They're really critical to our business.". What we continue to learn about Theranos is that the level of deception was unprecedented and that Homes surely belong in jail. Tom Fox:Yeah. Have you looked at the control Tom, in terms of the voting shares? The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive, Carreyrou said. Amii:Warren Buffet has three criteria for board members. 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). It was formed in 2003 by then 19-year-old Elizabeth Holmes, who dropped out of Stanford University to launch the company. Federal prosecutors say the failure rate of the Theranos blood-testing system was 51.3 %. 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. The Theranos issue is just one of the proof that companies need to have a cautious yet. 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. Take our quiz to find out. Elizabeth on the other hand, failed to even recognize who her actual customer was. 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. Elizabeth Holmes is not Bernie Madoff, Carreyrou said. 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. All of Silicon Valley was like in a trance and easily accepted non-disclosure and lack of specificity, clearly a problem when the technology at issue is intended to be a life-saver in many instances. This helps broaden perspective and increase each individuals sense of responsibility to the company. 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. 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. This podcast will help you understand, as a board member, your role and your role going forward in this type of situation. 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. Here are the main takeaways from Carreyrous discussion of the scandal. 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 . Obviously, common sense would demand skepticism and a more regulated checks and balances on a Founder. Commentary: Absconding CEOs show how corporate governance gaps can be better plugged. When it comes to the pharma trade press there is only one publication that pursues the truth; STAT News. Youregoing to keep that front and center and then if that guides everything you do, you're going to look into an employee complaint, you're going to think about, "Gosh, the lab director just quit. They also had the most prominent law firm in the country on a retainer at their beck and call. Others have emphasised the failure of the market to see through a founder who was celebrated as a 'visionary', . By February 2015 the Theranos fairytale was about to unravel publicly. She used phrases and words that had a magical ring to them. ", "What's the CEO's interaction with the board? primarily composed of former diplomats and military personnel. This board took her at her word, he added. Elon Musk and Governance post-Tweet at Tesla:http://fcpacompliancereport.com/2018/10/17602/ Corporate governance essentially involves balancing the interests of a companys many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community. 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?" Thanks for the positive feedback. Tom Fox:So, how does a board begin to take back control? In this podcast episode, former general manager Billy King discusses the decision-making process of assembling a team. Strong companiessuch as GE and Home Depotare known for ensuring their boards do an effective job. 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. 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 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. Corporate governance, according to Investopedia, is the system of rules, practices and processes by which a firm is directed and controlled. 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 . A non-degree, customizable program for mid-career professionals. View. Now, Holmes and former Theranos president Ramesh Sunny Balwani, arefacing federal wire and fraud charges, and the company, valued at $10 billion at its peak,dissolvedat the end of August. Were they just purposefully ignorant or were they just that blind to the charisma of Elizabeth? 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. She made false claims as to who were her clients. What types of questions should a board start asking and how early should they start asking those questions? Theranos, at one point valued at $9bn (6.5bn), was once the darling of biotech and Silicon Valley. 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. 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? 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. She specializes in accelerating the success of executives and partners with leaders and teams to help scale their businesses. She talked about her fear of needles and blood. Volkswagen's share value plunged 30% in the . Theranos was involved in high complexity testing and the lab director quit abruptly one day, before the Carreyrou reporting hit. 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. How data-savvy are you, really? Option 2: Have the students watch the video (the full video or the shorter version) in class. In the face of corruption in India, wise business leaders must decide what is negotiable and what isnt. Nov. 18, 2022. A 12-month program focused on applying the tools of modern data science, optimization and machine learning to solve real-world business problems. George Schultz even went as far as straining his relationship with his grandson who worked at Theranos by supporting and believing Elizabeth over his own grandson. So, that's something that a board would normally want to look into. A doctoral program that produces outstanding scholars who are leading in their fields of research. Since corporate governance also provides the framework for attaining a companys objectives, it encompasses practically every sphere of management, from action plans andinternal controlsto performance measurement and corporatedisclosure. Homes company Theranos clearly lacked an effective corporate governance that balanced Homes aspirations with the transparency needed for customers, suppliers, government, financiers, and the community. In a court filing, prosecutors argue Holmes "likely benefitted," from the loss of the LIS. In October 2015, a Wall Street Journal investigation exposed Silicon Valley startup Theranos for making fraudulent claims about its breakthrough advancements in blood-testing technologies. In reality, the company was running its tests on commercial machines produced by a German company and diluting blood samples to make it work, according to John Carreyrou, the Wall Street Journal investigative reporter who firstbroke the Theranos story in 2015. Amii is a frequent author and speaker on leadership, thriving workplace cultures, and reputation risk management. Theranos' board had very limited access to people and information. Doesnt this happen often in our own lives? When misconceptions like this propagate within a company and its leadership, it is the responsibility of the board of directors to provide necessary oversight. 