What Makes Some Health Care Teams More Effective Than Others? She always flew in private gulf stream jets. Larry . It's a fascinating exploration of a case that's literally torn from the headlines. International Corporate Governance is an essential text for those . In this episode, we take up the failures of the Theranos Board of Directors. Required fields are marked *. Silicon Valley was most certainly not lacking on legal talent to represent startups. Corporate Governance failures have the capability of inflicting the deadliest attack on Investors' Trust. It is very easy to notice here how none of these people have any affiliation to medical science. 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. I came at it from the medical perspective with my East Coast skepticism.. Partner Fund purchased 5.6 million shares of Theranos at a price of $17 a share in February 2014. Text. Agnishwar Basu. See Theranos founder Elizabeth Holmes charged with $700m fraud. bbc.com. Tom Fox:Yeah, Francine McKenna wrote that there were no audited financial statements during this time period. What is weird is that Elizabeth was publicly making claims of the Theranos system being used in battlefields in Afghanistan to get investments. Using a "nanotainer" (a small device designed to draw, retain, and analyze a . 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. 35 Pages Posted: 28 Mar 2022 Last revised: 14 Jan 2023. That gave her 99% of the voting power. The fishy excuse provided by Holmes was quickly and carelessly accepted and not questioned. They decided the company needed to be led by an adult, Carreyrou said. 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. Theranos, at one point valued at $9bn (6.5bn), was once the darling of biotech and Silicon Valley. Here are the main takeaways from Carreyrous discussion of the scandal. 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. High-performing health care teams focus on functional and cultural change simultaneously, while low-performing teams focus on just one type of change. Corporate governance failures Corporate governance was also touted in many instances as the main reason for corporate failures. At the end of the day, the difference between an effective board and a failing board boils down to whether or not there is a social system of respect, trust and candor among members of management. 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. Tom Fox:Yeah. But, somehow, Holmes was able to get away with it. www.barnardbahn.com@amiibb. 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 lied about the current state of development for her heralded new technology. This reminded me of an instance from Warrens biography The Snowball by Alice Schroeder. Narcissistic CEOs Can Mean Big Legal Bills, Big-Data Initiative in Intl. It's almost a situation of where to begin, but with regard to the board of directors, where would you suggest we begin? Elizabeth on the other hand, failed to even recognize who her actual customer was. After only 2 semesters at Stanford, she decided she knew enough about the chemistry of blood testing and business to drop out and start Theranos. ", "What are some recent examples of board suggestions that have been adopted by management?" If you have any questions about any of the topics we discussed, you can reach me at TFox@tfoxlaw.com. Tom Fox:In addition to no CFO, none of the investors, none of the board had the benefit of audited financial statements. If the company had been set up properly around compliance, red flags and had an ethical safety net, they would have looked into this. In some of the emails, the lab director talks about his Hippocratic Oath and how he felt ethically in a very bad spot. More recent duties: Strategy development (a debate point), talent management, and investor relations. 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. Theranos was a privately held healthcare technology company founded by then 19-year-old Elizabeth Holmes in 2003. But, it is also a reminder that business owners often make bad decisions when faced with certain pressures that are perceived to be rigid. They've got a lot of pressure and the board needs to have a harmonious enough working relationship with the CEO. She used phrases and words that had a magical ring to them. As a result, the company quickly and rather easily raised hundreds of millions of dollars in . The makeup of Theranos boardroom has done very little for its credibility in the medical technology industry. 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. Keep in mind that one reporter did have the courage to pursue the truth, but what all the other so called journalists? Doesnt this happen often in our own lives? Have you looked at the control Tom, in terms of the voting shares? 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. 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. Theranos sold a noble vision to its investors and the world. This 20-month MBA program equips experienced executives to enhance their impact on their organizations and the world. | Reuters/Brendan McDermid 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. 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. What fast-growing startups and their boards must understand about building culture. A special opportunity for partner and affiliate schools only. It would not be me if I didnt talk about Warren Buffet while I was talking about corporate governance and ethics. To shed some light on how corporate governance failure can lead to disaster, we've taken a closer look at 3 organisations who've practiced improper corporate governance and the lessons to be learned from their mistakes. I hope even more that the board members dont just get to move on. 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. 