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. 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. George Schultz even went as far as straining his relationship with his grandson who worked at Theranos by supporting and believing Elizabeth over his own grandson. She is a strategic advisor to boards of directors and executive coach to many C-Suite members. Essentially, the board is the CEOs boss figuratively at least. She just went full force ahead. But what we also are learning is that the media, for the most part, did not do their job in uncovering the massive fraud and instead decided to promote the hell out of Ms Holmes. So, how is it there were significant red flags in not only the rhetoric that Holmes was using throughout her rise, but also in her actions and behavior? Corporate Governance Failures on the Theranos Board Lets start with the management team, Tom. So Amii, with that incredibly long winded introduction, welcome and thank you for taking the time to visit with me today. Or once you've lost control, is that it? 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. She chose to be dishonest with investors and . Complex dependencies that required progressively bigger risks or face complete failure. It is the responsibility of the board to identify systemic issues and take the necessary steps to rectify the situation. 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. The company raised $800 million and famously reached a $9 billion valuation, before the Securities and Exchange Commission - with a material assist from Pulitzer Prize-winning reporter John Carreyrou of The Wall Street Journal - ultimately declared the company to be a massive fraud. In a court filing, prosecutors argue Holmes "likely benefitted," from the loss of the LIS. 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. An Unsung Hero from the Theranos Board - Adam J. Epstein How did the board never know about the changing faces of leadership at every level within the company? 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. Ms Holmes surely belongs in jail, but will justice be served? Businesses need to ensure they remain disciplined, transparent, independent, accountable for their actions, responsible, and fair. Through intellectual rigor and experiential learning, this full-time, two-year MBA program develops leaders who make a difference in the world. Quote I wonder why they're leaving the hottest company in the world that just won all these awards for innovation.". 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. Across the Board is a part of the Compliance Podcast Network. 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. And then when they hired a general counsel, she had a political background. 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. The insolvency of the company attributed to the failure of its governance system that led to the inefficiency of the venture. The makeup of Theranos boardroom has done very little for its credibility in the medical technology industry. This would suggest that, as ridiculous as Theranos boardroom may appear, the bigger mistake was perhaps failing to create a system of openness. Keep in mind that one reporter did have the courage to pursue the truth, but what all the other so called journalists? 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. In this particular case, it was both. 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. That it was just a prestige board designed to help get investor money for Theranos, which it did quite well. Walgreens consultant for the new clinics advised his client to not to proceed working with the in-store clinics, executives at Walgreens dismissed his statement and ignored his concerns. Using a "nanotainer" (a small device designed to draw, retain, and analyze a . 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. When expanded it provides a list of search options that will switch the search inputs to match the current selection. They also could have ordered an independent investigation. Now, hopefully this is not the case for people who are on this call and who are in corporations or serving on boards. Sinyee Koh on LinkedIn: FTX, Zilingo, Theranos: How proper corporate 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. Holmes vision for a better blood test was legitimate and the cause was good, Carreyrou said. When two would-be whistleblowers told the Theranos board that Holmes had exaggerated revenue projections, the board considered replacing her with an experienced executive. The Theranos scandal highlights the need for transparent corporate governance. Theranos - A Case Study on Risk and Reputation Management - eLeaP 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. As a matter of fact, any time someone spoke up about their disagreements with the decisions being made, they were fired. She talked about her fear of needles and blood. A systemic failure of corporate governance means the failure of the whole set of regulatory, market, stakeholder, and internal governance. 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. Commentary: Doesn't anyone do due diligence any more? - CNA See Theranos founder Elizabeth Holmes charged with $700m fraud. bbc.com. I think that in this case, with Theranos, there was a huge structural impediment to the board actually being able to do anything. Until she couldnt and it all came crashing down around her. More navigation items; Post-mortem on Theranoswhere were the controls? Fortune magazine put her on their cover. How companies use AI to reach customers, innovate, Creating change through collaborative participation. In this case, the health of patients was not taken into account. Theres a limit to that playbook, and it doesnt transfer well to the realm of medicine. Is It Time To Change Director Board Compensation In Private Real Estate Firms? Its unclear whether any information that was important got to the board. The board knew this was the investors money she was spending right? Preprint. It would not be me if I didnt talk about Warren Buffet while I was talking about corporate governance and ethics. Tom Fox:Well, Amii, unfortunately we're near the end of our time, but I hope that companies will certainly take your message to heart and, more importantly, I hope you will continue to spread this message. "In fact, the . 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. The lab director is core to their business. When Walgreens, one of Theranos large clients that spent millions of dollars to set up clinics to showcase the new technology, asked to see the lab with the new technology, Holmes denied them such permission. In 2018, the Securities and Exchange Commission (SEC) charged Theranos, Holmes, and former president Ramesh Balwani with massive fraud. In larger organizations, a well-structured, independent corporate governance is critical to making sure an organization stays ethical and follows all laws. For Holmes, the dog represented the journey that lay ahead for Theranos. View. Oversight of the leadership was what you did as a board member. The culture at Theranos was toxic, Carreyrou said. I particularly like "If you don't do an appropriate investigation, you're basically inviting the government to do it for you. 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. It's a fascinating exploration of a case that's literally torn from the headlines. Tom Fox:Hello everyone. She made false claims as to who were her clients. How about no compliance and ethics officer? They also had the most prominent law firm in the country on a retainer at their beck and call. Jan. 6, 2022 5:30 am ET. Steve Jobs while demanding and difficult to work with at times, was extremely focused and aware of the needs of his customer. 