Those tests and Walgreens adoption of Theranos technology in its stores led to $750 million in new funding. Soltani (2014) argued that "the ethical dilemma is coupled with ineffective boards, inefficient corporate governance and control mechanisms moreover, dysfunctional management behaviour" (p. 251). Conclusion. As she explained to colleagues at the company's headquarters, in Palo Alto, he was named after the world-famous sled dog . Due to the various causes of corporate failures, corporate governance failures . Rather, she says it shows what investigative reporting can do. 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. 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. Holmes promised that more than two hundred tests would be conducted with her new technology. 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. 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. Of course, Theranos was actively deceiving regulators, too. Former US Secretary of States Henry Kissinger and George Schultz, Two US Senators, Army General James Mattis, Navy Admiral Gary Roughead and Former CEOs of Bechtel Corporation and Wells Fargo. 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. They also had the most prominent law firm in the country on a retainer at their beck and call. When an employee asked why, she said it was because when she made a promise to a customer, she intended to keep it. Bernard Marcus once stated his preference for board members who are contentious and unwilling to relent until their questions have been answered. Tom Fox: There's been a lot written about the Theranos case, so lots that both you and I have digested. Corporate governance essentially involves balancing the interests of a companys many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community. Criticism of leadership or practices was unwelcome. Now it's under civil and criminal investigation for defrauding investors. But if you put them into a group that discourages dissent, they nearly always start to conform. 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. When expanded it provides a list of search options that will switch the search inputs to match the current selection. 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. 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. They need to be the conscience of the company and rein in things that are going to be an unrewarded risk to the company. But the suspect science behind Theranos and its paranoid, secretive culture of leadership eventually caught up to the business, leading to criminal charges. The corporate culture was one of fear and secrecy, not one of transparency and commitment to a conversation around compliance. This podcast will help you understand, as a board member, your role and your role going forward in this type of situation. 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. Can We Save Social Media? There are fourteen new forensic case analyses critically scrutinising governance failures. A board needs to both give a CEO wings to be innovative and to come up with new ideas and to take calculated risks. So, prospective board members should ask things like, "What is the senior management and board turnover? You can always hire them if you have that sort of a litigation on your hands Id assume. Keep in mind that one reporter did have the courage to pursue the truth, but what all the other so called journalists? Here are two others: Corporate governance, according to Investopedia, is the system of rules, practices and processes by which a firm is directed and controlled. 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. But, somehow, Holmes was able to get away with it. Theranos, at one point valued at $9bn (6.5bn), was once the darling of biotech and Silicon Valley. The Theranos board and federal regulators provided insufficient oversight, Carreyrou noted. In addition to a loss of legitimacy, Theranos risks losing its license to operate labs, and CEO Elizabeth Holmes would likely be forced to exit the industry. This Enron case study presents our own analysis of the spectacular rise and fall of Enron. Her words and analogies actually made no sense if you paid attention to what she was saying. Theranos, Holmes and former company president Sunny Balwani were charged with fraud by the SEC in 2018. 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. 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?" Elizabeths number 2 and boyfriend Sunny threw them out in a fit of rage. The mission of the MIT Sloan School of Management is to develop principled, innovative leaders who improve the world and to generate ideas that advance management practice. It included a lot of politically connected figures. They shouldn't just be doing it for a marquis title. Frankly, when you've got ethical management in place, they would prefer to have an independent investigation as well. She used phrases and words that had a magical ring to them. Carreyrous first article appeared in October 2015, and revealed: Theranos did less than 10 percent of its tests on Edison machines.. See Theranos founder Elizabeth Holmes charged with $700m fraud. bbc.com. apply code of ethics in the business world. | 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. Notably, Boies was already connected to Theranos (as an . 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. Amii:Well, I advise people to ask before they join a board. 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. Elizabeth Holmes, the former CEO and founder of failed blood testing startup Theranos, was found guilty on four charges of defrauding investors, capping off the stunning downfall of a former tech. I wonder why they're leaving the hottest company in the world that just won all these awards for innovation.". You may opt-out by. 