In his article from March 14, 2018, If you watched this Elizabeth Homes TED Talk from 2014, It was Clear She was a Fraud From Day One. John Brandon, Contributing Editor for www.inc.com, points out that Holmes never said anything about the science or tests or clinics. It is a lesson in many things you should look out for and all things you should avoid. Conclusion. This would suggest that, as ridiculous as Theranos boardroom may appear, the bigger mistake was perhaps failing to create a system of openness. Tom Fox:That's a great tagline. Text. It is amazing to me that Elizabeth Holmes got her start when she was invited to deliver a TED MED talk in 2014. 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. Customers called and complained about faulty blood results that led these families to run to the Emergency Room. Soltani (2014) argued that "the ethical dilemma is coupled with ineffective boards, inefficient corporate governance and control mechanisms moreover, dysfunctional management behaviour" (p. 251). 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. 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. We touch upon a wide variety of institutional corporate governance controls and other failures of the company. Carreyrous first article appeared in October 2015, and revealed: Theranos did less than 10 percent of its tests on Edison machines.. Amii:Yeah, and then one near and dear to our hearts Tom. Notably, Boies was already connected to Theranos (as an . The Indian market-regulator SEBI has taken significant steps in ensuring sufficient controls to manage Corporate Governance standards. And that comes down to the super voting shares that Elizabeth had. 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. Theranos, Holmes and former company president Sunny Balwani were charged with fraud by the SEC in 2018. 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. 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. Theranos, at one point valued at $9bn (6.5bn), was once the darling of biotech and Silicon Valley. Companies headed by overconfident, self-centered risk-takers are more likely to end up in court. 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. The technology simply couldnt deliver as promised. Im not sure what law you could pass that would catch someone intent on lying, Carreyrou said. 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. 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. 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. The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive. As a result, the company quickly and rather easily raised hundreds of millions of dollars in . She just went full force ahead. John Carreyrou, the Wall Street Reporter who broke the story on Holmes and Thernos said She (Homes) is a pathological liar. Show abstract. ", "What's the CEO's interaction with the board? What we continue to learn about Theranos is that the level of deception was unprecedented and that Homes surely belong in jail. 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. Usually this means finding a new CEO or voting on the right board member to take over. eventually fail to sustain its operations. 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. This begins by ensuring that the right people are on board. Meanwhile, the power that . 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. The company hyped itself up and secured massive funding, all the while failing to. Is it asking these series of questions and becoming perhaps more strident or more demanding or aggressive? In the case of Theranos, we are seeing what can happen when such a board does not exist. It needs to be proportionate. 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. Theranos founder Elizabeth Holmes charged with $700m fraud, 5 Areas Collegiate Athletics Can Work on to Improve Their Cultures. They briefly had a CFO very early on in the company. It is alleged that Holmes saw the board as a 'necessary burden' that would lead to further funding and an increase in Theranos' profile. 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. 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. Furthermore, Theranos maintained extreme secrecy in the name of protecting their proprietary technology. Some of the systems that would have been in place if they'd had an effective compliance and ethics program, would have brought a lot of these issues to light a lot earlier. A miniaturized blood analyzer that would disrupt. strong foundation in establishing corporate governance or else the company will. She owned 55% of the shares of Theranos, but more importantly she had stock that gave her 100 votes per share of Theranos stock. 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. Elizabeth Holmes, CEO, Chairman and Founder of Theranos, settled with the Securities and Exchange Commission (SEC) when she was charged with committing $700 million of fraud against its investors and the public. It included a lot of politically connected figures. In this particular case, it was both. Professor Anat Admati, faculty director of the Corporations and Society Initiative, noted in her introduction for the event that Theranos raises many questions, and that Carreyrou could help the Stanford community by shedding light on what happened and what the audience can learn from this story. The most effective boards are also the ones where dissent is welcomed. I recently delivered a keynote address for the Health Care Compliance Associations annual Compliance Institute titled Red Flags and Risk: Why Ethical Decision-making is Key. In my presentation, I discussed identifying red flags when they emerge and having the courage to address them and take actionable change as necessary. She used phrases and words that had a magical ring to them. The company hyped itself up and secured massive funding, all the while failing to expose its technology to thorough testing and peer review. Its getting into new industries, getting into self-driving cars, getting into medicine, Carreyrou said. 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. 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 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. When it comes to the pharma trade press there is only one publication that pursues the truth; STAT News. A board acting to prevent further dilution of the existing investors stake in the company should likely have asked that question. 