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. Both Holmes and the board were out of their depth.. By Erin Griffith. 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. Theranos founder Elizabeth Holmes charged with $700m fraud, 5 Areas Collegiate Athletics Can Work on to Improve Their Cultures. Elon Musk and Governance post-Tweet at Tesla:http://fcpacompliancereport.com/2018/10/17602/ 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. Or its new and shiny and seems clean, so all is good with the product or process or company or person. If its banking institutions, of course its banking customers. The Theranos scandal highlights the need for transparent corporate governance. While Warren acknowledged that he learned a lot from his mentor Ben Graham, he also admitted he was different. 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. Holmes vision for a better blood test was legitimate and the cause was good, Carreyrou said. First, we review the stakeholder approach to corporate governance as an alternative to the shareholder-focused conception of the firm. Mar 2018. Your email address will not be published. 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. They go to the regulators. 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. Show abstract. Non-degree programs for senior executives and high-potential managers. 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. A doctoral program that produces outstanding scholars who are leading in their fields of research. Now it's under civil and criminal investigation for defrauding investors. Tom Fox: There's been a lot written about the Theranos case, so lots that both you and I have digested. I may just have to name the episode that. They need to be shareholder oriented, they need to watch out for shareholder value, but then they also should have a special interest in the company. She owned 55% of the shares of Theranos, but more importantly she had stock that gave her 100 votes per share of Theranos stock. Zenefits did this, and then they fixed it and then they started up again. So Amii, with that incredibly long winded introduction, welcome and thank you for taking the time to visit with me today. Earn your MBA and SM in engineering with this transformative two-year program. It didn't take long for problems to occur after Theranos was incorporated in 2004. The after-effects of any Corporate Governance failures is a resulting wiping-off in billions of stock value. The culture at Theranos was toxic, Carreyrou said. 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. It is a lesson in many things you should look out for and all things you should avoid. 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. 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. 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. Her 50 percent share of the company was worth $4.5 billion. Im not sure what law you could pass that would catch someone intent on lying, Carreyrou said. By February 2015 the Theranos fairytale was about to unravel publicly. 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. 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. 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. You have to get your product working first.. The most powerful expression I took from this class was said by Patty Bedient. Attribution 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. 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. They also had the most prominent law firm in the country on a retainer at their beck and call. Getting a . The evidence needed to back Theranos claims is now absent, rendering the company even more suspect. Today I have back with me, podcast favorite, Amii Barnard-Bahn. John Carreyrou, Carreyrous outside perspective helped him break the story. Quote They also could have ordered an independent investigation. Furthermore, Theranos maintained extreme secrecy in the name of protecting their proprietary technology. She said nothing concrete. 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. 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? A board needs to both give a CEO wings to be innovative and to come up with new ideas and to take calculated risks. 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. Those tests and Walgreens adoption of Theranos technology in its stores led to $750 million in new funding. A new study concludes that successful tech firms are often discovered and not planned., Navigating Corruption: A Case Study from India. The company was criticized for having a board of directorsprimarily composed of former diplomats and military personnel. 5. Theranos, Holmes and former company president Sunny Balwani were charged with fraud by the SEC in 2018. She specializes in accelerating the success of executives and partners with leaders and teams to help scale their businesses. I like the simplicity of that. Federal prosecutors say the failure rate of the Theranos blood-testing system was 51.3 %. In my consulting work with company boards and CEO's, we work together to build healthy board governance and executive leadership practices. Subscribe to receive news and updates: I particularly like "If you don't do an appropriate investigation, you're basically inviting the government to do it for you. 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. 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. One of the most epic failures in corporate governance in the annals of American capitalism. To read a transcript, scroll below. apply code of ethics in the business world. 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. They want to look for rewarded risk. A systemic failure of corporate governance means the failure of the whole set of regulatory, market, stakeholder, and internal governance. Attempts at curbing these failures in the form of more stringent legislation and regulation does not appear to have had the desired impact. 