The company was criticized for having a board of directorsprimarily composed of former diplomats and military personnel. I particularly like "If you don't do an appropriate investigation, you're basically inviting the government to do it for you. In the case of Theranos, we are seeing what can happen when such a board does not exist. 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. 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. Amii Barnard-Bahn (amii@barnardbahn.com) is an executive coach and strategic advisor to business executives and directors. 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. Corporate governance essentially involves balancing the interests of a companys many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community. 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. written by AppliedCG 29 February, 2016. 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. Oversight of the leadership was what you did as a board member. John Carreyrou, Carreyrous outside perspective helped him break the story. 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. Subscribe to receive news and updates: 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. Everyone else is doing it and so it must be okay? This was Elizabeth Holmes masterstroke. 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. Why did no-one ask this question? Theranos, a fast-growing private company intent on trailblazing a new technology, set out to attain ambitious goals. 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. It is very easy to notice here how none of these people have any affiliation to medical science. What we continue to learn about Theranos is that the level of deception was unprecedented and that Homes surely belong in jail. I think the public health component of the criminal charges is going to resonate, Carreyrou said. But Holmes created a structure that was unusual in corporate governance. A full-time MBA program for mid-career leaders eager to dedicate one year of discovery for a lifetime of impact. That dream garnered buy-in from numerous leaders in both the business and political fields. You can always hire them if you have that sort of a litigation on your hands Id assume. 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. ensure responsible corporate governance both from a CSR and a good governance perspective. Preprint. 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. A special opportunity for partner and affiliate schools only. This would suggest that, as ridiculous as Theranos boardroom may appear, the bigger mistake was perhaps failing to create a system of openness. What's the worst case scenario and what do we always need to keep in mind?" Theres a limit to that playbook, and it doesnt transfer well to the realm of medicine. 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. Doesnt this happen often in our own lives? Tom Fox:Hello everyone. The Theranos scandal highlights the need for transparent corporate governance. So far Theranos has raised about $750 million. The health companys plummet carries valuable lessons for Silicon Valley. 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. This board took her at her word, he added. At the close of the round in April 2015, the company had a valuation of $9 billion. She was a wannabe prodigy and wanted to mimic Steve Jobs. Did the public, investors, board members, potential customers, and employees ignore obvious red flags? However, how do they get penalized for not doing their jobs? It is the first in a new series assessing organisations against ACG's Golden Rules of corporate governance and applying our proprietary rating tool. First, we review the stakeholder approach to corporate governance as an alternative to the shareholder-focused conception of the firm. What Silicon Valley Can Learn from the Theranos Fraud Case. www.Knowledge.wharton.penn.edu. I know you will enjoy it. 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. Is It Time To Change Director Board Compensation In Private Real Estate Firms? 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. A miniaturized blood analyzer that would disrupt the $60 billion lab testing industry dominated by giants LabCorp and Quest Diagnostics. Her 50 percent share of the company was worth $4.5 billion. She is a strategic advisor to boards of directors and executive coach to many C-Suite members. Recently, I have been fascinated with the emergence of Silicon Valleys rising star, Theranos, and its subsequent federal investigation and decline. To read a transcript, scroll below. 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 was formed in 2003 by then 19-year-old Elizabeth Holmes, who dropped out of Stanford University to launch the company. For the media, Elizabeth Holmes story proved irresistible: a bright young woman revolutionizing blood testing, in Silicon Valley no less. 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. 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. Tom Fox:So, how does a board begin to take back control? She wanted to be a celebrated tech entrepreneur. The after-effects of any Corporate Governance failures is a resulting wiping-off in billions of stock value. Boies Schiller Flexner LLP is not your run of the mill law firm. Theranos, Holmes and former company president Sunny Balwani were charged with fraud by the SEC in 2018. A lack of expertise on the board Theranos' leadership also distinctly lacked the expertise required to develop a sophisticated medical testing technology, Carreyrou said. A miniaturized blood analyzer that would disrupt. So, that's something that a board would normally want to look into. It included a lot of politically connected figures. How transparent is it? Across the Board is a part of the Compliance Podcast Network. 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. But the suspect science behind Theranos and its paranoid, secretive culture of leadership eventually caught up to the business, leading to criminal charges. If theres one big thematic lesson from the Theranos scandal, thats it.. Much is at stake should the company fail to prove the accuracy of its claims, the efficacy of its technologies and its compliance with lab standards. Here are the main takeaways from Carreyrous discussion of the scandal. Narcissistic CEOs Can Mean Big Legal Bills, Big-Data Initiative in Intl. 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. 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. A board acting to prevent further dilution of the existing investors stake in the company should likely have asked that question. She described in a single expression for us the job of a board member as Nose in, hands out. This could have been an opportunity for that to happen. In the spirit of moving fast and breaking things, Theranos, offering to disrupt a massive medical technology industry, was founded in 2003 by Elizabeth Holmes and quickly skyrocketed to a $10 billion valuation by 2013 and 2014, raising over $700 million in venture capital (via Forbes).Theranos promised to simplify and streamline the expensive, arduous process of lab testing blood samples . It's all about internal controls, writes The Man From FCPA. Zenefits did this, and then they fixed it and then they started up again. 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 . Image When misconceptions like this propagate within a company and its leadership, it is the responsibility of the board of directors to provide necessary oversight. Amii:Yeah, and then one near and dear to our hearts Tom. This button displays the currently selected search type. Why didnt directors demand a better accounting of the companys direction and well-being? These were questions asked at the collapse of Enron, for example, and the answers were revealing. The company was criticized for having a board of directors primarily composed of former diplomats and military personnel. 