They decided the company needed to be led by an adult, Carreyrou said. In 2016, a detailed report was released by the Business, Innovation and Skills Committee (ISC) which . 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. Combine an international MBA with a deep dive into management science. More navigation items; Post-mortem on Theranoswhere were the controls? Rashmi Airansmission is to share the need for ethical vigilance and to inspire you to make good ethical choices in all areas of your life. It is our obligation to commit to paying attention to the red flags, beware of the risks, and make wise choices after engaging in ethical decision-making. The Theranos scandal has dominated headlines, and both fascinated and appalled readers worldwide, since John Carreyrou's shattering report first broke in 2015. 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. March 19, 2018. 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. In Bad Blood, Carreyrou states that employees tried to warn Holmes that the Theranos technology was not ready to go live on humans. 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. Theranos was a privately held healthcare technology company founded by then 19-year-old Elizabeth Holmes in 2003. This 20-month MBA program equips experienced executives to enhance their impact on their organizations and the world. They're really critical to our business.". 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. 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? Opinions expressed by Forbes Contributors are their own. In this podcast episode, former general manager Billy King discusses the decision-making process of assembling a team. 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 chose to be dishonest with investors and . Sonnenfeld insists that active participation and open dialogue are crucial for a board to fulfill its role: Well be fighting the wrong war if we simply tighten procedural rules for boards and ignore their more pressing needto be strong, high-functioning work groups whose members trust and challenge one another and engage directly with senior managers on critical issues facing corporations. 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? Can also assign Skeet article on Snap IPO to compare similar issues in another company. This button displays the currently selected search type. When two would-be whistleblowers told the Theranos board that Holmes had exaggerated revenue projections, the board considered replacing her with an experienced executive. This begins by ensuring that the right people are on board. The gap between what she claimed and what she had really achieved became a massive fraud, Carreyrou said. In my consulting work with company boards and CEO's, we work together to build healthy board governance and executive leadership practices. As a result, the company quickly and rather easily raised hundreds of millions of dollars in . 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. The company hyped itself up and secured massive funding, all the while failing to expose its technology to thorough testing and peer review. 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. much as was the case with Adam Neumann of WeWork or the well-publicised Elizabeth Holmes of Theranos. A non-degree, customizable program for mid-career professionals. Private security is not cheap and neither is bulletproof glass which is what was installed in Elizabeths office. Amii Barnard-Bahn (amii@barnardbahn.com) is an executive coach and strategic advisor to business executives and directors. Have you looked at the control Tom, in terms of the voting shares? Quote ", and "What kind of access to senior management does the board have? View. The fishy excuse provided by Holmes was quickly and carelessly accepted and not questioned. 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. Jan. 6, 2022 5:30 am ET. 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. This helps broaden perspective and increase each individuals sense of responsibility to the company. Oversight of the leadership was what you did as a board member. A full-time MBA program for mid-career leaders eager to dedicate one year of discovery for a lifetime of impact. The health companys plummet carries valuable lessons for Silicon Valley. 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. How does such a politically and militarily connected board not know that these claims are being made to investors? A company that wanted to look into issues would have contacted the person or used the 60 days working notice to interview them about why they were leaving. ", "What's the CEO's interaction with the board? Larry . The evidence needed to back Theranos claims is now absent, rendering the company even more suspect. The SEC determined that the board was misled just like the rest of the other people. The company hyped itself up and secured massive funding, all the while failing to. 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. Amii:Great question. 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. Its a perfect example of how easy it is for all of us to make assumptions and believe what we want because of our goals. I would recommend that CEO's and boards sit down and talk about what their value creation model is, who their stakeholders are. 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. By Erin Griffith. 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. Option 2: Have the students watch the video (the full video or the shorter version) in class. The reason? According to Jeffery Sonnenfeld of Yales Executive Leadership Institute, the most deciding factors in a boards effectiveness are, surprisingly, not structural prescriptionssuch as board makeup, procedures, committees, executive sessions, board members age, equity involvement, independence or even credentials. In fact, it turns out that the lab director had sent hundreds of emails to himself at or around the time of his resignation. 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. A lot of people have commented on that that was the case here. The Theranos issue is just one of the proof that companies need to have a cautious yet. Theranos founder Elizabeth Holmes charged with $700m fraud, 5 Areas Collegiate Athletics Can Work on to Improve Their Cultures. 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. By then, Theranos and CEO Elizabeth Holmes were accused of making false claims about the blood testing technology. Holmes "chose fraud over business failure. 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 company was criticized for having a board of directorsprimarily composed of former diplomats and military personnel. Any employees that raised ethical issues were fired and no questions were allowed. 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. Partner Fund purchased 5.6 million shares of Theranos at a price of $17 a share in February 2014. eventually fail to sustain its operations. Complex dependencies that required progressively bigger risks or face complete failure. If convicted, each faces up to 20 years in prison. Furthermore, Theranos maintained extreme secrecy in the name of protecting their proprietary technology. When, in fact only about a dozen or so tests were done. The firm which was once valued at $9 billion . I hope you will join us again for our next episode of Across the Board. I know you will enjoy it. She used phrases and words that had a magical ring to them. 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. 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. Usually there's at least a general counsel at some point to serve in a dual-hatted role. In a court filing, prosecutors argue Holmes "likely benefitted," from the loss of the LIS. I like the simplicity of that. "In fact, the . She said nothing concrete. This seems to be the key to a robust boardbuilding a team of diverse skills and perspectives, where individuals are held accountable and dissent is encouraged. Case Study: Violating Disclosure Laws. Those tests and Walgreens adoption of Theranos technology in its stores led to $750 million in new funding. 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? 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 talked about her fear of needles and blood. 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. Carreyrou recently visited Stanford Graduate School of Business as part of a program organized by the schools Corporations and Society Initiative. 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. 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. And she wouldnt let anything get in the way of that. This could have been an opportunity for that to happen. She specializes in accelerating the success of executives and partners with leaders and teams to help scale their businesses.