Using a "nanotainer" (a small device designed to draw, retain, and analyze a . Combine that reality with the myth of the brilliant Silicon Valley start-up founder who sees around corners and can never be wrong, as Carreyrou described it, and you have a very dangerous set of circumstances the kind that yield a business story that starts with sky-high valuations and ends in criminal charges. I think the public health component of the criminal charges is going to resonate, Carreyrou said. Under scrutiny, the company faced lawsuits from investors, pharmaceutical partners, and the state of Arizona, where it provided blood-testing directly to consumers. Obviously, common sense would demand skepticism and a more regulated checks and balances on a Founder. written by AppliedCG 29 February, 2016. Rashmi is anethics speakerand consultant fighting to create a culture of conversation and bringethical issues in businessto light, to promote integrity, to enhance commitment to fiduciary duty, to build ethical leadership, and to shift the paradigm of ethics standards through ethics training. 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. Notably, Boies was already connected to Theranos (as an . Your email address will not be published. Keep in mind that one reporter did have the courage to pursue the truth, but what all the other so called journalists? 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? Sports Direct . Both Holmes and the board were out of their depth.. 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. 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. The board has an oversight responsibility. See Theranos founder Elizabeth Holmes charged with $700m fraud. bbc.com. Theranos' board had very limited access to people and information. If you have any questions about any of the topics we discussed, you can reach me at TFox@tfoxlaw.com. Corporate governance essentially involves balancing the interests of a companys many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community. It's a fascinating exploration of a case that's literally torn from the headlines. Through intellectual rigor and experiential learning, this full-time, two-year MBA program develops leaders who make a difference in the world. The Theranos board was very carefully crafted. Opinions expressed by Forbes Contributors are their own. 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. So why was there no push for a compliance officer at an earlier time? A lack of expertise on the board Theranos' leadership also distinctly lacked the expertise required to develop a sophisticated medical testing technology, Carreyrou said. An interdisciplinary program that combines engineering, management, and design, leading to a masters degree in engineering and management. Assign the Jones Unicorn Governance Trap article, and the Ramsey, Business Insider articles to be read prior to class. 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. And she wouldnt let anything get in the way of that. 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. We touch upon a wide variety of institutional corporate governance controls and other failures of the company. 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. The Theranos scandal has dominated headlines, and both fascinated and appalled readers worldwide, since John Carreyrou's shattering report first broke in 2015. Recently, I have been fascinated with the emergence of Silicon Valleys rising star, Theranos, and its subsequent federal investigation and decline. 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?" It was not unusual for employees and executives to be fired from the company. 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. 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. 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. So, that's something that a board would normally want to look into. The gap between what she claimed and what she had really achieved became a massive fraud, Carreyrou said. 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. Essentially, the board is the CEOs boss figuratively at least. 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. First, we review the stakeholder approach to corporate governance as an alternative to the shareholder-focused conception of the firm. The SEC determined that the board was misled just like the rest of the other people. Tom Fox:Hello everyone. The reporter entered Silicon Valley not as a tech businessperson or even a tech reporter but as a health care reporter pursuing a tip. She always flew in private gulf stream jets. 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. One of the interesting things about Theranos is who was driving the corporation and what support did management have in running an effective corporation. 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. Theranos has been the subject of scathing coverage in The Wall Street Journal, which has relentlessly questioned the reliability and safety of its blood tests, and it is under intense regulatory. Frankly, when you've got ethical management in place, they would prefer to have an independent investigation as well. 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. Her words and analogies actually made no sense if you paid attention to what she was saying. Commentary: Absconding CEOs show how corporate governance gaps can be better plugged. She lied about the current state of development for her heralded new technology. Elizabeth Holmes, founder of Theranos (Credit: Vanity Fair) T heranos, the infamous biotech startup, has been the topic of many conversations in media. Show abstract. In addition to a loss of legitimacy, Theranos risks losing its license to operate labs, and CEO Elizabeth Holmes would likely be forced to exit the industry. Jan. 6, 2022 5:30 am ET. But Holmes created a structure that was unusual in corporate governance. They also could have ordered an independent investigation. This button displays the currently selected search type. High-performing health care teams focus on functional and cultural change simultaneously, while low-performing teams focus on just one type of change. March 19, 2018. 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. 