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, prospective board members should ask things like, "What is the senior management and board turnover? We've certainly seen that happen and that's what, as compliance officers, we would advise our corporations to do in the case where there might be some questions around whether management has acted appropriately. Tom Fox:Hello everyone. Corporate governance, according to Investopedia, is the system of rules, practices and processes by which a firm is directed and controlled. Jan. 6, 2022 5:30 am ET. In a recent statement announcing the decision to cut its workforce by 40 percent earlier this year, Theranos defended the layoffs as necessary to "marshal its resources most efficiently and. 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 . 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. 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. Or rather were not allowed to do. By February 2015 the Theranos fairytale was about to unravel publicly. She just went full force ahead. 5. The most effective boards are also the ones where dissent is welcomed. Just read this quote: Though the media attention may have initially boosted Holmes profile nationwide, Textor says the Holmes story is not a failure for journalism. (2 minutes) The verdict in the criminal trial of Elizabeth Holmes completes a chapter in the tangled tale of Theranos. 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. She talked about her fear of needles and blood. That it was just a prestige board designed to help get investor money for Theranos, which it did quite well. A systemic failure of corporate governance means the failure of the whole set of regulatory, market, stakeholder, and internal governance. As we say in our business ethics examples homepage introducing . As a matter of fact, after the scandal broke, Rupert Murdoch sold back the shares from his $125 million investment back to the company for $1 just to get the tax write-off. When, in fact only about a dozen or so tests were done. She lied about the current state of development for her heralded new technology. Ms Holmes surely belongs in jail, but will justice be served? 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. I represents clients like Nike in the recent Michael Avenatti fiasco. Or once you've lost control, is that it? 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. The dance of being on a board, staying independent enough from the CEO, but getting along well enough to get business done, is not to be underestimated. Have you looked at the control Tom, in terms of the voting shares? Any employees that raised ethical issues were fired and no questions were allowed. -0.79 -1.69%. It was not unusual for employees and executives to be fired from the company. 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. The fishy excuse provided by Holmes was quickly and carelessly accepted and not questioned. 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. They also could have ordered an independent investigation. 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. This was Elizabeth Holmes' masterstroke. 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. They did nothing to verify that her scientific claims were true. In larger organizations, a well-structured, independent corporate governance is critical to making sure an organization stays ethical and follows all laws. Tom Fox: There's been a lot written about the Theranos case, so lots that both you and I have digested. www.barnardbahn.com@amiibb. So, if you can imagine operating a company that had taken 700 million dollars from investors, and that had been valued at 9 billion dollars without a CFO, that's something a healthy board would be interested in. Summary. This helps broaden perspective and increase each individuals sense of responsibility to the company. Keep in mind that one reporter did have the courage to pursue the truth, but what all the other so called journalists? Amii:I think so. The board has an oversight responsibility. He was brought back to Apple for the same reason. What is corporate governance? Home Depots co-founder She wanted to be rich and famous. This question will be approached in the following way. In this episode, we take up the failures of the Theranos Board of Directors. 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 said the companys culture of extreme secrecy and swift retaliation against anyone who went against the grain set the stage for its eventual failure. And that comes down to the super voting shares that Elizabeth had. 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. Of course, there's lot of reasons why this lack of a compliance role becomes important later. So, thank you very much! 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. Holmes promised that more than two hundred tests would be conducted with her new technology. In 2006 Henry Mosley, the chief financial officer of Theranos noticed that employees were unhappy after a demonstration of their technology, Edison which analyzed blood samples, to the pharmaceutical company Novartis. And then when they hired a general counsel, she had a political background. 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. The gap between what she claimed and what she had really achieved became a massive fraud, Carreyrou said. This isn't unusual, its increasingly common in Silicon Valley, its often used with family-owned business to concentrate power in the family in case there's a takeover, that kind of thing, but 100 per share is quite a lot. While a lot of tech companies maintain secrecy around their products, this was at a different level. 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. I really hope that Elizabeth and Sunny Balwani get what they deserve. This begins by ensuring that the right people are on board. 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. 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 attracted an all-star board of directors. Or once you've lost control, is that it? In 2018, the Securities and Exchange Commission (SEC) charged Theranos, Holmes, and former president Ramesh Balwani with massive fraud. What types of questions should a board start asking and how early should they start asking those questions? Of course, Theranos was actively deceiving regulators, too. A board needs to both give a CEO wings to be innovative and to come up with new ideas and to take calculated risks. What we're going to focus on today is the failures at the board level. Strong companiessuch as GE and Home Depotare known for ensuring their boards do an effective job. So Amii, with that incredibly long winded introduction, welcome and thank you for taking the time to visit with me today. How do they repay for the betrayal of the investors trust in them? According to John Carreyrou, who recently published his book titled Bad Blood, Secrets and Lies in a Silicon Valley Startup, Holmes was a Stanford University student who dropped out of college to launch her company, promising to make blood tests as convenient as the iPhone. 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. Opinions expressed by Forbes Contributors are their own. 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. That made its founder and CEO Elizabeth Holmes, now 32, the richest self-made woman in America. Holmes was seen as the darling of Silicon Valley. This 20-month MBA program equips experienced executives to enhance their impact on their organizations and the world. 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. Using a "nanotainer" (a small device designed to draw, retain, and analyze a . EBAY. Bring a business perspective to your technical and quantitative expertise with a bachelors degree in management, business analytics, or finance. 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. The only problem? Holmes did nothing to deal with the complaints of customers or issues raised by employees. 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. 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.
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