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. Amii:Warren Buffet has three criteria for board members. As a consequence, the fact of the failing technology was able to be kept secret, which fostered a negative culture of mistrust and secrecy. Companies headed by overconfident, self-centered risk-takers are more likely to end up in court. 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. Steve Jobs while demanding and difficult to work with at times, was extremely focused and aware of the needs of his customer. 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. Strong companiessuch as GE and Home Depotare known for ensuring their boards do an effective job. 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. In a court filing, prosecutors argue Holmes "likely benefitted," from the loss of the LIS. It was formed in 2003 by then 19-year-old Elizabeth Holmes, who dropped out of Stanford University to launch the company. 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. 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. In this episode, we take up the failures of the Theranos Board of Directors. | Reuters/Brendan McDermid. I am an optimist and I would like to think that this is a healthy watershed moment for startups that have unicorn status, that get all this money, and that boards will be more careful and that CEO's frankly will be more open to being questioned. Holmes vision for a better blood test was legitimate and the cause was good, Carreyrou said. Agnishwar Basu. 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. A rigorous, hands-on program that prepares adaptive problem solvers for premier finance careers. 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 . With real journalists, like Ed Silverman, they continue to ask the hard questions that too many seem to ignore. I know you will enjoy it. The culture at Theranos was toxic, Carreyrou said. Private security is not cheap and neither is bulletproof glass which is what was installed in Elizabeths office. These were speakers that were there to talk about corporate governance. She assured her investors that projected revenues would be approximately $100 million, when in fact the revenues in 2014 were closer to $100,000. When an employee asked why, she said it was because when she made a promise to a customer, she intended to keep it. The after-effects of any Corporate Governance failures is a resulting wiping-off in billions of stock value. Once she managed to convince Larry Ellison, the founder of Oracle to become an investor and board member, there was no looking back. In Bad Blood, Carreyrou states that employees tried to warn Holmes that the Theranos technology was not ready to go live on humans. I also don't mean to suggest that the board should take over day to day responsibility for the corporation because there's definitely a boundary there and they should not be doing that. Can We Save Social Media? You may opt-out by. To read a transcript, scroll below. It clears their name, it shows a good faith effort to comply and not to do anything inappropriate. Is It Time To Change Director Board Compensation In Private Real Estate Firms? First, Theronos put powerhouse lawyer David Boies on to its Board of Directors to help navigate the current crisis. Silicon Valley was most certainly not lacking on legal talent to represent startups. 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. So far Theranos has raised about $750 million. ", "What's the CEO's interaction with the board? 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 . Corporate Governance failures have the capability of inflicting the deadliest attack on Investors' Trust. Usually this means finding a new CEO or voting on the right board member to take over. What we've seen here is that if you don't do an appropriate investigation, you're basically inviting the government to do it for you. Corporate governance essentially involves balancing the interests of a companys many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community. I particularly like "If you don't do an appropriate investigation, you're basically inviting the government to do it for you. Originally published at worldofdtcmarketing.com on May 21, 2018. A special opportunity for partner and affiliate schools only. 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,. What really bothers me about all of this is while there was damage done to the reputation of some of these people they will go on to live their lives. This button displays the currently selected search type. The Transition of Accounting Principles: A Survey of the Existing Literature. Essentially, the board is the CEOs boss figuratively at least. What were their motivations to continue to lie in bed with Theranos? Is it asking these series of questions and becoming perhaps more strident or more demanding or aggressive? International Corporate Governance is an essential text for those . Narcissistic CEOs Can Mean Big Legal Bills, Big-Data Initiative in Intl. 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. 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. 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. Forbes named her one of the richest self-made women in the world. In larger organizations, a well-structured, independent corporate governance is critical to making sure an organization stays ethical and follows all laws. -0.79 -1.69%. This is a BETA experience. See all articles by Lawrence J. Trautman . Im not sure what law you could pass that would catch someone intent on lying, Carreyrou said. This is third in a series - let me know what you'd like to hear and I'll do more. But it failed to acknowledge that this vision made patients their ultimate customer. While a lot of tech companies maintain secrecy around their products, this was at a different level. Recently, I have been fascinated with the emergence of Silicon Valleys rising star, Theranos, and its subsequent federal investigation and decline. 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). 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. 