It included a lot of politically connected figures. Have you looked at the control Tom, in terms of the voting shares? That's interesting in this case as well. 5. An interdisciplinary program that combines engineering, management, and design, leading to a masters degree in engineering and management. Amii:I think so. Individual Corporate. One of the interesting things about Theranos is who was driving the corporation and what support did management have in running an effective corporation. What we continue to learn about Theranos is that the level of deception was unprecedented and that Homes surely belong in jail. Image But the suspect science behind Theranos and its paranoid, secretive culture of leadership eventually caught up to the business, leading to criminal charges. 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 is Tom Fox again, I hope you've enjoyed this episode of Across the Board. She talked about her fear of needles and blood. Theranos, at one point valued at $9bn (6.5bn), was once the darling of biotech and Silicon Valley. The fishy excuse provided by Holmes was quickly and carelessly accepted and not questioned. ensure responsible corporate governance both from a CSR and a good governance perspective. Amii:Well, I advise people to ask before they join a board. Elizabeth Holmes is not Bernie Madoff, Carreyrou said. apply code of ethics in the business world. As a consequence, the fact of the failing technology was able to be kept secret, which fostered a negative culture of mistrust and secrecy. That should have been a big red flag to the board to investigate, "Gosh why is our lab director resigning? 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. What is corporate governance? Potentially they would have looked into the lab issues, found serious problems, and they would have potentially shut down the lab. ", "What's the CEO's interaction with the board? You may opt-out by. Usually there's at least a general counsel at some point to serve in a dual-hatted role. Keep in mind that one reporter did have the courage to pursue the truth, but what all the other so called journalists? March 19, 2018. In 2018, the Securities and Exchange Commission (SEC) charged Theranos, Holmes, and former president Ramesh Balwani with massive fraud. Theranos was valued at $9 billion and Elizabeth Holmes had a net worth of almost $5 billion. 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. Any employees that raised ethical issues were fired and no questions were allowed. If convicted, each faces up to 20 years in prison. Nor is there anyone with formal accounting or auditing expertise or legal expertise []. | Reuters/Brendan McDermid I particularly like "If you don't do an appropriate investigation, you're basically inviting the government to do it for you. What we continue to learn about Theranos is that the level of deception was unprecedented and that Homes surely belong in jail. 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. The company was criticized for having a board of directors primarily composed of former diplomats and military personnel. Assign the Jones Unicorn Governance Trap article, and the Ramsey, Business Insider articles to be read prior to class. To shed some light on how corporate governance failure can lead to disaster, we've taken a closer look at 3 organisations who've practiced improper corporate governance and the lessons to be learned from their mistakes. How do they repay for the betrayal of the investors trust in them? 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. 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. 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,. 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. Frankly, when you've got ethical management in place, they would prefer to have an independent investigation as well. 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. 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 just finished reading Bad Blood by John Carreyrou, the Pulitzer Prize winning Wall Street Journal investigative reporter. This would suggest that, as ridiculous as Theranos boardroom may appear, the bigger mistake was perhaps failing to create a system of openness. What we're going to focus on today is the failures at the board level. "In fact, the . Federal prosecutors say the failure rate of the Theranos blood-testing system was 51.3 %. 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. 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. 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. A miniaturized blood analyzer that would disrupt the $60 billion lab testing industry dominated by giants LabCorp and Quest Diagnostics. ", "Are there regular reports by key employees? By Erin Griffith. 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. This is Tom Fox and I'd like to welcome you to episode Across the Board, a podcast that focuses on corporate governance, boards of directors, and management of strategic risk. 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. 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. When expanded it provides a list of search options that will switch the search inputs to match the current selection. They decided the company needed to be led by an adult, Carreyrou said. I hope even more that the board members dont just get to move on. 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 original twelve-member Board of Directors was stacked with two former Secretaries of State, two former senators and several high-level former military officers. Usually this means finding a new CEO or voting on the right board member to take over. This was Elizabeth Holmes' masterstroke. 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. 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. So, technically, if you just look at it straight on with that, the board is actually powerless. It was not unusual for employees and executives to be fired from the company. Earn your MBA and SM in engineering with this transformative two-year program. 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. I wonder why they're leaving the hottest company in the world that just won all these awards for innovation.". Of course, Theranos was actively deceiving regulators, too. Quote Ms Holmes surely belongs in jail, but will justice be served? In some of the emails, the lab director talks about his Hippocratic Oath and how he felt ethically in a very bad spot. 