He wants board members that are 1) business-savvy, 2) shareholder oriented, and 3) have a special interest in the company. 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. It needs to be proportionate. Also problematic was Holmes attempt to adapt the traditional Silicon Valley business model of fail fast and fake it until you make it to a tech startup developing a product with public health implications, Carreyrou said. ", and "What kind of access to senior management does the board have? In Bad Blood, Carreyrou states that employees tried to warn Holmes that the Theranos technology was not ready to go live on humans. She owned 55% of the shares of Theranos, but more importantly she had stock that gave her 100 votes per share of Theranos stock. What's the worst case scenario and what do we always need to keep in mind?" Amii is a frequent author and speaker on leadership, thriving workplace cultures, and reputation risk management. Amii:Until January 2015. Required fields are marked *. 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. Theranos is a Silicon Valley startup once valued at as much as $9 billion. Amii:Yeah, and then one near and dear to our hearts Tom. She just went full force ahead. The company hyped itself up and secured massive funding, all the while failing to. Jan. 6, 2022 5:30 am ET. ", "Who are in the key management roles and what are their qualifications and how's it going? What we continue to learn about Theranos is that the level of deception was unprecedented and that Homes surely belong in jail. Federal prosecutors say the failure rate of the Theranos blood-testing system was 51.3 %. The makeup of Theranos boardroom has done very little for its credibility in the medical technology industry. In conclusion, if you ever want to serve on a board of an organization, you should read this book. 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. Home Depots co-founder Holmes vision for a better blood test was legitimate and the cause was good, Carreyrou said. apply code of ethics in the business world. Lets start with the management team, Tom. This is third in a series - let me know what you'd like to hear and I'll do more. First, we review the stakeholder approach to corporate governance as an alternative to the shareholder-focused conception of the firm. Steve Jobs while demanding and difficult to work with at times, was extremely focused and aware of the needs of his customer. This was Elizabeth Holmes' masterstroke. 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. 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. Carreyrou recently released a book about the scandal entitled Bad Blood: Secrets and Lies in a Silicon Valley Startup, and spoke at MIT on Oct. 2, where he described the red flags that should have signaled something was amiss at the company. We touch upon a wide variety of institutional corporate governance controls and other failures of the company. The corporate culture was one of fear and secrecy, not one of transparency and commitment to a conversation around compliance. But it failed to acknowledge that this vision made patients their ultimate customer. To read a transcript, scroll below. 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. 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. 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.. Or once you've lost control, is that it? A vision to give normal people the ability to test and access their own health data by making blood tests cheap and accessible. Some companies, as you know, when they find a problem like this, they self-disclose. 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. So, that's something that a board would normally want to look into. Tom Fox:Right. ensure responsible corporate governance both from a CSR and a good governance perspective. Can also assign Skeet article on Snap IPO to compare similar issues in another company. A new study concludes that successful tech firms are often discovered and not planned., Navigating Corruption: A Case Study from India. 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. In some of the emails, the lab director talks about his Hippocratic Oath and how he felt ethically in a very bad spot. It didn't take long for problems to occur after Theranos was incorporated in 2004. Tom Fox:Hello everyone. 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. Tom Fox:Hello everyone. Corporate Governance failures have the capability of inflicting the deadliest attack on Investors' Trust. An interdisciplinary program that combines engineering, management, and design, leading to a masters degree in engineering and management. What is corporate governance? Did the public, investors, board members, potential customers, and employees ignore obvious red flags? I just finished reading Bad Blood by John Carreyrou, the Pulitzer Prize winning Wall Street Journal investigative reporter. In the case of Theranos, we are seeing what can happen when such a board does not exist. Theranos, at one point valued at $9bn (6.5bn), was once the darling of biotech and Silicon Valley. As a result, the company quickly and rather easily raised hundreds of millions of dollars in . 