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. Zenefits did this, and then they fixed it and then they started up again. 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. It's all about internal controls, writes The Man From FCPA. She said nothing concrete. It is also an example of how important it is to. Boies Schiller Flexner LLP is not your run of the mill law firm. The Indian market-regulator SEBI has taken significant steps in ensuring sufficient controls to manage Corporate Governance standards. 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. Partner Fund purchased 5.6 million shares of Theranos at a price of $17 a share in February 2014. Ms Holmes surely belongs in jail, but will justice be served? written by AppliedCG 29 February, 2016. 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. 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. Attempts at curbing these failures in the form of more stringent legislation and regulation does not appear to have had the desired impact. What is corporate governance? Theranos and FTX show a broad failure by investors to ask enough questions before handing over cash, . They've got a lot of pressure and the board needs to have a harmonious enough working relationship with the CEO. Another key role that's interesting is the lab director. In any case, no one demanded the proper data, and this is ultimately the boards responsibility. But there was apparently no one on the board to point out that this approach doesn't work very well for technology startups. So far Theranos has raised about $750 million. Complex dependencies that required progressively bigger risks or face complete failure. How companies use AI to reach customers, innovate, Creating change through collaborative participation. Where it became fraud is that she and Sunny lied about the fact that they had succeeded when, in fact, it was still very much a work in progress.. The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive. The Theranos board and federal regulators provided insufficient oversight, Carreyrou noted. As we say in our business ethics examples homepage introducing . A systemic failure of corporate governance means the failure of the whole set of regulatory, market, stakeholder, and internal governance. One of the most epic failures in corporate governance in the annals of American capitalism. 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. Meanwhile, the power that . The health companys plummet carries valuable lessons for Silicon Valley. 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. When two would-be whistleblowers told the Theranos board that Holmes had exaggerated revenue projections, the board considered replacing her with an experienced executive. The Theranos board and federal regulators provided insufficient oversight, Carreyrou noted. But Holmes created a structure that was unusual in corporate governance. March 19, 2018. Theranos was a privately held healthcare technology company founded by then 19-year-old Elizabeth Holmes in 2003. The most powerful expression I took from this class was said by Patty Bedient. The only problem? Tom Fox:Hello everyone. Why does a startup need the best law firm in the country representing them? Now, hopefully this is not the case for people who are on this call and who are in corporations or serving on boards. I think that in this case, with Theranos, there was a huge structural impediment to the board actually being able to do anything. The SEC determined that the board was misled just like the rest of the other people. 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. Combine an international MBA with a deep dive into management science. And that comes down to the super voting shares that Elizabeth had. If its banking institutions, of course its banking customers. Ethical Failure at Theranos. In July of that year, the company . Amii:Well, I advise people to ask before they join a board. So, thank you very much! What Silicon Valley Can Learn from the Theranos Fraud Case. www.Knowledge.wharton.penn.edu. She assured her investors that projected revenues would be approximately $100 million, when in fact the revenues in 2014 were closer to $100,000. She was a wannabe prodigy and wanted to mimic Steve Jobs. This was Elizabeth Holmes masterstroke. How does such a politically and militarily connected board not know that these claims are being made to investors? March 14, 2018. 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. 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 particularly like "If you don't do an appropriate investigation, you're basically inviting the government to do it for you. Case Study: Violating Disclosure Laws. Larry . 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. Summary. So, yeah, could we just agree lots of red flags? Rather, she says it shows what investigative reporting can do. The Theranos story was supposed to have a very different ending. Furthermore, Theranos maintained extreme secrecy in the name of protecting their proprietary technology. 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. Enron built layers of financial dependencies in a constant push to raise stock prices and led to the Enron collapse. In Bad Blood, Carreyrou states that employees tried to warn Holmes that the Theranos technology was not ready to go live on humans. In this episode, we take up the failures of the Theranos Board of Directors. 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. As the Founder, she had complete effective control with a dual-class shareholding structure, which essentially meant that for every one vote that a shareholder could make, Holmes had one hundred votes. 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. 35 Pages Posted: 28 Mar 2022 Last revised: 14 Jan 2023. It clears their name, it shows a good faith effort to comply and not to do anything inappropriate. I wonder why they're leaving the hottest company in the world that just won all these awards for innovation.". But, it is also a reminder that business owners often make bad decisions when faced with certain pressures that are perceived to be rigid. 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 the case of Theranos, we are seeing what can happen when such a board does not exist. Until she couldnt and it all came crashing down around her. That should have been a big red flag to the board to investigate, "Gosh why is our lab director resigning? 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. Your email address will not be published. Some companies, as you know, when they find a problem like this, they self-disclose. She wore black turtlenecks and was extremely stubborn about her vision. These were speakers that were there to talk about corporate governance. Theranos sold a noble vision to its investors and the world. A miniaturized blood analyzer that would disrupt. We touch upon a wide variety of institutional corporate governance controls and other failures of the company. Elizabeth Holmes, CEO, Chairman and Founder of Theranos, settled with the Securities and Exchange Commission ("SEC) when she was charged with committing $700 million of fraud against its investors and the public. So I look forward to our next conversation, whether it be on Theranos or yet another something that has come up in the public record. 