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 . He was brought back to Apple for the same reason. The other red flag was Elizabeths security detail. What Theranos Got Right About Risk and Reputation Management. 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? Rashmi is anethics speakerand consultant fighting to create a culture of conversation and bringethical issues in businessto light, to promote integrity, to enhance commitment to fiduciary duty, to build ethical leadership, and to shift the paradigm of ethics standards through ethics training. She described in a single expression for us the job of a board member as Nose in, hands out. Customers called and complained about faulty blood results that led these families to run to the Emergency Room. In my consulting work with company boards and CEO's, we work together to build healthy board governance and executive leadership practices. 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. Theranos: Biggest failure of corporate governance in history Elizabeth Holmes built her company Theranos on this invention she named the Edison. Now, Holmes and former Theranos president Ramesh Sunny Balwani, arefacing federal wire and fraud charges, and the company, valued at $10 billion at its peak,dissolvedat the end of August. Furthermore, Theranos maintained extreme secrecy in the name of protecting their proprietary technology. She just went full force ahead. In response to the Wharton podcast, Robert Talbot-Stern said in a comment: As for Theranos, There was a toxic mix of an unseasoned, untethered or ethically loose (take your pick) founder in control and a board woefully short of corporate governance skills (whether or not purposely hand-picked by Holmes because of that skill shortage and regardless of their impressive but meaningless credentials for their board role). An interdisciplinary program that combines engineering, management, and design, leading to a masters degree in engineering and management. Both Holmes and the board were out of their depth.. Strong companiessuch as GE and Home Depotare known for ensuring their boards do an effective job. Individual Corporate. See all articles by Lawrence J. Trautman . Business is about taking risks and so by no means am I suggesting that a board is there to be a cop, but they do need to also have this dual role of giving the CEO wings, but also telling them when something is too risky and pointing it out. Steve Jobs while demanding and difficult to work with at times, was extremely focused and aware of the needs of his customer. 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. It needs to be proportionate. The Theranos board was very carefully crafted. In Bad Blood, Carreyrou states that employees tried to warn Holmes that the Theranos technology was not ready to go live on humans. A board acting to prevent further dilution of the existing investors stake in the company should likely have asked that question. March 19, 2018. 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. I really hope that Elizabeth and Sunny Balwani get what they deserve. 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. I like the simplicity of that. Under scrutiny, the company faced lawsuits from investors, pharmaceutical partners, and the state of Arizona, where it provided blood-testing directly to consumers. 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. 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. Understanding the sudden rise and fall of Theranos and, more particularly its founder, Elizabeth Holmes, is a must for every entrepreneur, businessperson, and human. Earn your masters degree in engineering and management. 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. Or its new and shiny and seems clean, so all is good with the product or process or company or person. Tom Fox:Hello everyone. 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. 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. Click below for the podcast. The only problem? Major questions arise with any companys breakdown, Where was the board? How do they repay for the betrayal of the investors trust in them? The SEC determined that the board was misled just like the rest of the other people. 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. The reason? 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. Theranos's fall from grace is one large-scale compliance failure. 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? strong foundation in establishing corporate governance or else the company will. Her 50 percent share of the company was worth $4.5 billion. The insolvency of the company attributed to the failure of its governance system that led to the inefficiency of the venture. Elizabeth Holmes built her company Theranos on this invention she named the Edison. According to Jeffery Sonnenfeld of Yales Executive Leadership Institute, the most deciding factors in a boards effectiveness are, surprisingly, not structural prescriptionssuch as board makeup, procedures, committees, executive sessions, board members age, equity involvement, independence or even credentials. Or once you've lost control, is that it? 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.. After being ignored again and again, it should come as no surprise that those whistleblowers eventually reported their concerns to external parties, including the primary federal regulator of medical laboratories. Recently, I have been fascinated with the emergence of Silicon Valleys rising star, Theranos, and its subsequent federal investigation and decline. 