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. Your email address will not be published. Private security is not cheap and neither is bulletproof glass which is what was installed in Elizabeths office. 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. Tom Fox:Right. I like the simplicity of that. That should have been a big red flag to the board to investigate, "Gosh why is our lab director resigning? But she crossed a line when she began to grossly misrepresent what shed achieved in her efforts to raise the support she needed to truly reach that point. Theranos was involved in high complexity testing and the lab director quit abruptly one day, before the Carreyrou reporting hit. Carreyrou, a Pulitzer Prize-winning Wall Street Journal reporter, chronicled the downfall of Theranos in his book Bad Blood. 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. In essence, it kicked the can down the road, hoping that salvation would come at some point. written by AppliedCG 29 February, 2016. 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. Others have emphasised the failure of the market to see through a founder who was celebrated as a 'visionary', . As a matter of fact, any time someone spoke up about their disagreements with the decisions being made, they were fired. Through intellectual rigor and experiential learning, this full-time, two-year MBA program develops leaders who make a difference in the world. I just finished reading Bad Blood by John Carreyrou, the Pulitzer Prize winning Wall Street Journal investigative reporter. They didn't have a general counsel for a long time, until I think it was 2015. And then they had no CFO until the final year. Debabrata Mitra. She chose to be dishonest with investors and . If you start from that place, you're going to avoid a lot of problems. 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. Just three years later, in 2010, the company was valued at $1bn. 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. But the suspect science behind Theranos and its paranoid, secretive culture of leadership eventually caught up to the business, leading to criminal charges. 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. 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. When misconceptions like this propagate within a company and its leadership, it is the responsibility of the board of directors to provide necessary oversight. 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. Truth be told as Brandon states in his article, amazingly Walgreens didnt want to be left out or miss out on the new technology that everyone was raving about. Due to the various causes of corporate failures, corporate governance failures . I really hope that Elizabeth and Sunny Balwani get what they deserve. Obviously, common sense would demand skepticism and a more regulated checks and balances on a Founder. 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. 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. Did the public, investors, board members, potential customers, and employees ignore obvious red flags? It wasnt just billionaires who were misled and bamboozled., Perhaps the biggest takeaway from the Theranos story is the expansion of Silicon Valley from its traditional roots to a much broader range of offerings. Corporate Governance failures have the capability of inflicting the deadliest attack on Investors' Trust. 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 . 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 corporate culture was one of fear and secrecy, not one of transparency and commitment to a conversation around compliance. The Theranos board and federal regulators provided insufficient oversight, Carreyrou noted. Understanding the sudden rise and fall of Theranos and, more particularly its founder, Elizabeth Holmes, is a must for every entrepreneur, businessperson, and human. 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. Essentially, the board is the CEOs boss figuratively at least. While we see infographics on the numbers behind mHealth physicians still havent bought into the technology and are will not diagnose patients based on the data from devices. Tom Fox:Yeah, Francine McKenna wrote that there were no audited financial statements during this time period. Recently, I have been fascinated with the emergence of Silicon Valleys rising star, Theranos, and its subsequent federal investigation and decline. Elizabeth on the other hand, failed to even recognize who her actual customer was. In this podcast episode, former general manager Billy King discusses the decision-making process of assembling a team. 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. Tom Fox:In addition to no CFO, none of the investors, none of the board had the benefit of audited financial statements. | Reuters/Brendan McDermid What we continue to learn about Theranos is that the level of deception was unprecedented and that Homes surely belong in jail. For Holmes, the dog represented the journey that lay ahead for Theranos. The Theranos scandal highlights the need for transparent corporate governance. Complex dependencies that required progressively bigger risks or face complete failure. 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. I really believe, that to a point, mHealth could be the next Theranos. 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. A systemic failure of corporate governance means the failure of the whole set of regulatory, market, stakeholder, and internal governance. 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. The after-effects of any Corporate Governance failures is a resulting wiping-off in billions of stock value. The gap between what she claimed and what she had really achieved became a massive fraud, Carreyrou said. 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. What we're going to focus on today is the failures at the board level. So, yeah, could we just agree lots of red flags? Why does a startup need the best law firm in the country representing them? 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. She made the decision to go live with her blood testing devices in Walgreens stores in Northern California and Arizona even though her employees told her that the devices were not quite ready. 