| 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. Essentially, the board is the CEOs boss figuratively at least. Oversight of the leadership was what you did as a board member. Amii:Yeah, and then one near and dear to our hearts Tom. He wants board members that are 1) business-savvy, 2) shareholder oriented, and 3) have a special interest in the company. 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. Using a "nanotainer" (a small device designed to draw, retain, and analyze a . If its banking institutions, of course its banking customers. 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. The reporter entered Silicon Valley not as a tech businessperson or even a tech reporter but as a health care reporter pursuing a tip. Corporate governance, according to Investopedia, is the system of rules, practices and processes by which a firm is directed and controlled. 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. In the spirit of moving fast and breaking things, Theranos, offering to disrupt a massive medical technology industry, was founded in 2003 by Elizabeth Holmes and quickly skyrocketed to a $10 billion valuation by 2013 and 2014, raising over $700 million in venture capital (via Forbes).Theranos promised to simplify and streamline the expensive, arduous process of lab testing blood samples . In conclusion, if you ever want to serve on a board of an organization, you should read this book. Click below for the podcast. 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. Facebook Shows That Tech Companies Need New Corporate Governance Theranos: Biggest failure of corporate governance in history Are You Leading with Power Over or Power With? The Theranos board and federal regulators provided insufficient oversight, Carreyrou noted. When, in fact only about a dozen or so tests were done. They shouldn't just be doing it for a marquis title. 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. 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. In my consulting work with company boards and CEO's, we work together to build healthy board governance and executive leadership practices. The lab director is core to their business. There was sort of an Omert in that from the early stages of the company and it got worse and worse there was really unethical behavior and employees who would try to raise questions were either fired, or marginalized, or left of their own volition, Carreyrou said. This board took her at her word, he added. Theranos is a Silicon Valley startup once valued at as much as $9 billion. Under scrutiny, the company faced lawsuits from investors, pharmaceutical partners, and the state of Arizona, where it provided blood-testing directly to consumers. 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. This would suggest that, as ridiculous as Theranos boardroom may appear, the bigger mistake was perhaps failing to create a system of openness. The evidence needed to back Theranos claims is now absent, rendering the company even more suspect. And you're talking about a very highly regulated business. Amii:Warren Buffet has three criteria for board members. I think they really did try to develop a technology, they just never got to the point where it worked, he said. The reason? In 2016, a detailed report was released by the Business, Innovation and Skills Committee (ISC) which . How did the board never know about the changing faces of leadership at every level within the company? 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. The last days of Theranos the financials were as - MarketWatch She specializes in accelerating the success of executives and partners with leaders and teams to help scale their businesses. In some of the emails, the lab director talks about his Hippocratic Oath and how he felt ethically in a very bad spot. Theranos, a fast-growing private company intent on trailblazing a new technology, set out to attain ambitious goals. See all articles by Lawrence J. Trautman . We touch upon a wide variety of institutional corporate governance controls and other failures of the company. 5. Obviously, common sense would demand skepticism and a more regulated checks and balances on a Founder. To this date, most people in the media are not being held accountable for their part in building up Ms Holmes without asking tough questions. A Secret Behind Theranos's Downfall Is Revealed | Vanity Fair 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? Keep in mind that one reporter did have the courage to pursue the truth, but what all the other so called journalists? 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. At the end of the day, the difference between an effective board and a failing board boils down to whether or not there is a social system of respect, trust and candor among members of management. Just three years later, in 2010, the company was valued at $1bn. Mar 2018. The Transition of Accounting Principles: A Survey of the Existing Literature. Your email address will not be published. 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? Theranos and Disclosure Laws - Compliance Mitigation Notably, Boies was already connected to Theranos (as an . In 2018, the Securities and Exchange Commission (SEC) charged Theranos, Holmes, and former president Ramesh Balwani with massive fraud. PDF Corporate Failures - assets.kpmg.com Bleeding out: Theranos oozes with corporate governance lessons This button displays the currently selected search type. 