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. A lot of people have commented on that that was the case here. Attribution . Option 2: Have the students watch the video (the full video or the shorter version) in class. How data-savvy are you, really? A new study concludes that successful tech firms are often discovered and not planned., Navigating Corruption: A Case Study from India. More recent duties: Strategy development (a debate point), talent management, and investor relations. The board was a whos who of big names including Kissinger and current Secretary of Defense Jim Mattis that boosted Theranoss reputation and Holmess credibility, but was a make-believe board, Carreyrou said, due to Holmess voting control. What Makes Some Health Care Teams More Effective Than Others? The investors in the company were mostly very wealthy individuals and the lost money is a blip in their financial ecosystem so they might not care. 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. One of the most epic failures in corporate governance in the annals of American capitalism. 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. 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. Partner Fund purchased 5.6 million shares of Theranos at a price of $17 a share in February 2014. The Theranos board and federal regulators provided insufficient oversight, Carreyrou noted. It's all about internal controls, writes The Man From FCPA. 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. In 2016, a detailed report was released by the Business, Innovation and Skills Committee (ISC) which . 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. By Erin Griffith. Rather, she says it shows what investigative reporting can do. The company was criticized for having a board of directors primarily composed of former diplomats and military personnel. How companies use AI to reach customers, innovate, Creating change through collaborative participation. There are fourteen new forensic case analyses critically scrutinising governance failures. You can always hire them if you have that sort of a litigation on your hands Id assume. (2 minutes) The verdict in the criminal trial of Elizabeth Holmes completes a chapter in the tangled tale of Theranos. Bad corporate governance could cripple even the best businesses. That gave her 99% of the voting power. Required fields are marked *. See all articles by Lawrence J. Trautman . They've got a lot of pressure and the board needs to have a harmonious enough working relationship with the CEO. This 20-month MBA program equips experienced executives to enhance their impact on their organizations and the world. As a matter of fact, any time someone spoke up about their disagreements with the decisions being made, they were fired. Some of the systems that would have been in place if they'd had an effective compliance and ethics program, would have brought a lot of these issues to light a lot earlier. However, how do they get penalized for not doing their jobs? Tom Fox:Yeah. Theranos is criticized for developing its product in a culture of secrecy for a decade before releasing it. Customers called and complained about faulty blood results that led these families to run to the Emergency Room. 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. Zenefits did this, and then they fixed it and then they started up again. Tom Fox:Hello everyone. Theranos: Biggest failure of corporate governance in history Elizabeth Holmes built her company Theranos on this invention she named the Edison. Combine an international MBA with a deep dive into management science. Theranos, Holmes and former company president Sunny Balwani were charged with fraud by the SEC in 2018. I wonder why they're leaving the hottest company in the world that just won all these awards for innovation.". 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. When misconceptions like this propagate within a company and its leadership, it is the responsibility of the board of directors to provide necessary oversight. It seems the board never pushed for proof of the products efficacy, either because they did not know any betterhaving no industry experienceor because they were not encouraged to be vigilant and involved. Agnishwar Basu. 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. She wanted to be rich and famous. That dream garnered buy-in from numerous leaders in both the business and political fields. In this particular case, it was both. Elizabeth Holmes is not Bernie Madoff, Carreyrou said. 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 Wall Street Journal, which published the glowing article about Theranos early on, ultimately unraveled its myth, thanks to a months-long investigation by reporter John Carreyrou. She described in a single expression for us the job of a board member as Nose in, hands out. She wanted to be a celebrated tech entrepreneur. A non-degree, customizable program for mid-career professionals. The history of the company and its eventual downfall and current vindication and trial of the founder, Elizabeth Holmes, is marred with ethical concerns and issues. Forbes named her one of the richest self-made women in the world. To read a transcript, scroll below. 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. 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 . Amii:Until January 2015. But, who was she and what did she promise? 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. He spoke before an audience in conversation with Michael Callahan, executive director of the Rock Center for Corporate Governance, which cosponsored the event. Discussion questions about corporate governance A board needs to both give a CEO wings to be innovative and to come up with new ideas and to take calculated risks. Tom Fox: There's been a lot written about the Theranos case, so lots that both you and I have digested. Amii:Great question. When it comes to the pharma trade press there is only one publication that pursues the truth; STAT News. In October 2015, a Wall Street Journal investigation exposed Silicon Valley startup Theranos for making fraudulent claims about its breakthrough advancements in blood-testing technologies. View. 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. 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. 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. 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.