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. SAN JOSE - A jury found Elizabeth A. Holmes guilty of one count of conspiracy and three counts of wire fraud in connection with a multi-million-dollar scheme to defraud investors in Theranos, Inc., announced United States Attorney Stephanie M. Hinds; Federal Bureau of Investigation (FBI) Special Agent in Charge Craig D. Fair; Food and Drug Administration (FDA) Acting Commissioner Janet . It's a fascinating exploration of a case that's literally torn from the headlines. Debabrata Mitra. If you look at those two people, you've got a smart 19 year old woman who went to college for a year and then dropped out, who had no background in medical or healthcare. As she explained to colleagues at the company's headquarters, in Palo Alto, he was named after the world-famous sled dog . This 20-month MBA program equips experienced executives to enhance their impact on their organizations and the world. 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. 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. Recently, I have been fascinated with the emergence of Silicon Valleys rising star, Theranos, and its subsequent federal investigation and decline. Essentially, the board is the CEOs boss figuratively at least. But, it is also a reminder that business owners often make bad decisions when faced with certain pressures that are perceived to be rigid. A joint program for mid-career professionals that integrates engineering and systems thinking. 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. In any case, no one demanded the proper data, and this is ultimately the boards responsibility. And then they had no CFO until the final year. 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. I like the simplicity of that. View. Opinions expressed by Forbes Contributors are their own. When two would-be whistleblowers told the Theranos board that Holmes had exaggerated revenue projections . High-performing health care teams focus on functional and cultural change simultaneously, while low-performing teams focus on just one type of change. It's almost a situation of where to begin, but with regard to the board of directors, where would you suggest we begin? Usually there's at least a general counsel at some point to serve in a dual-hatted role. It is a lesson in many things you should look out for and all things you should avoid. It is amazing to me that Elizabeth Holmes got her start when she was invited to deliver a TED MED talk in 2014. Today I have back with me, podcast favorite, Amii Barnard-Bahn. NameEmail*, Posted by The Bart Organization, anInternet Marketing company, Your email address will not be published. How does such a politically and militarily connected board not know that these claims are being made to investors? As a consequence, the fact of the failing technology was able to be kept secret, which fostered a negative culture of mistrust and secrecy. The SEC determined that the board was misled just like the rest of the other people. Or once you've lost control, is that it? So, yeah, could we just agree lots of red flags? Corporate governance, according to Investopedia, is the system of rules, practices and processes by which a firm is directed and controlled. By Erin Griffith. More navigation items; Post-mortem on Theranoswhere were the controls? She said nothing concrete. It clears their name, it shows a good faith effort to comply and not to do anything inappropriate. 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. He was brought back to Apple for the same reason. Fortress Investment Group LLC, a division of SoftBank demanded an independent auditor's opinion on Theranos' 2017 financial statements as a condition of loaning the company $100 million in December 2017, $65 million immediately and the rest if it got a clean audit and met other conditions. Enron built layers of financial dependencies in a constant push to raise stock prices and led to the Enron collapse. Private security is not cheap and neither is bulletproof glass which is what was installed in Elizabeths office. 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. They're really critical to our business.". They decided the company needed to be led by an adult, Carreyrou said. 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. 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. Earn your MBA and SM in engineering with this transformative two-year program. But, who was she and what did she promise? 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. Patty was a long time executive at Weyerhauser and currently serves on the board of Suncor Energy and Alaska Airlines. The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive, Carreyrou said. But the suspect science behind Theranos and its paranoid, secretive culture of leadership eventually caught up to the business, leading to criminal charges. 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. A lot of people have commented on that that was the case here. In fact, it turns out that the lab director had sent hundreds of emails to himself at or around the time of his resignation. In this episode, we take up the failures of the Theranos Board of Directors. This is Tom Fox again, I hope you've enjoyed this episode of Across the Board. I think that in this case, with Theranos, there was a huge structural impediment to the board actually being able to do anything. I think the public health component of the criminal charges is going to resonate, Carreyrou said. They did nothing to verify that her scientific claims were true. But there was apparently no one on the board to point out that this approach doesn't work very well for technology startups. The Theranos scandal highlights the need for transparent corporate governance. Click below for the podcast. Meanwhile, the power that . By then, Theranos and CEO Elizabeth Holmes were accused of making false claims about the blood testing technology. 