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. They decided the company needed to be led by an adult, Carreyrou said. Key Learnings From World'S Biggest Corporate Governance Failures A systemic failure of corporate governance means the failure of the whole set of regulatory, market, stakeholder, and internal governance. That should have been a big red flag to the board to investigate, "Gosh why is our lab director resigning? This Enron case study presents our own analysis of the spectacular rise and fall of Enron. Frankly, when you've got ethical management in place, they would prefer to have an independent investigation as well. 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. Would-be whistleblowers were threatened with lawsuits. Some companies, as you know, when they find a problem like this, they self-disclose. Theranos: A Fallen Unicorn - Investopedia That made its founder and CEO Elizabeth Holmes, now 32, the richest self-made woman in America. apply code of ethics in the business world. The Theranos board was very carefully crafted. Failed Startups: Theranos - Forbes The Enron Collapse: 8 Reasons Why It Failed | Shortform Books Theranos leadership also distinctly lacked the expertise required to develop a sophisticated medical testing technology, Carreyrou said. Understanding the sudden rise and fall of Theranos and, more particularly its founder, Elizabeth Holmes, is a must for every entrepreneur, businessperson, and human. An Unsung Hero from the Theranos Board - Adam J. Epstein Option 2: Have the students watch the video (the full video or the shorter version) in class. 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. Private security is not cheap and neither is bulletproof glass which is what was installed in Elizabeths office. 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. 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. Any employees that raised ethical issues were fired and no questions were allowed. 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). How does such a politically and militarily connected board not know that these claims are being made to investors? As lawmakers grill Facebook CEO Mark Zuckerberg this week, it's clear many are wrestling with whether and how the government should regulate tech . 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. 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. Businesses behaving badly: 3 Corporate Governance Failures Ethical Failure at Theranos - SSRN As a consequence, the fact of the failing technology was able to be kept secret, which fostered a negative culture of mistrust and secrecy. Everyone else is doing it and so it must be okay? Through intellectual rigor and experiential learning, this full-time, two-year MBA program develops leaders who make a difference in the world. The health companys plummet carries valuable lessons for Silicon Valley. The company hyped itself up and secured massive funding, all the while failing to. Preprint. So far Theranos has raised about $750 million. As a board member, even if you don't know anything about the science behind the company, any key departure like that should have been investigated. 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. Conclusion. Until she couldnt and it all came crashing down around her. Attempts at curbing these failures in the form of more stringent legislation and regulation does not appear to have had the desired impact. 4 red flags that signaled Theranos' downfall | MIT Sloan 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. 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 . In this podcast episode, former general manager Billy King discusses the decision-making process of assembling a team. 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. The only problem? George Schultz even went as far as straining his relationship with his grandson who worked at Theranos by supporting and believing Elizabeth over his own grandson. Theranos and the Tale of the Disappearing Board of Directors 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. She chose to be dishonest with investors and . Last month, The Wall Street Journal revealed complaints from Theranos employees that most of the 235 tests the company offers are not performed using its revolutionary technology but rely instead. Amii:Lets start with an acknowledgement of what a board should do, which is to make informed business judgments. See Theranos founder Elizabeth Holmes charged with $700m fraud. bbc.com. Bad corporate governance could cripple even the best businesses. Carreyrou recently released a book about the scandal entitled Bad Blood: Secrets and Lies in a Silicon Valley Startup, and spoke at MIT on Oct. 2, where he described the red flags that should have signaled something was amiss at the company. THERANOS | PDF | Corporate Governance | Internal Control 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. By Erin Griffith. The Theranos Scandal Explained - Grunge.com As a result, the company quickly and rather easily raised hundreds of millions of dollars in . Theranos: The Limits of the "Fake It Till You Make It" Strategy 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. Potentially they would have looked into the lab issues, found serious problems, and they would have potentially shut down the lab. 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. In any case, no one demanded the proper data, and this is ultimately the boards responsibility. 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. They're really critical to our business.". 