If theres one big thematic lesson from the Theranos scandal, thats it.. More navigation items; Post-mortem on Theranoswhere were the controls? First, Theronos put powerhouse lawyer David Boies on to its Board of Directors to help navigate the current crisis. 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? Until she couldnt and it all came crashing down around her. 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. I know you will enjoy it. In conclusion, if you ever want to serve on a board of an organization, you should read this book. 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. He continued: Be mindful of a companys culture and if you feel the culture is really going off the rails and becoming toxic, then perhaps its not the place that you want to keep working at.. 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. 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. Carreyrou, a Pulitzer Prize-winning Wall Street Journal reporter, chronicled the downfall of Theranos in his book Bad Blood. Theranos was a privately held healthcare technology company founded by then 19-year-old Elizabeth Holmes in 2003. But she crossed a line when she began to grossly misrepresent what shed achieved in her efforts to raise the support she needed to truly reach that point. Theranos founder Elizabeth Holmes epitomized Steve Jobs, which attracted Silicon Valley investors who didn't look too closely at the health company's claims, says John Carreyrou, the Wall Street Journal reporter who investigated Theranos. David Boies's Dual Roles at Theranos Set Up Conflict 35 Pages Posted: 28 Mar 2022 Last revised: 14 Jan 2023. 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. She made false claims as to who were her clients. Potentially they would have looked into the lab issues, found serious problems, and they would have potentially shut down the lab. In the case of Theranos, we are seeing what can happen when such a board does not exist. Corporate governance failure lehman brothers. Corporate Governance I recently delivered a keynote address for the Health Care Compliance Associations annual Compliance Institute titled Red Flags and Risk: Why Ethical Decision-making is Key. In my presentation, I discussed identifying red flags when they emerge and having the courage to address them and take actionable change as necessary. Earn your MBA and SM in engineering with this transformative two-year program. 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. I hope even more that the board members dont just get to move on. Corporate Governance Background & Duties of BOD Managerial Capitalism, Agency Problem Board of Directors: Elected group of individuals who have a legal duty to establish corporate objectives, develop broad policies, and select top-level personnel to carry out the objectives. 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. A Secret Behind Theranos's Downfall Is Revealed | Vanity Fair 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. Commentary: Absconding CEOs show how corporate governance gaps can be better plugged. It is the first in a new series assessing organisations against ACG's Golden Rules of corporate governance and applying our proprietary rating tool. She talked about her fear of needles and blood. In some of the emails, the lab director talks about his Hippocratic Oath and how he felt ethically in a very bad spot. Theranos' board had very limited access to people and information. Thanks for the positive feedback. See all articles by Lawrence J. Trautman . Can also assign Skeet article on Snap IPO to compare similar issues in another company. If you have any questions about any of the topics we discussed, you can reach me at TFox@tfoxlaw.com. 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. Furthermore, Theranos maintained extreme secrecy in the name of protecting their proprietary technology. Theranos, Holmes and former company president Sunny Balwani were charged with fraud by the SEC in 2018. As a result, the company quickly and rather easily raised hundreds of millions of dollars in . eventually fail to sustain its operations. Now, hopefully this is not the case for people who are on this call and who are in corporations or serving on boards. In essence, it kicked the can down the road, hoping that salvation would come at some point. This is Tom Fox again, I hope you've enjoyed this episode of Across the Board. For the media, Elizabeth Holmes story proved irresistible: a bright young woman revolutionizing blood testing, in Silicon Valley no less. The corporate culture was one of fear and secrecy, not one of transparency and commitment to a conversation around compliance. 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. They've got a lot of pressure and the board needs to have a harmonious enough working relationship with the CEO. In 2003, 19-year-old Elizabeth Holmes dropped out of Stanford University to start the company, which promised something revolutionary: accurate diagnoses of health conditions using a single drop of blood. So, technically, if you just look at it straight on with that, the board is actually powerless. 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. Amii:Great question. The company hyped itself up and secured massive funding, all the while failing to. 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. 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. Missing Theranos patient data at the heart of latest Holmes hearing The Greatest Governance Failings of the 21st Century Preprint. Today I have back with me, podcast favorite, Amii Barnard-Bahn. Elizabeth Holmes is not Bernie Madoff, Carreyrou said. In total, Volkswagen installed defeat devices in 11 million cars across the globe between 2009 and 2015, 500,000 of which were in the U.S. Volkswagen were forced to pay a heavy price for their governance failures in the aftermath of the scandal, most notably a mammoth $18 billion fine from the EPA. Complex dependencies that required progressively bigger risks or face complete failure. 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. Major questions arise with any companys breakdown, Where was the board? 