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. 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. If theres one big thematic lesson from the Theranos scandal, thats it.. As a consequence, the fact of the failing technology was able to be kept secret, which fostered a negative culture of mistrust and secrecy. That dream garnered buy-in from numerous leaders in both the business and political fields. Image A full-time MBA program for mid-career leaders eager to dedicate one year of discovery for a lifetime of impact. Steve jobs was fired from Apple because the board agreed that he needed to go. Customers called and complained about faulty blood results that led these families to run to the Emergency Room. When two would-be whistleblowers told the Theranos board that Holmes had exaggerated revenue projections . 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. What we're going to focus on today is the failures at the board level. A rigorous, hands-on program that prepares adaptive problem solvers for premier finance careers. Summary. Corporate governance essentially involves balancing the interests of a companys many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community. 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. 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. 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. Tom Fox:Hello everyone. ", "Are there regular reports by key employees? This is Tom Fox again, I hope you've enjoyed this episode of Across the Board. Elizabeths number 2 and boyfriend Sunny threw them out in a fit of rage. Can also assign Skeet article on Snap IPO to compare similar issues in another company. Amii:Yeah, and then one near and dear to our hearts Tom. She talked about her fear of needles and blood. What is clear is that we need to rethink corporate governance to encompass the interests of all stakeholders - not solely . A miniaturized blood analyzer that would disrupt. 2004-2010: Theranos thrives with early funding. The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive. PDF | On May 16, 2018, Karl J. Lackner and others published The Theranos saga and the consequences | Find, read and cite all the research you need on ResearchGate How companies use AI to reach customers, innovate, Creating change through collaborative participation. Boies Schiller Flexner LLP is not your run of the mill law firm. 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. This Enron case study presents our own analysis of the spectacular rise and fall of Enron. Bring a business perspective to your technical and quantitative expertise with a bachelors degree in management, business analytics, or finance. Truth be told as Brandon states in his article, amazingly Walgreens didnt want to be left out or miss out on the new technology that everyone was raving about. A joint program for mid-career professionals that integrates engineering and systems thinking. Theranos attracted an all-star board of directors. He spoke before an audience in conversation with Michael Callahan, executive director of the Rock Center for Corporate Governance, which cosponsored the event. 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. 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. 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 firm which was once valued at $9 billion . With real journalists, like Ed Silverman, they continue to ask the hard questions that too many seem to ignore. Others have emphasised the failure of the market to see through a founder who was celebrated as a 'visionary', . 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. Once she managed to convince Larry Ellison, the founder of Oracle to become an investor and board member, there was no looking back. 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. In Bad Blood, Carreyrou states that employees tried to warn Holmes that the Theranos technology was not ready to go live on humans. 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. 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. 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. An interdisciplinary program that combines engineering, management, and design, leading to a masters degree in engineering and management. How do they repay for the betrayal of the investors trust in them? How transparent is it? I really hope that Elizabeth and Sunny Balwani get what they deserve. Theranos was incorporated in 2004 but did not hire a compliance officer until 2016, more than twelve years later. By 2007, Theranos's valuation hit $197m after it raised another $43.2m in early-round funding. Fortune magazine put her on their cover. Amii Barnard-Bahn (amii@barnardbahn.com) is an executive coach and strategic advisor to business executives and directors. 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. The lab director is core to their business. 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. Potentially they would have looked into the lab issues, found serious problems, and they would have potentially shut down the lab. Didn't do its job in governing, but certainly attracted investors and a lot of PR to the company. 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. So, technically, if you just look at it straight on with that, the board is actually powerless. 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. USD. 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. Carreyrou said the companys culture of extreme secrecy and swift retaliation against anyone who went against the grain set the stage for its eventual failure. When misconceptions like this propagate within a company and its leadership, it is the responsibility of the board of directors to provide necessary oversight.