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. She has shaped many company cultures and strategic initiatives as an executive at Fortune 20 companies, smaller business and non-profits, and leading multiple functions, including human resources, legal, IT, communications, and compliance. The 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. That gave her 99% of the voting power. Tom Fox:Right. 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. 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. Earn your MBA and SM in engineering with this transformative two-year program. | Reuters/Brendan McDermid When, in fact only about a dozen or so tests were done. See Theranos founder Elizabeth Holmes charged with $700m fraud. bbc.com. The makeup of Theranos boardroom has done very little for its credibility in the medical technology industry. It is amazing to me that Elizabeth Holmes got her start when she was invited to deliver a TED MED talk in 2014. 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. ", "Are there regular reports by key employees? Text. Are You Leading with Power Over or Power With? 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. It is also an example of how important it is to. Zenefits did this, and then they fixed it and then they started up again. Amii:Lets start with an acknowledgement of what a board should do, which is to make informed business judgments. Elizabeth Holmes, founder of Theranos (Credit: Vanity Fair) T heranos, the infamous biotech startup, has been the topic of many conversations in media. 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. The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive. Tom Fox:That's a great tagline. Theranos was valued at $9 billion and Elizabeth Holmes had a net worth of almost $5 billion. They've got a lot of pressure and the board needs to have a harmonious enough working relationship with the CEO. 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. There's a lot of evidence that the two of them comprised the executive committee of the board and that there was no other group in charge. 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. The company was criticized for having a board of directorsprimarily composed of former diplomats and military personnel. ", "What are some recent examples of board suggestions that have been adopted by management?" 5. Or rather were not allowed to do. Businesses need to ensure they remain disciplined, transparent, independent, accountable for their actions, responsible, and fair. So, Amii, if not in Silicon Valley, certainly near Silicon Valley, you've worked in a wide variety of roles with companies and I guess the question I have, in looking back in hindsight now it may appear clearer what was going on, but what really should a board start asking for a startup, even one that is what you call a "disruptive" or whether you call it "innovative", with technology that is so different, so unique, that really could make a huge change in the marketplace. Were they just purposefully ignorant or were they just that blind to the charisma of Elizabeth? They want to look for rewarded risk. Attempts at curbing these failures in the form of more stringent legislation and regulation does not appear to have had the desired impact. If you look with hindsight at how the company was structured, there's evidence that all the decisions were made by Elizabeth and, at least while he was there, her second in command - Ramesh "Sunny" Balwani. Boies Schiller Flexner LLP is not your run of the mill law firm. 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. 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. Due to the various causes of corporate failures, corporate governance failures . She always flew in private gulf stream jets. By Erin Griffith. For example, GE strives for a diversity of board views. The company commits to having a board that represents a range of experience in various areas of expertise that are relevant to the Companys global activities., Another way companies encourage strong boards is through performance evaluations, regular feedback and required involvement outside the boardroom. 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. Tom Fox:So, how does a board begin to take back control? The gender factor also played a role, as Carreyrou highlighted in his book: There was a yearning to see a female entrepreneur break out and succeed on the scale that all these men have: Mark Zuckerberg, Larry Page and Sergey Brin, Steve Jobs, and Bill Gates before them. As a young, conventionally attractive woman, he adds, Holmes was also able to charm many of the older men who eventually backed her. Quote The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive. Patty was a long time executive at Weyerhauser and currently serves on the board of Suncor Energy and Alaska Airlines. Everyone else is doing it and so it must be okay? 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 . . 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. I represents clients like Nike in the recent Michael Avenatti fiasco. 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? Carreyrou recently visited Stanford Graduate School of Business as part of a program organized by the schools Corporations and Society Initiative. The health companys plummet carries valuable lessons for Silicon Valley. Amii is a frequent author and speaker on leadership, thriving workplace cultures, and reputation risk management. 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 shouldn't just be doing it for a marquis title. After being ignored again and again, it should come as no surprise that those whistleblowers eventually reported their concerns to external parties, including the primary federal regulator of medical laboratories. But, who was she and what did she promise? Theranos: Biggest failure of corporate governance in history Elizabeth Holmes built her company Theranos on this invention she named the Edison. When expanded it provides a list of search options that will switch the search inputs to match the current selection. Summary. It is a lesson in many things you should look out for and all things you should avoid. Thanks for the positive feedback. 