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. I think that in this case, with Theranos, there was a huge structural impediment to the board actually being able to do anything. A lot of people have commented on that that was the case here. So, technically, if you just look at it straight on with that, the board is actually powerless. Soltani (2014) argued that "the ethical dilemma is coupled with ineffective boards, inefficient corporate governance and control mechanisms moreover, dysfunctional management behaviour" (p. 251). The Theranos scandal has dominated headlines, and both fascinated and appalled readers worldwide, since John Carreyrou's shattering report first broke in 2015. A special opportunity for partner and affiliate schools only. 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 . Elizabeth Holmes is not Bernie Madoff, Carreyrou said. Were they just purposefully ignorant or were they just that blind to the charisma of Elizabeth? For example, Home Depot requires directors to regularly visit stores and engage in the operational review of stores throughout the year.. This could have been an opportunity for that to happen. 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. Rather, she says it shows what investigative reporting can do. 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. 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. . 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 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. Volkswagen's share value plunged 30% in the . 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. The company was criticized for having a board of directorsprimarily composed of former diplomats and military personnel. NameEmail*, Posted by The Bart Organization, anInternet Marketing company, Your email address will not be published. Doesnt this happen often in our own lives? 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. 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. What Wirecard teaches us about financial governance Due to the various causes of corporate failures, corporate governance failures . It was formed in 2003 by then 19-year-old Elizabeth Holmes, who dropped out of Stanford University to launch the company. 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. Combine an international MBA with a deep dive into management science. Theranos: Why don't start-up investors and boards require compliance 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 . As she explained to colleagues at the company's headquarters, in Palo Alto, he was named after the world-famous sled dog . At the close of the round in April 2015, the company had a valuation of $9 billion. 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. Didn't do its job in governing, but certainly attracted investors and a lot of PR to the company. Walgreens consultant for the new clinics advised his client to not to proceed working with the in-store clinics, executives at Walgreens dismissed his statement and ignored his concerns. That gave her 99% of the voting power. Theranos was valued at $9 billion and Elizabeth Holmes had a net worth of almost $5 billion. 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. Those tests and Walgreens adoption of Theranos technology in its stores led to $750 million in new funding. What is weird is that Elizabeth was publicly making claims of the Theranos system being used in battlefields in Afghanistan to get investments. They want to look for rewarded risk. What Theranos Got Right About Risk and Reputation Management. This was Elizabeth Holmes masterstroke. Enron Case Study - History, Ethics and Governance failures primarily composed of former diplomats and military personnel. Partner Fund purchased 5.6 million shares of Theranos at a price of $17 a share in February 2014. 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. Ethical Failure at Theranos. It didn't take long for problems to occur after Theranos was incorporated in 2004. (PDF) Wirecard: A Corporate Governance Perspective - ResearchGate 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? But it failed to acknowledge that this vision made patients their ultimate customer. 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. So, if you can imagine operating a company that had taken 700 million dollars from investors, and that had been valued at 9 billion dollars without a CFO, that's something a healthy board would be interested in. The other red flag was Elizabeths security detail. He was brought back to Apple for the same reason. The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive, Carreyrou said. A miniaturized blood analyzer that would disrupt the $60 billion lab testing industry dominated by giants LabCorp and Quest Diagnostics. And she wouldnt let anything get in the way of that. What's the worst case scenario and what do we always need to keep in mind?" All of Silicon Valley was like in a trance and easily accepted non-disclosure and lack of specificity, clearly a problem when the technology at issue is intended to be a life-saver in many instances. This button displays the currently selected search type. 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. www.barnardbahn.com@amiibb. 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. 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. 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. What she meant is that as a board member of an organization, you represented the investors of the company. Corporate governance failures Corporate governance was also touted in many instances as the main reason for corporate failures.