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. 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. Professor Anat Admati, faculty director of the Corporations and Society Initiative, noted in her introduction for the event that Theranos raises many questions, and that Carreyrou could help the Stanford community by shedding light on what happened and what the audience can learn from this story. When you enter industries where lives are in the balance, you cant really just iterate and debug as youre going. 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. Just three years later, in 2010, the company was valued at $1bn. But Holmes created a structure that was unusual in corporate governance. Those tests and Walgreens adoption of Theranos technology in its stores led to $750 million in new funding. They could not know what Warren was investing their money in but he had built a strong level of credibility in the business and had immensely strong character witnesses. 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. 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. 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's fall from grace is one large-scale compliance failure. Attempts at curbing these failures in the form of more stringent legislation and regulation does not appear to have had the desired impact. Here are two others: 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. Amii:I think so. She made false claims as to who were her clients. 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. At the close of the round in April 2015, the company had a valuation of $9 billion. It is the responsibility of the board to identify systemic issues and take the necessary steps to rectify the situation. And that comes down to the super voting shares that Elizabeth had. The evidence needed to back Theranos claims is now absent, rendering the company even more suspect. 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. Here are the main takeaways from Carreyrous discussion of the scandal. Both Holmes and the board were out of their depth.. 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). When it comes to the pharma trade press there is only one publication that pursues the truth; STAT News. 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 . Holmes was seen as the darling of Silicon Valley. Notably, Boies was already connected to Theranos (as an . To this date, most people in the media are not being held accountable for their part in building up Ms Holmes without asking tough questions. For the media, Elizabeth Holmes story proved irresistible: a bright young woman revolutionizing blood testing, in Silicon Valley no less. Strong companiessuch as GE and Home Depotare known for ensuring their boards do an effective job. Narcissistic CEOs Can Mean Big Legal Bills, Big-Data Initiative in Intl. Once she managed to convince Larry Ellison, the founder of Oracle to become an investor and board member, there was no looking back. much as was the case with Adam Neumann of WeWork or the well-publicised Elizabeth Holmes of Theranos. | Reuters/Brendan McDermid. The reason? This podcast will help you understand, as a board member, your role and your role going forward in this type of situation. 2004-2010: Theranos thrives with early funding. The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive. And then when they hired a general counsel, she had a political background. This board took her at her word, he added. Boies Schiller Flexner LLP is not your run of the mill law firm. Usually this means finding a new CEO or voting on the right board member to take over. Others have emphasised the failure of the market to see through a founder who was celebrated as a 'visionary', . When, in fact only about a dozen or so tests were done. If the company had been set up properly around compliance, red flags and had an ethical safety net, they would have looked into this. She used phrases and words that had a magical ring to them. I think they really did try to develop a technology, they just never got to the point where it worked, he said. So why was there no push for a compliance officer at an earlier time? 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? ", "What's the CEO's interaction with the board? Ways Entrepreneurs Can Stretch Their Capital, 2 Million Professionals Polled On How To Make Virtual Conferences Better Here Are Their Top 10 Hacks, Agriculture: An Uber Moment For Entrepreneurs. This begins by ensuring that the right people are on board. Theranos attracted an all-star board of directors. A non-degree, customizable program for mid-career professionals. A lack of expertise on the board Theranos' leadership also distinctly lacked the expertise required to develop a sophisticated medical testing technology, Carreyrou said. Theranos leadership also distinctly lacked the expertise required to develop a sophisticated medical testing technology, Carreyrou said. We should look into that. Ms Holmes surely belongs in jail, but will justice be served? If convicted, each faces up to 20 years in prison. I hope even more that the board members dont just get to move on. It is never too late to mitigate damage and in recent weeks, Theranos has made at least a few strategic moves. As we say in our business ethics examples homepage introducing . 