2004-2010: Theranos thrives with early funding. Debabrata Mitra. 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. 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? 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. Today I have back with me, podcast favorite, Amii Barnard-Bahn. 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. She chose to be dishonest with investors and . But, who was she and what did she promise? By Tom Fox 2018-03-22T09:45:00. By Erin Griffith. That's interesting in this case as well. This 20-month MBA program equips experienced executives to enhance their impact on their organizations and the world. Elizabeth on the other hand, emulated Steve Jobs by attempting to look like him, talk like him and be stubborn like him but was unwilling to demonstrate his most important quality being obsessed with quality. 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). Carreyrou, a Pulitzer Prize-winning Wall Street Journal reporter, chronicled the downfall of Theranos in his book Bad Blood. 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Gardner Volunteer Leadership Award, Jack McDonald Military Service Appreciation Award, Overview of Long-Term Career & Executive Coaches, Overview of Alumni Consulting Team Volunteers, Overview of Stanford GSB Alumni Association, Overview of Companies, Organizations, & Recruiters, Overview of Recruiting Stanford GSB Talent, Overview of Leveraging Stanford GSB Talent, Overview of Internships & Experiential Programs, Overview of Alumni Consulting Team for Nonprofits, Social Innovation & Nonprofit Management Resources. What is clear is that we need to rethink corporate governance to encompass the interests of all stakeholders - not solely . In fact, it turns out that the lab director had sent hundreds of emails to himself at or around the time of his resignation. Across the Board is a part of the Compliance Podcast Network. Of course, Theranos was actively deceiving regulators, too. ensure responsible corporate governance both from a CSR and a good governance perspective. 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. Agnishwar Basu. It's almost a situation of where to begin, but with regard to the board of directors, where would you suggest we begin? They shouldn't just be doing it for a marquis title. She wanted to be rich and famous. ", and "What kind of access to senior management does the board have? The company was criticized for having a board of directorsprimarily composed of former diplomats and military personnel. John Carreyrou, Carreyrous outside perspective helped him break the story. They want to look for rewarded risk. Contemporary governance failures including BP, VW, Boeing, GM/Tesla, Apple, Purdue Pharma, and Theranos; The ongoing vitality of the diversity of corporate governance across the world . In my consulting work with company boards and CEO's, we work together to build healthy board governance and executive leadership practices. The fishy excuse provided by Holmes was quickly and carelessly accepted and not questioned. Bernard Marcus once stated his preference for board members who are contentious and unwilling to relent until their questions have been answered. Show abstract. Theranos has been criticized for the makeup of its investors and board of directors which featured heavy-hitting investors such as media mogul Rupert Murdoch and former secretary of state Henry. It needs to be proportionate. Just three years later, in 2010, the company was valued at $1bn. NameEmail*, Posted by The Bart Organization, anInternet Marketing company, Your email address will not be published. By then, Theranos and CEO Elizabeth Holmes were accused of making false claims about the blood testing technology. Amii:Yeah, and then one near and dear to our hearts Tom. That made its founder and CEO Elizabeth Holmes, now 32, the richest self-made woman in America. 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. Holmes promised that more than two hundred tests would be conducted with her new technology. Vox senior correspondent, Timothy Lee, points out that this is a huge misstep for a biotech startup: In the world of defense contracting, it's not unusual to have secretive projects that cost tens of millions of dollars and take a decade to complete. She owned 55% of the shares of Theranos, but more importantly she had stock that gave her 100 votes per share of Theranos stock. How do they repay for the betrayal of the investors trust in them? 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. First, Theronos put powerhouse lawyer David Boies on to its Board of Directors to help navigate the current crisis. Any employees that raised ethical issues were fired and no questions were allowed. So, what lessons, you've detailed several different points, but are there some overall lessons you might suggest to a high flying startup now to either, for the board to get their hands around the controls, get their hands around the audited financial statements, or perhaps even go in a different direction? But if you put them into a group that discourages dissent, they nearly always start to conform. 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. Would-be whistleblowers were threatened with lawsuits. You may opt-out by. One of the interesting things about Theranos is who was driving the corporation and what support did management have in running an effective corporation. With real journalists, like Ed Silverman, they continue to ask the hard questions that too many seem to ignore. Listen to article. So why was there no push for a compliance officer at an earlier time? 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 . Holmes was seen as the darling of Silicon Valley. As a board member, even if you don't know anything about the science behind the company, any key departure like that should have been investigated. It would not be me if I didnt talk about Warren Buffet while I was talking about corporate governance and ethics. 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 Theranos scandal has dominated headlines, and both fascinated and appalled readers worldwide, since John Carreyrou's shattering report first broke in 2015. Assign the Jones Unicorn Governance Trap article, and the Ramsey, Business Insider articles to be read prior to class. A special opportunity for partner and affiliate schools only. The technology simply couldnt deliver as promised. She had been on Hilary Clinton's staff and had done some litigation, but she had no healthcare expertise.
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