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. Home Depots co-founder (2 minutes) The verdict in the criminal trial of Elizabeth Holmes completes a chapter in the tangled tale of Theranos. 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. 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. In July of that year, the company . 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. What is corporate governance? apply code of ethics in the business world. The other red flag was Elizabeths security detail. Holmes promised that more than two hundred tests would be conducted with her new technology. If the company had been set up properly around compliance, red flags and had an ethical safety net, they would have looked into this. They've got a lot of pressure and the board needs to have a harmonious enough working relationship with the CEO. 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. Amii:I think so. Corporate Governance failures have the capability of inflicting the deadliest attack on Investors' Trust. Recently, I have been fascinated with the emergence of Silicon Valleys rising star, Theranos, and its subsequent federal investigation and decline. Across the Board is a part of the Compliance Podcast Network. Theranos, a fast-growing private company intent on trailblazing a new technology, set out to attain ambitious goals. No one was truly policing the businesss processes or offerings. She assured her investors that projected revenues would be approximately $100 million, when in fact the revenues in 2014 were closer to $100,000. 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. He wants board members that are 1) business-savvy, 2) shareholder oriented, and 3) have a special interest in the company. Criticism of leadership or practices was unwelcome. What Silicon Valley Can Learn from the Theranos Fraud Case. www.Knowledge.wharton.penn.edu. ", "Are there regular reports by key employees? Theranos, Holmes and former company president Sunny Balwani were charged with fraud by the SEC in 2018. Theranos: Biggest failure of corporate governance in history Elizabeth Holmes built her company Theranos on this invention she named the Edison. 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. What types of questions should a board start asking and how early should they start asking those questions? How companies use AI to reach customers, innovate, Creating change through collaborative participation. Theranos is a Silicon Valley startup once valued at as much as $9 billion. And she wouldnt let anything get in the way of that. 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. 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. She wanted to be rich and famous. Preprint. 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. Tom Fox:Right. They do not have responsibility for day to day management, but they need to make sure they're informed and in this case they needed to be informed of risk areas and mitigation plans and there's no evidence that that ever took place at Theranos. A new study concludes that successful tech firms are often discovered and not planned., Navigating Corruption: A Case Study from India. Amii:Well, I advise people to ask before they join a board. For the media, Elizabeth Holmes story proved irresistible: a bright young woman revolutionizing blood testing, in Silicon Valley no less. However, how do they get penalized for not doing their jobs? 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. This is third in a series - let me know what you'd like to hear and I'll do more. Steve Jobs while demanding and difficult to work with at times, was extremely focused and aware of the needs of his customer. 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. By 2007, Theranos's valuation hit $197m after it raised another $43.2m in early-round funding. By then, Theranos and CEO Elizabeth Holmes were accused of making false claims about the blood testing technology. This was Elizabeth Holmes' masterstroke. Of course, Theranos was actively deceiving regulators, too. 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. Volkswagen's share value plunged 30% in the . This Enron case study presents our own analysis of the spectacular rise and fall of Enron. | Reuters/Brendan McDermid What we're going to focus on today is the failures at the board level. The SEC determined that the board was misled just like the rest of the other people. 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. International Corporate Governance is an essential text for those . In the face of corruption in India, wise business leaders must decide what is negotiable and what isnt. And you're talking about a very highly regulated business. She had been on Hilary Clinton's staff and had done some litigation, but she had no healthcare expertise. The after-effects of any Corporate Governance failures is a resulting wiping-off in billions of stock value. They also had the most prominent law firm in the country on a retainer at their beck and call. This could have been an opportunity for that to happen. If convicted, each faces up to 20 years in prison. When expanded it provides a list of search options that will switch the search inputs to match the current selection. Take our quiz to find out. Amii:Great question. Holmes did nothing to deal with the complaints of customers or issues raised by employees. So I look forward to our next conversation, whether it be on Theranos or yet another something that has come up in the public record. Theranos was incorporated in 2004 but did not hire a compliance officer until 2016, more than twelve years later. The company was criticized for having a board of directorsprimarily composed of former diplomats and military personnel. 