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. 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. Narcissistic CEOs Can Mean Big Legal Bills, Big-Data Initiative in Intl. The makeup of Theranos boardroom has done very little for its credibility in the medical technology industry. . 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. To read a transcript, scroll below. This Enron case study presents our own analysis of the spectacular rise and fall of Enron. ", and "What kind of access to senior management does the board have? Agnishwar Basu. Theranos sold a noble vision to its investors and the world. 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. Show abstract. But, who was she and what did she promise? When expanded it provides a list of search options that will switch the search inputs to match the current selection. How companies use AI to reach customers, innovate, Creating change through collaborative participation. The Theranos board and federal regulators provided insufficient oversight, Carreyrou noted. 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. Both Holmes and the board were out of their depth.. Amii:Great question. 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. 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. Its getting into new industries, getting into self-driving cars, getting into medicine, Carreyrou said. In this particular case, it was both. It is the first in a new series assessing organisations against ACG's Golden Rules of corporate governance and applying our proprietary rating tool. 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. Her words and analogies actually made no sense if you paid attention to what she was saying. 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). Similar attestations were made by Bill Ayer, the ex CEO of Alaska Airlines and a board member at Honeywell as well as Charlotte Guyman, a board member at Brooks Running, The Space Needle and Berkshire Hathaway. In essence, it kicked the can down the road, hoping that salvation would come at some point. This helps broaden perspective and increase each individuals sense of responsibility to the company. Essentially, the board is the CEOs boss figuratively at least. The lab director is core to their business. 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 question will be approached in the following way. For Holmes, the dog represented the journey that lay ahead for Theranos. I think they really did try to develop a technology, they just never got to the point where it worked, he said. Today I have back with me, podcast favorite, Amii Barnard-Bahn. I may just have to name the episode that. Carreyrou recently visited Stanford Graduate School of Business as part of a program organized by the schools Corporations and Society Initiative. Mar 2018. Now it's under civil and criminal investigation for defrauding investors. 35 Pages Posted: 28 Mar 2022 Last revised: 14 Jan 2023. Theranos is a Silicon Valley startup once valued at as much as $9 billion. 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. 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. 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. Theranos, a fast-growing private company intent on trailblazing a new technology, set out to attain ambitious goals. When two would-be whistleblowers told the Theranos board that Holmes had exaggerated revenue projections, the board considered replacing her with an experienced executive. 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. Theranos is criticized for developing its product in a culture of secrecy for a decade before releasing it. So, thank you very much! Forbes named her one of the richest self-made women in the world. ", "What are some recent examples of board suggestions that have been adopted by management?" This begins by ensuring that the right people are on board. By Tom Fox 2018-03-22T09:45:00. 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. I hope you will join us again for our next episode of Across the Board. She chose to be dishonest with investors and . 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 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. Until she couldnt and it all came crashing down around her. Or rather were not allowed to do. First, Theronos put powerhouse lawyer David Boies on to its Board of Directors to help navigate the current crisis. The Theranos scandal highlights the need for transparent corporate governance. 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. Private security is not cheap and neither is bulletproof glass which is what was installed in Elizabeths office. And that comes down to the super voting shares that Elizabeth had. 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. 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 close of the round in April 2015, the company had a valuation of $9 billion. Theranos leadership also distinctly lacked the expertise required to develop a sophisticated medical testing technology, Carreyrou said. However, these changes came too late for Theranos to win the benefit of the doubt when it comes to standards of good governance. Tom Fox: There's been a lot written about the Theranos case, so lots that both you and I have digested. 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. 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. Here are the main takeaways from Carreyrous discussion of the scandal. The firm which was once valued at $9 billion . Notably, Boies was already connected to Theranos (as an . See all articles by Lawrence J. Trautman . A lot of people have commented on that that was the case here. They're really critical to our business.". Theranos' board had very limited access to people and information. Its unclear whether any information that was important got to the board. A special opportunity for partner and affiliate schools only. 2004-2010: Theranos thrives with early funding. Theranos was a privately held healthcare technology company founded by then 19-year-old Elizabeth Holmes in 2003. Her 50 percent share of the company was worth $4.5 billion. You might argue that they are in fact looking out for the investors by protecting the intellectual property but you dont necessarily need a firm on a retainer for that. The 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. If the technology of Theranos turns out to be not what it claims, investors would almost certainly seek to sue the chief executive, Ms. Holmes, and the company, as well as the board that allowed. 