organization, you represented the investors of the company. Holmes "chose fraud over business failure. 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. Holmes did nothing to deal with the complaints of customers or issues raised by employees. So Amii, with that incredibly long winded introduction, welcome and thank you for taking the time to visit with me today. It was not unusual for employees and executives to be fired from the company. 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. International Corporate Governance is an essential text for those . Commentary: Absconding CEOs show how corporate governance gaps can be better plugged. Take our quiz to find out. Tom Fox:Yeah, Francine McKenna wrote that there were no audited financial statements during this time period. 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. Oversight of the leadership was what you did as a board member. Ms Holmes surely belongs in jail, but will justice be served? ", Patrick Gitau CFE,CRISC,CERG,GRCP,CFIP,CRICP,CRA, CPMP,CHPC,SRMP,CIA,CPPP,MBA-Finance (With Merit). That's interesting in this case as well. Theranos's fall from grace is one large-scale compliance failure. That is about where the similarities ceased. Amii:Warren Buffet has three criteria for board members. In a recent statement announcing the decision to cut its workforce by 40 percent earlier this year, Theranos defended the layoffs as necessary to "marshal its resources most efficiently and. It is never too late to mitigate damage and in recent weeks, Theranos has made at least a few strategic moves. Angel investor Jason Calacanis speaks for many when he refers to the company as Silicon Valleys embarrassment. Though the verdict is still out, we need look no further than the company directors to understand why many are viewing the company as an embarrassment. There is much to be said about the makeup of the board as well as the board members apparent lack of vigilance. Customers called and complained about faulty blood results that led these families to run to the Emergency Room. 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. Elizabeths number 2 and boyfriend Sunny threw them out in a fit of rage. The technology simply couldnt deliver as promised. 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. They decided the company needed to be led by an adult, Carreyrou said. The Theranos scandal highlights the need for transparent corporate governance. "In fact, the . As a result, the company quickly and rather easily raised hundreds of millions of dollars in . By 2007, Theranos's valuation hit $197m after it raised another $43.2m in early-round funding. 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. Carreyrou said the companys culture of extreme secrecy and swift retaliation against anyone who went against the grain set the stage for its eventual failure. 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. Sports Direct . 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. A lack of expertise on the board Theranos' leadership also distinctly lacked the expertise required to develop a sophisticated medical testing technology, Carreyrou said. 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. I really believe, that to a point, mHealth could be the next Theranos. Of course, there's lot of reasons why this lack of a compliance role becomes important later. However, how do they get penalized for not doing their jobs? He was willing to give credit to his mentor where it was due but had the audacity to be different to become who he is today. The corporate culture was one of fear and secrecy, not one of transparency and commitment to a conversation around compliance. Originally published at worldofdtcmarketing.com on May 21, 2018. A board acting to prevent further dilution of the existing investors stake in the company should likely have asked that question. The reason? 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. I really hope that Elizabeth and Sunny Balwani get what they deserve. 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. I just finished reading Bad Blood by John Carreyrou, the Pulitzer Prize winning Wall Street Journal investigative reporter. 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. 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. Theranos attracted an all-star board of directors. In a normal healthy board, the board could, if they're not educated around labs, in this case for example, they could hire a consultant to be an independent consultant to the board, to help educate them on the types of questions they should be asking in order to fulfill their governance responsibilities. Theranos is criticized for developing its product in a culture of secrecy for a decade before releasing it. The dance of being on a board, staying independent enough from the CEO, but getting along well enough to get business done, is not to be underestimated. 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. More navigation items; Post-mortem on Theranoswhere were the controls? The Indian market-regulator SEBI has taken significant steps in ensuring sufficient controls to manage Corporate Governance standards. Barring a plea deal, which seems unlikely, Elizabeth Holmes, the founder and CEO of failed blood testing company Theranos, and president/COO Ramesh Balwani are scheduled for trial on multiple counts of criminal fraud in August 2020. 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. Theranos, a fast-growing private company intent on trailblazing a new technology, set out to attain ambitious goals. 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. There were so many red flags for shareholders and investors and clients, but they were ignored because of some blanket that was pulled over their eyes by Holmes. I would recommend that CEO's and boards sit down and talk about what their value creation model is, who their stakeholders are. 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. Strong companiessuch as GE and Home Depotare known for ensuring their boards do an effective job. Volkswagen's share value plunged 30% in the . 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. At the close of the round in April 2015, the company had a valuation of $9 billion. 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 2003, 19-year-old Elizabeth Holmes dropped out of Stanford University to start the company, which promised something revolutionary: accurate diagnoses of health conditions using a single drop of blood. 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). 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 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. 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. She lied about the current state of development for her heralded new technology. The SEC determined that the board was misled just like the rest of the other people. The insolvency of the company attributed to the failure of its governance system that led to the inefficiency of the venture. 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. When an employee asked why, she said it was because when she made a promise to a customer, she intended to keep it. 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. The company was criticized for having a board of directorsprimarily composed of former diplomats and military personnel. The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive. 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. apply code of ethics in the business world. View. 