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. Carreyrou recently visited Stanford Graduate School of Business as part of a program organized by the schools Corporations and Society Initiative. I would recommend that CEO's and boards sit down and talk about what their value creation model is, who their stakeholders are. A 12-month program focused on applying the tools of modern data science, optimization and machine learning to solve real-world business problems. Or its new and shiny and seems clean, so all is good with the product or process or company or person. Listen to article. 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. Theranos leadership also distinctly lacked the expertise required to develop a sophisticated medical testing technology, Carreyrou said. What we continue to learn about Theranos is that the level of deception was unprecedented and that Homes surely belong in jail. In a recent statement announcing the decision to cut its workforce by 40 percent earlier this year, Theranos defended the layoffs as necessary to "marshal its resources most efficiently and. It would not be me if I didnt talk about Warren Buffet while I was talking about corporate governance and ethics. Combine an international MBA with a deep dive into management science. By Erin Griffith. The technology simply couldnt deliver as promised. But, who was she and what did she promise? 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). 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. A doctoral program that produces outstanding scholars who are leading in their fields of research. As a matter of fact, any time someone spoke up about their disagreements with the decisions being made, they were fired. However, these changes came too late for Theranos to win the benefit of the doubt when it comes to standards of good governance. 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. Theranos' board had very limited access to people and information. Patty was a long time executive at Weyerhauser and currently serves on the board of Suncor Energy and Alaska Airlines. Meanwhile, the power that . 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. And then when they hired a general counsel, she had a political background. I wonder why they're leaving the hottest company in the world that just won all these awards for innovation.". ensure responsible corporate governance both from a CSR and a good governance perspective. A special opportunity for partner and affiliate schools only. PDF | On May 16, 2018, Karl J. Lackner and others published The Theranos saga and the consequences | Find, read and cite all the research you need on ResearchGate Corporate executives are often criticized for doing just that and here we had a company that was burning through cash and spending money on entirely unnecessary expenses. Are You Leading with Power Over or Power With? The gap between what she claimed and what she had really achieved became a massive fraud, Carreyrou said. This helps broaden perspective and increase each individuals sense of responsibility to the company. Lets start with the management team, Tom. Amii:Yeah, and then one near and dear to our hearts Tom. This is Tom Fox again, I hope you've enjoyed this episode of Across the Board. Lets choose collective intelligence over the madness of mobs, MIT Sloan research on AI and machine learning, Report details the business benefits of responsible AI, Bad Blood: Secrets and Lies in a Silicon Valley Startup. 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 Theranos scandal highlights the need for transparent corporate governance. But it failed to acknowledge that this vision made patients their ultimate customer. What were their motivations to continue to lie in bed with Theranos? Tom Fox:Yeah, Francine McKenna wrote that there were no audited financial statements during this time period. 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. 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 . . She is a strategic advisor to boards of directors and executive coach to many C-Suite members. And then you have an older gentleman who had no training in biosciences or medical devices, had business and IT experience in Microsoft and Lotus software, and then became president when he joined in 2009. 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. Theranos - When Corporate Governance Fails - sanjogpatel.com If you are a new company and in need of legitimacy and capital infusion, having oversight from a board comprised of influential people would be great for your reputation. | 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. 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. ", "Who are in the key management roles and what are their qualifications and how's it going? When you enter industries where lives are in the balance, you cant really just iterate and debug as youre going. Theranos's fall from grace is one large-scale compliance failure. See all articles by Lawrence J. Trautman . The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive, Carreyrou said. The issues that Theranos faced were repeatedly raised internally by employees. Major questions arise with any companys breakdown, Where was the board? Rare is the company that has failed so spectacularly or so famously as Theranos, the biotech startup that purportedly could divine your health through revolutionary new blood-testing devices that. It is very easy to notice here how none of these people have any affiliation to medical science. Here are the main takeaways from Carreyrous discussion of the scandal. For example, Home Depot requires directors to regularly visit stores and engage in the operational review of stores throughout the year.. 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?