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. The Theranos story was supposed to have a very different ending. For Holmes, the dog represented the journey that lay ahead for Theranos. Were they just purposefully ignorant or were they just that blind to the charisma of Elizabeth? Its getting into new industries, getting into self-driving cars, getting into medicine, Carreyrou said. . While Warren acknowledged that he learned a lot from his mentor Ben Graham, he also admitted he was different. Frankly, when you've got ethical management in place, they would prefer to have an independent investigation as well. The whole notion that she had dropped out of Stanford without any medical training, any science training really to speak of, and suddenly revolutionized a field of medicine from my experience reporting on health care, thats not really how these things happen, he said. They also could have ordered an independent investigation. Holmes "chose fraud over business failure. It is very easy to notice here how none of these people have any affiliation to medical science. 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. The Indian market-regulator SEBI has taken significant steps in ensuring sufficient controls to manage Corporate Governance standards. They go to the regulators. How transparent is it? 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. Everyone else is doing it and so it must be okay? How do they repay for the betrayal of the investors trust in them? The fast-growing startup is now under civil and criminal investigations by the U.S. Securities and Exchange Commission, the Department of Justice and federal health regulators. 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. However, these changes came too late for Theranos to win the benefit of the doubt when it comes to standards of good governance. He spoke before an audience in conversation with Michael Callahan, executive director of the Rock Center for Corporate Governance, which cosponsored the event. Ethics and DEI Policy (Diversity, Ethics, and Inclusion), Having Covid Integrity When Sending Your Children to School, Having Resiliency and Overcoming Adversity, White Collar Decisions: Amazon Wishlist for Books, Having Courageous Conversations When Life Gets Hard, Finding Resiliency During Lifes Unexpected Moments of Uncertainty. A board acting to prevent further dilution of the existing investors stake in the company should likely have asked that question. Tom Fox: There's been a lot written about the Theranos case, so lots that both you and I have digested. Larry . What Silicon Valley Can Learn from the Theranos Fraud Case. www.Knowledge.wharton.penn.edu. ", "What are some recent examples of board suggestions that have been adopted by management?" The board knew this was the investors money she was spending right? She had been on Hilary Clinton's staff and had done some litigation, but she had no healthcare expertise. The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive. I really believe, that to a point, mHealth could be the next Theranos. Show abstract. 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 really hope that Elizabeth and Sunny Balwani get what they deserve. 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. 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. Bring a business perspective to your technical and quantitative expertise with a bachelors degree in management, business analytics, or finance. It is the first in a new series assessing organisations against ACG's Golden Rules of corporate governance and applying our proprietary rating tool. Volkswagen's share value plunged 30% in the . For example, Home Depot requires directors to regularly visit stores and engage in the operational review of stores throughout the year.. She always flew in private gulf stream jets. Elizabeths number 2 and boyfriend Sunny threw them out in a fit of rage. The Transition of Accounting Principles: A Survey of the Existing Literature. 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. Earn your masters degree in engineering and management. It would not be me if I didnt talk about Warren Buffet while I was talking about corporate governance and ethics. Of course, in a highly regulated industry like healthcare or financial services, board members need to be aware that there's a greater degree of scrutiny than in other industries where it might not be as high. So far Theranos has raised about $750 million. Combine an international MBA with a deep dive into management science. I came at it from the medical perspective with my East Coast skepticism.. Now, hopefully this is not the case for people who are on this call and who are in corporations or serving on boards. 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. Under scrutiny, the company faced lawsuits from investors, pharmaceutical partners, and the state of Arizona, where it provided blood-testing directly to consumers. Summary. 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. If its banking institutions, of course its banking customers. The ones that dont often self-select out. 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. Is it asking these series of questions and becoming perhaps more strident or more demanding or aggressive? Carreyrou recently visited Stanford Graduate School of Business as part of a program organized by the schools Corporations and Society Initiative. Thanks for the positive feedback.

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