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. She used phrases and words that had a magical ring to them. So, yeah, could we just agree lots of red flags? www.barnardbahn.com@amiibb. Most people put more trust on glassdoor reviews than what a CEO says in a TV interview before they take a job because usually, people that work in the weeds are the ones that know what a place is really like. In some of the emails, the lab director talks about his Hippocratic Oath and how he felt ethically in a very bad spot. 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. What fast-growing startups and their boards must understand about building culture. For now and for what it is worth, the board members have my strongest stamp of disapproval and I say SHAME ON YOU for not doing your job. And you really need to think about it when you're in a highly regulated environment, like blood testing. 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. Theranos attracted an all-star board of directors. Getting a . 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. I really hope that Elizabeth and Sunny Balwani get what they deserve. The reporter entered Silicon Valley not as a tech businessperson or even a tech reporter but as a health care reporter pursuing a tip. What Makes Some Health Care Teams More Effective Than Others? 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. Furthermore, Theranos maintained extreme secrecy in the name of protecting their proprietary technology. 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. They also had the most prominent law firm in the country on a retainer at their beck and call. So why was there no push for a compliance officer at an earlier time? It was not unusual for employees and executives to be fired from the company. | 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. Here are the main takeaways from Carreyrous discussion of the scandal. Elizabeth was intelligent but arrogant. 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. Now it's under civil and criminal investigation for defrauding investors. It would not be me if I didnt talk about Warren Buffet while I was talking about corporate governance and ethics. This board took her at her word, he added. I came at it from the medical perspective with my East Coast skepticism.. I hope you will join us again for our next episode of Across the Board. It included a lot of politically connected figures. The Theranos scandal has dominated headlines, and both fascinated and appalled readers worldwide, since John Carreyrou's shattering report first broke in 2015. The company has claimed it has been able to use a finger-prick test to draw blood from patients instead of the traditional, more invasive venipuncture. For the media, Elizabeth Holmes story proved irresistible: a bright young woman revolutionizing blood testing, in Silicon Valley no less. This is Tom Fox again, I hope you've enjoyed this episode of Across the Board. It is never too late to mitigate damage and in recent weeks, Theranos has made at least a few strategic moves. And she wouldnt let anything get in the way of that. 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. They did nothing to verify that her scientific claims were true. Elon Musk and Governance post-Tweet at Tesla:http://fcpacompliancereport.com/2018/10/17602/ Tom Fox:Hello everyone. A board needs to both give a CEO wings to be innovative and to come up with new ideas and to take calculated risks. 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. 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. Corporate governance, according to Investopedia, is the system of rules, practices and processes by which a firm is directed and controlled. What is weird is that Elizabeth was publicly making claims of the Theranos system being used in battlefields in Afghanistan to get investments. 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. 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 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. ", Patrick Gitau CFE,CRISC,CERG,GRCP,CFIP,CRICP,CRA, CPMP,CHPC,SRMP,CIA,CPPP,MBA-Finance (With Merit). Debabrata Mitra. When expanded it provides a list of search options that will switch the search inputs to match the current selection. 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. 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. 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 lack of expertise on the board Theranos' leadership also distinctly lacked the expertise required to develop a sophisticated medical testing technology, Carreyrou said. Barring a plea deal, which seems unlikely, Elizabeth Holmes, the founder and CEO of failed blood testing company Theranos, and president/COO Ramesh Balwani are scheduled for trial on multiple counts of criminal fraud in August 2020. Oversight of the leadership was what you did as a board member. He spoke before an audience in conversation with Michael Callahan, executive director of the Rock Center for Corporate Governance, which cosponsored the event. ", and "What kind of access to senior management does the board have? Image 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. Any employees that raised ethical issues were fired and no questions were allowed. The Theranos board and federal regulators provided insufficient oversight, Carreyrou noted. 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? More navigation items; Post-mortem on Theranoswhere were the controls? For Holmes, the dog represented the journey that lay ahead for Theranos. 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. 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. It didn't take long for problems to occur after Theranos was incorporated in 2004. The Theranos scandal highlights the need for transparent corporate governance. 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. If its banking institutions, of course its banking customers. Amii Barnard-Bahn (amii@barnardbahn.com) is an executive coach and strategic advisor to business executives and directors. Others have emphasised the failure of the market to see through a founder who was celebrated as a 'visionary', .