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. In conclusion, if you ever want to serve on a board of an organization, you should read this book. Would-be whistleblowers were threatened with lawsuits. International Corporate Governance is an essential text for those . Option 2: Have the students watch the video (the full video or the shorter version) in class. A vision to give normal people the ability to test and access their own health data by making blood tests cheap and accessible. We identify important steps a board should take to ensure the health and viability of companies in the best interests of investors, employees, and the public. ", "Are there regular reports by key employees? 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. They didn't have a general counsel for a long time, until I think it was 2015. Theranos has been the subject of scathing coverage in The Wall Street Journal, which has relentlessly questioned the reliability and safety of its blood tests, and it is under intense regulatory. The health companys plummet carries valuable lessons for Silicon Valley. Initially valued at $10 billion dollars, the company has become an epic fail with Holmes and the president being indicted and charged with wire fraud. 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. Tom Fox:That's a great tagline. We touch upon a wide variety of institutional corporate governance controls and other failures of the company. It also meant that the board did not have a quorum unless she was present. She owned 55% of the shares of Theranos, but more importantly she had stock that gave her 100 votes per share of Theranos stock. 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. As Wayne Guay and James Angel discussed in this podcast for Wharton School of Business, Theranos was an example of corporate governance failure that defrauded investors of $700 million. Jan. 6, 2022 5:30 am ET. You and I both know that a lot of startups don't necessarily have the funding or resources to have a compliance and ethics officer right off the bat. Ethical Failure at Theranos. Theranos sold a noble vision to its investors and the world. The Theranos board and federal regulators provided insufficient oversight, Carreyrou noted. Rashmi Airansmission is to share the need for ethical vigilance and to inspire you to make good ethical choices in all areas of your life. The fishy excuse provided by Holmes was quickly and carelessly accepted and not questioned. When expanded it provides a list of search options that will switch the search inputs to match the current selection. What we continue to learn about Theranos is that the level of deception was unprecedented and that Homes surely belong in jail. 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. It clears their name, it shows a good faith effort to comply and not to do anything inappropriate. 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. 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. I may just have to name the episode that. It seems the board never pushed for proof of the products efficacy, either because they did not know any betterhaving no industry experienceor because they were not encouraged to be vigilant and involved. In July of that year, the company . She had been on Hilary Clinton's staff and had done some litigation, but she had no healthcare expertise. 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). Theranos was a privately held healthcare technology company founded by then 19-year-old Elizabeth Holmes in 2003. Tom Fox:In addition to no CFO, none of the investors, none of the board had the benefit of audited financial statements. I hope even more that the board members dont just get to move on. No one was truly policing the businesss processes or offerings. 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. 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. Take our quiz to find out. 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. Show abstract. When, in fact only about a dozen or so tests were done. Ultimately, it was the accountants, not the scientists, who were left with no choice but to deliver the bitter pill to the Theranos board: The company had even less money than time. Dec 26, 2022, 10:47 AM SGT SINGAPORE - When crypto exchange FTX filed for bankruptcy in November, its new chief executive John Ray III said he had never seen "such a complete failure of. 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. 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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. It is the first in a new series assessing organisations against ACG's Golden Rules of corporate governance and applying our proprietary rating tool. 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. 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. A miniaturized blood analyzer that would disrupt. EBAY. Opinions expressed by Forbes Contributors are their own. And then they had no CFO until the final year. By Tom Fox 2018-03-22T09:45:00. 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. They want to look for rewarded risk. As a matter of fact, any time someone spoke up about their disagreements with the decisions being made, they were fired. Narcissistic CEOs Can Mean Big Legal Bills, Big-Data Initiative in Intl. However, how do they get penalized for not doing their jobs? I hope you will join us again for our next episode of Across the Board. 5. Is It Time To Change Director Board Compensation In Private Real Estate Firms? I think the public health component of the criminal charges is going to resonate, Carreyrou said. The Theranos scandal has dominated headlines, and both fascinated and appalled readers worldwide, since John Carreyrou's shattering report first broke in 2015. 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. 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.