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 owned 55% of the shares of Theranos, but more importantly she had stock that gave her 100 votes per share of Theranos stock. By February 2015 the Theranos fairytale was about to unravel publicly. Due to the various causes of corporate failures, corporate governance failures . And she wouldnt let anything get in the way of that. I think they really did try to develop a technology, they just never got to the point where it worked, he said. 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. The board has an oversight responsibility. A lot of people have commented on that that was the case here. Holmes promised that more than two hundred tests would be conducted with her new technology. 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,. If theres one big thematic lesson from the Theranos scandal, thats it.. This would suggest that, as ridiculous as Theranos boardroom may appear, the bigger mistake was perhaps failing to create a system of openness. 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. They want to look for rewarded risk. The reporter entered Silicon Valley not as a tech businessperson or even a tech reporter but as a health care reporter pursuing a tip. Subscribe to receive news and updates: And you really need to think about it when you're in a highly regulated environment, like blood testing. The Theranos board and federal regulators provided insufficient oversight, Carreyrou noted. EBAY INC. 45.98. Holmes' company raised $6.9m in early funding soon after its foundation, gaining a $30m valuation. Can also assign Skeet article on Snap IPO to compare similar issues in another company. While a lot of tech companies maintain secrecy around their products, this was at a different level. First, we review the stakeholder approach to corporate governance as an alternative to the shareholder-focused conception of the firm. Carreyrous first article appeared in October 2015, and revealed: Theranos did less than 10 percent of its tests on Edison machines.. But there was apparently no one on the board to point out that this approach doesn't work very well for technology startups. In this particular case, it was both. The after-effects of any Corporate Governance failures is a resulting wiping-off in billions of stock value. Through intellectual rigor and experiential learning, this full-time, two-year MBA program develops leaders who make a difference in the world. She described in a single expression for us the job of a board member as Nose in, hands out. Opinions expressed by Forbes Contributors are their own. Notably, Boies was already connected to Theranos (as an . Theres a limit to that playbook, and it doesnt transfer well to the realm of medicine. 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. 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. Theranos sold a noble vision to its investors and the world. Usually there's at least a general counsel at some point to serve in a dual-hatted role. 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. 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 . The most powerful expression I took from this class was said by Patty Bedient. Theranos' board had very limited access to people and information. He wants board members that are 1) business-savvy, 2) shareholder oriented, and 3) have a special interest in the company. You can always hire them if you have that sort of a litigation on your hands Id assume. In 2018, the Securities and Exchange Commission (SEC) charged Theranos, Holmes, and former president Ramesh Balwani with massive fraud. How data-savvy are you, really? Carreyrou, a Pulitzer Prize-winning Wall Street Journal reporter, chronicled the downfall of Theranos in his book Bad Blood. As a consequence, the fact of the failing technology was able to be kept secret, which fostered a negative culture of mistrust and secrecy. Usually this means finding a new CEO or voting on the right board member to take over. She said nothing concrete. ", and "What kind of access to senior management does the board have? In some of the emails, the lab director talks about his Hippocratic Oath and how he felt ethically in a very bad spot. 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. Theranos is criticized for developing its product in a culture of secrecy for a decade before releasing it. It clears their name, it shows a good faith effort to comply and not to do anything inappropriate. Soltani (2014) argued that "the ethical dilemma is coupled with ineffective boards, inefficient corporate governance and control mechanisms moreover, dysfunctional management behaviour" (p. 251). Amii is a frequent author and speaker on leadership, thriving workplace cultures, and reputation risk management. The other red flag was Elizabeths security detail. That dream garnered buy-in from numerous leaders in both the business and political fields. The only problem? 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. 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. 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 . You could argue that if the culture at Theranos hadnt been so toxic, they could have made better progress and maybe even gotten there, Carreyrou said. The firm which was once valued at $9 billion . To read a transcript, scroll below. In conclusion, if you ever want to serve on a board of an organization, you should read this book. This could have been an opportunity for that to happen. Tom Fox:That's a great tagline. 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. As a matter of fact, any time someone spoke up about their disagreements with the decisions being made, they were fired. A vision to give normal people the ability to test and access their own health data by making blood tests cheap and accessible. | Reuters/Brendan McDermid She wanted to be rich and famous. USD. 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. 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Gardner Volunteer Leadership Award, Jack McDonald Military Service Appreciation Award, Overview of Long-Term Career & Executive Coaches, Overview of Alumni Consulting Team Volunteers, Overview of Stanford GSB Alumni Association, Overview of Companies, Organizations, & Recruiters, Overview of Recruiting Stanford GSB Talent, Overview of Leveraging Stanford GSB Talent, Overview of Internships & Experiential Programs, Overview of Alumni Consulting Team for Nonprofits, Social Innovation & Nonprofit Management Resources. 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. Lets start with the management team, Tom. 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. The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive. How do they repay for the betrayal of the investors trust in them? 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. 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. Obviously, common sense would demand skepticism and a more regulated checks and balances on a Founder. Elon Musk and Governance post-Tweet at Tesla:http://fcpacompliancereport.com/2018/10/17602/ Here are the main takeaways from Carreyrous discussion of the scandal. Tom Fox:Hello everyone. What types of questions should a board start asking and how early should they start asking those questions? So, technically, if you just look at it straight on with that, the board is actually powerless. Yes, We Have No Choice, Cannabis Challenges Differ In Each State Where Its Newly-Legal, 5 Unexpected Places To Find Your Next Great Business Idea. 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.