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. 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. The last days of Theranos the financials were as - MarketWatch ", and "What kind of access to senior management does the board have? Key Learnings From World'S Biggest Corporate Governance Failures 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. Its getting into new industries, getting into self-driving cars, getting into medicine, Carreyrou said. The most powerful expression I took from this class was said by Patty Bedient. 35 Pages Posted: 28 Mar 2022 Last revised: 14 Jan 2023. While Warren acknowledged that he learned a lot from his mentor Ben Graham, he also admitted he was different. See all articles by Lawrence J. Trautman . When Warren started out his early investment partnerships, he had established very stringent rules about what the investors were allowed to do. PDF Corporate Failures - assets.kpmg.com They didn't have a general counsel for a long time, until I think it was 2015. Theranos: The Limits of the "Fake It Till You Make It" Strategy And you're talking about a very highly regulated business. The Theranos board and federal regulators provided insufficient oversight, Carreyrou noted. Theranos: Biggest failure of corporate governance in history Elizabeth Holmes built her company Theranos on this invention she named the Edison. She always flew in private gulf stream jets. 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. 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. The company was criticized for having a board of directorsprimarily composed of former diplomats and military personnel. Bad corporate governance could cripple even the best businesses. It clears their name, it shows a good faith effort to comply and not to do anything inappropriate. Holmes did nothing to deal with the complaints of customers or issues raised by employees. We touch upon a wide variety of institutional corporate governance controls and other failures of the company which led to its demise. The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive. much as was the case with Adam Neumann of WeWork or the well-publicised Elizabeth Holmes of Theranos. 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. Potentially they would have looked into the lab issues, found serious problems, and they would have potentially shut down the lab. 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. 5. This could have been an opportunity for that to happen. (2 minutes) The verdict in the criminal trial of Elizabeth Holmes completes a chapter in the tangled tale of Theranos. What we're going to focus on today is the failures at the board level. 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. This button displays the currently selected search type. Of course, there's lot of reasons why this lack of a compliance role becomes important later. High-performing health care teams focus on functional and cultural change simultaneously, while low-performing teams focus on just one type of change. Debabrata Mitra. The Indian market-regulator SEBI has taken significant steps in ensuring sufficient controls to manage Corporate Governance standards. 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. Elizabeth Holmes trial verdict: Guilty on four out of 11 charges | CNN 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 . A rigorous, hands-on program that prepares adaptive problem solvers for premier finance careers. So far Theranos has raised about $750 million. 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. A lot of people have commented on that that was the case here. Last month, The Wall Street Journal revealed complaints from Theranos employees that most of the 235 tests the company offers are not performed using its revolutionary technology but rely instead. Theranos and FTX show a broad failure by investors to ask enough questions before handing over cash, . Theranos is a Silicon Valley startup once valued at as much as $9 billion. While a lot of tech companies maintain secrecy around their products, this was at a different level. Earn your MBA and SM in engineering with this transformative two-year program. In this episode, we take up the failures of the Theranos Board of Directors. This board took her at her word, he added. Theranos Founder Elizabeth Holmes Found Guilty Of Investor Fraud Mylan, Theranos, and Valeant Resort to Unsavory Governance - Fortune Today I have back with me, podcast favorite, Amii Barnard-Bahn. The Transition of Accounting Principles: A Survey of the Existing Literature. Doesnt this happen often in our own lives? SAN JOSE - A jury found Elizabeth A. Holmes guilty of one count of conspiracy and three counts of wire fraud in connection with a multi-million-dollar scheme to defraud investors in Theranos, Inc., announced United States Attorney Stephanie M. Hinds; Federal Bureau of Investigation (FBI) Special Agent in Charge Craig D. Fair; Food and Drug Administration (FDA) Acting Commissioner Janet . I came at it from the medical perspective with my East Coast skepticism.. It is a lesson in many things you should look out for and all things you should avoid. 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. A non-degree, customizable program for mid-career professionals. Usually this means finding a new CEO or voting on the right board member to take over. 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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. 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. ", "What are some recent examples of board suggestions that have been adopted by management?" The after-effects of any Corporate Governance failures is a resulting wiping-off in billions of stock value. Companies headed by overconfident, self-centered risk-takers are more likely to end up in court. I think they really did try to develop a technology, they just never got to the point where it worked, he said. 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. Here are the main takeaways from Carreyrous discussion of the scandal. Amii:Until January 2015. They're really critical to our business.". But it failed to acknowledge that this vision made patients their ultimate customer. Im not sure what law you could pass that would catch someone intent on lying, Carreyrou said. 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. EBAY INC. 45.98. 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. After high-profile startup failures like FTX or Theranos, investors, employees, customers, and policymakers all ask what might have been done differently to ensure accountability and . Ultimately, it was the accountants, not the scientists, who were left with no choice but to deliver the bitter pill to the Theranos board: The company had even less money than time. | Reuters/Brendan McDermid. Theranos was a privately held healthcare technology company founded by then 19-year-old Elizabeth Holmes in 2003. 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. 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. One of the US senators was a heart transplant surgeon but he obviously spent more time on policy than medicine by the time Theranos came along. As she explained to colleagues at the company's headquarters, in Palo Alto, he was named after the world-famous sled dog . This button displays the currently selected search type. Theranos, Holmes and former company president Sunny Balwani were charged with fraud by the SEC in 2018. 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. Tom Fox:Hello everyone. When it comes to the pharma trade press there is only one publication that pursues the truth; STAT News.