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 . Elizabeth Holmes is not Bernie Madoff, Carreyrou said. Why didnt directors demand a better accounting of the companys direction and well-being? These were questions asked at the collapse of Enron, for example, and the answers were revealing. SAN JOSE, Calif. Elizabeth Holmes, the founder of the failed blood-testing start-up Theranos, was sentenced to more than 11 years in prison on Friday for . Partner Fund purchased 5.6 million shares of Theranos at a price of $17 a share in February 2014. 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. When expanded it provides a list of search options that will switch the search inputs to match the current selection. I think the public health component of the criminal charges is going to resonate, Carreyrou said. Carrie H. Cohen, Christine Wong, and Kate Driscoll partnered with Corporate Directors Forum and Bavan Halloway, corporate board member at Topgolf Callaway Brands, T-Mobile, and TPI Composites, Inc. to present "Lessons from the Theranos Trials: Navigating Ethical Decisions in the Boardroom." The Theranos trials have served as case studies on ethics and corporate governance, including the . Now, hopefully this is not the case for people who are on this call and who are in corporations or serving on boards. Attribution Any employees that raised ethical issues were fired and no questions were allowed. Major questions arise with any companys breakdown, Where was the board? 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). Here are the main takeaways from Carreyrous discussion of the scandal. This podcast will help you understand, as a board member, your role and your role going forward in this type of situation. March 19, 2018. Theranos was a privately held healthcare technology company founded by then 19-year-old Elizabeth Holmes in 2003. This reminded me of an instance from Warrens biography The Snowball by Alice Schroeder. 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. The Wall Street Journal, which published the glowing article about Theranos early on, ultimately unraveled its myth, thanks to a months-long investigation by reporter John Carreyrou. . 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. How did the board never know about the changing faces of leadership at every level within the company? Getting a . (2 minutes) The verdict in the criminal trial of Elizabeth Holmes completes a chapter in the tangled tale of Theranos. We should look into that. EBAY. The most powerful expression I took from this class was said by Patty Bedient. I represents clients like Nike in the recent Michael Avenatti fiasco. A rigorous, hands-on program that prepares adaptive problem solvers for premier finance careers. 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. The company was criticized for having a board of directorsprimarily composed of former diplomats and military personnel. The lab director is core to their business. One of the interesting things about Theranos is who was driving the corporation and what support did management have in running an effective corporation. This board took her at her word, he added. Holmes promised that more than two hundred tests would be conducted with her new technology. 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. Bring a business perspective to your technical and quantitative expertise with a bachelors degree in management, business analytics, or finance. It's a fascinating exploration of a case that's literally torn from the headlines. Rather, she says it shows what investigative reporting can do. 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? Can also assign Skeet article on Snap IPO to compare similar issues in another company. How about no compliance and ethics officer? Another key role that's interesting is the lab director. In July of that year, the company . 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. It is the first in a new series assessing organisations against ACG's Golden Rules of corporate governance and applying our proprietary rating tool. What Makes Some Health Care Teams More Effective Than Others? Usually there's at least a general counsel at some point to serve in a dual-hatted role. 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. 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. However, these changes came too late for Theranos to win the benefit of the doubt when it comes to standards of good governance. 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. They want to look for rewarded risk. 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. Discussion questions about corporate governance Zenefits did this, and then they fixed it and then they started up again. 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. Agnishwar Basu. Fortress Investment Group LLC, a division of SoftBank demanded an independent auditor's opinion on Theranos' 2017 financial statements as a condition of loaning the company $100 million in December 2017, $65 million immediately and the rest if it got a clean audit and met other conditions. Listen to article. I may just have to name the episode that. 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. 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. . So, how is it there were significant red flags in not only the rhetoric that Holmes was using throughout her rise, but also in her actions and behavior? 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. 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. 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. ensure responsible corporate governance both from a CSR and a good governance perspective. Or its new and shiny and seems clean, so all is good with the product or process or company or person. When an employee asked why, she said it was because when she made a promise to a customer, she intended to keep it. 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. In Bad Blood, Carreyrou states that employees tried to warn Holmes that the Theranos technology was not ready to go live on humans. I hope you will join us again for our next episode of Across the Board. 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?" So far Theranos has raised about $750 million. Under scrutiny, the company faced lawsuits from investors, pharmaceutical partners, and the state of Arizona, where it provided blood-testing directly to consumers. Her words and analogies actually made no sense if you paid attention to what she was saying. 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. 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.