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. What were their motivations to continue to lie in bed with Theranos? Just three years later, in 2010, the company was valued at $1bn. The ones that dont often self-select out. Bad corporate governance could cripple even the best businesses. What's the worst case scenario and what do we always need to keep in mind?" 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. The evidence needed to back Theranos claims is now absent, rendering the company even more suspect. The Indian market-regulator SEBI has taken significant steps in ensuring sufficient controls to manage Corporate Governance standards. Tom Fox:Right. As stated by Fortune senior editor Jennifer Reingold, [W]hile its probably useful to have a retired government official or two toteach and offer good leadership skills, when there are six with no medical or technology experiencewith an average age, get this, of 80one wonders just how plugged in they are to Theranos day-to-day activities. The health companys plummet carries valuable lessons for Silicon Valley. | Reuters/Brendan McDermid. 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 . It was formed in 2003 by then 19-year-old Elizabeth Holmes, who dropped out of Stanford University to launch the company. The Theranos board and federal regulators provided insufficient oversight, Carreyrou noted. Furthermore, Theranos maintained extreme secrecy in the name of protecting their proprietary technology. It's almost a situation of where to begin, but with regard to the board of directors, where would you suggest we begin? See Theranos founder Elizabeth Holmes charged with $700m fraud. bbc.com. Strong companiessuch as GE and Home Depotare known for ensuring their boards do an effective job. 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. The Theranos story was supposed to have a very different ending. 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. 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. Summary. 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. Holmes promised that more than two hundred tests would be conducted with her new technology. How did the board never know about the changing faces of leadership at every level within the company? That it was just a prestige board designed to help get investor money for Theranos, which it did quite well. Once she managed to convince Larry Ellison, the founder of Oracle to become an investor and board member, there was no looking back. 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. In 2016, a detailed report was released by the Business, Innovation and Skills Committee (ISC) which . 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? She is a strategic advisor to boards of directors and executive coach to many C-Suite members. What Theranos Got Right About Risk and Reputation Management. Its a perfect example of how easy it is for all of us to make assumptions and believe what we want because of our goals. Is It Time To Change Director Board Compensation In Private Real Estate Firms? While a lot of tech companies maintain secrecy around their products, this was at a different level. 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. She made false claims as to who were her clients. A doctoral program that produces outstanding scholars who are leading in their fields of research. 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. However, how do they get penalized for not doing their jobs? I think the public health component of the criminal charges is going to resonate, Carreyrou said. In much of the computer software industry, its possible and common to safely release and then iterate on incomplete products to fix bugs until they work. One of the most epic failures in corporate governance in the annals of American capitalism. That made its founder and CEO Elizabeth Holmes, now 32, the richest self-made woman in America. 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. So Amii, with that incredibly long winded introduction, welcome and thank you for taking the time to visit with me today. The technology simply couldnt deliver as promised. 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. How data-savvy are you, really? It didn't take long for problems to occur after Theranos was incorporated in 2004. 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:Warren Buffet has three criteria for board members. Soltani (2014) argued that "the ethical dilemma is coupled with ineffective boards, inefficient corporate governance and control mechanisms moreover, dysfunctional management behaviour" (p. 251). Obviously, common sense would demand skepticism and a more regulated checks and balances on a Founder. Elizabeths number 2 and boyfriend Sunny threw them out in a fit of rage. Theranos was incorporated in 2004 but did not hire a compliance officer until 2016, more than twelve years later. Papa John's Pizza:http://fcpacompliancereport.com/2018/07/across-board-episode-21-amii-barnard-bahn/, on a very interesting case study of the oversight role (or lack thereof) of boards. 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. Carreyrous first article appeared in October 2015, and revealed: Theranos did less than 10 percent of its tests on Edison machines.. NameEmail*, Posted by The Bart Organization, anInternet Marketing company, Your email address will not be published. Amii Barnard-Bahn ([email protected]) is an executive coach and strategic advisor to business executives and directors. What Silicon Valley Can Learn from the Theranos Fraud Case. www.Knowledge.wharton.penn.edu. 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. They need to be the conscience of the company and rein in things that are going to be an unrewarded risk to the company. 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. Attempts at curbing these failures in the form of more stringent legislation and regulation does not appear to have had the desired impact. Under scrutiny, the company faced lawsuits from investors, pharmaceutical partners, and the state of Arizona, where it provided blood-testing directly to consumers. What types of questions should a board start asking and how early should they start asking those questions? They did nothing to verify that her scientific claims were true. 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.