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. There were so many red flags for shareholders and investors and clients, but they were ignored because of some blanket that was pulled over their eyes by Holmes. 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. A board acting to prevent further dilution of the existing investors stake in the company should likely have asked that question. It wasnt just billionaires who were misled and bamboozled., Perhaps the biggest takeaway from the Theranos story is the expansion of Silicon Valley from its traditional roots to a much broader range of offerings. Usually there's at least a general counsel at some point to serve in a dual-hatted role. She specializes in accelerating the success of executives and partners with leaders and teams to help scale their businesses. I really hope that Elizabeth and Sunny Balwani get what they deserve. So, prospective board members should ask things like, "What is the senior management and board turnover? Its unclear whether any information that was important got to the board. Blood tech startups are booming following Theranos bust - The 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. But, who was she and what did she promise? 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?" Tom Fox:Right. 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. Theres a limit to that playbook, and it doesnt transfer well to the realm of medicine. Why does a startup need the best law firm in the country representing them? We should look into that. The health companys plummet carries valuable lessons for Silicon Valley. 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. 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. 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. 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. If you start from that place, you're going to avoid a lot of problems. Companies headed by overconfident, self-centered risk-takers are more likely to end up in court. So why was there no push for a compliance officer at an earlier time? This Enron case study presents our own analysis of the spectacular rise and fall of Enron. EBAY INC. 45.98. primarily composed of former diplomats and military personnel. When it comes to the pharma trade press there is only one publication that pursues the truth; STAT News. 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. Is It Time To Change Director Board Compensation In Private Real Estate Firms? In the face of corruption in India, wise business leaders must decide what is negotiable and what isnt. Elizabeth on the other hand, failed to even recognize who her actual customer was. This question will be approached in the following way. It needs to be proportionate. Holmes vision for a better blood test was legitimate and the cause was good, Carreyrou said. What is corporate governance? What is weird is that Elizabeth was publicly making claims of the Theranos system being used in battlefields in Afghanistan to get investments. 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. Theranos and Disclosure Laws - Compliance Mitigation The other red flag was Elizabeths security detail. (PDF) The Theranos saga and the consequences - ResearchGate That should have been a big red flag to the board to investigate, "Gosh why is our lab director resigning? Time selected her as one of its 100 Most Influential People. 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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. They also had the most prominent law firm in the country on a retainer at their beck and call. Tom Fox:In addition to no CFO, none of the investors, none of the board had the benefit of audited financial statements. At the close of the round in April 2015, the company had a valuation of $9 billion. Quote Theranos was involved in high complexity testing and the lab director quit abruptly one day, before the Carreyrou reporting hit. Theranos also exploited a regulatory loophole: Laboratory-developed tests like those the business offered didnt (and still dont) fall under the exclusive purview of the Food and Drug Administration or other health care-focused agencies. That's interesting in this case as well. Amii is a frequent author and speaker on leadership, thriving workplace cultures, and reputation risk management. Take a Lesson from Theranos: Plan Ahead - Corporate Compliance Insights Getting a . What went wrong with Theranos? - Cases and Tools in Biotechnology Enron built layers of financial dependencies in a constant push to raise stock prices and led to the Enron collapse. 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. The company hyped itself up and secured massive funding, all the while failing to expose its technology to thorough testing and peer review. The Theranos board and federal regulators provided insufficient oversight, Carreyrou noted. But Holmes talked her way out of the decision and prevented subsequent intervention by multiplying the voting rights of her shares to give her 99% of total voting rights. In a court filing, prosecutors argue Holmes "likely benefitted," from the loss of the LIS. Theranos attracted an all-star board of directors. That made its founder and CEO Elizabeth Holmes, now 32, the richest self-made woman in America. 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. I would recommend that CEO's and boards sit down and talk about what their value creation model is, who their stakeholders are. Across the Board is a part of the Compliance Podcast Network. Theranos: The Limits of the "Fake It Till You Make It" Strategy The History of $9 Billion Theranos and CEO Elizabeth Holmes How companies use AI to reach customers, innovate, Creating change through collaborative participation. 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. Home Depots co-founder From the get go, Theranos has shown signs of lacking a culture of openness, where dissenting viewpoints and challenging questions might be expressed and received respectfully. 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.