The board knew this was the investors money she was spending right? 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. The Theranos story was supposed to have a very different ending. I think that in this case, with Theranos, there was a huge structural impediment to the board actually being able to do anything. 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 you enter industries where lives are in the balance, you cant really just iterate and debug as youre going. Strong companiessuch as GE and Home Depotare known for ensuring their boards do an effective job. 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. 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. You cant do that in medicine, especially with a blood testing machine that patients and doctors rely on for very important medical decisions, Carreyrou said. 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 . Individual Corporate. Can We Save Social Media? But it failed to acknowledge that this vision made patients their ultimate customer. Holmes was seen as the darling of Silicon Valley. A board needs to both give a CEO wings to be innovative and to come up with new ideas and to take calculated risks. Until she couldnt and it all came crashing down around her. 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? The health companys plummet carries valuable lessons for Silicon Valley. Across the Board is a part of the Compliance Podcast Network. 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. Didn't do its job in governing, but certainly attracted investors and a lot of PR to the company. In this podcast with Tom Fox, we explore blood testing startup Theranos, once valued at $9 billion, and the failures of its board of directors to fulfill its oversight responsibilities. Carreyrous first article appeared in October 2015, and revealed: Theranos did less than 10 percent of its tests on Edison machines.. Here are two others: But Holmes created a structure that was unusual in corporate governance. A 12-month program focused on applying the tools of modern data science, optimization and machine learning to solve real-world business problems. | Reuters/Brendan McDermid, 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. When it comes to the pharma trade press there is only one publication that pursues the truth; STAT News. They need to be the conscience of the company and rein in things that are going to be an unrewarded risk to the company. Assign the Jones Unicorn Governance Trap article, and the Ramsey, Business Insider articles to be read prior to class. Rare is the company that has failed so spectacularly or so famously as Theranos, the biotech startup that purportedly could divine your health through revolutionary new blood-testing devices that. Or once you've lost control, is that it? For Holmes, the dog represented the journey that lay ahead for Theranos. 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. Those tests and Walgreens adoption of Theranos technology in its stores led to $750 million in new funding. But, somehow, Holmes was able to get away with it. Now, Holmes and former Theranos president Ramesh Sunny Balwani, arefacing federal wire and fraud charges, and the company, valued at $10 billion at its peak,dissolvedat the end of August. 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 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. So, yeah, could we just agree lots of red flags? In some of the emails, the lab director talks about his Hippocratic Oath and how he felt ethically in a very bad spot. Tom Fox:In addition to no CFO, none of the investors, none of the board had the benefit of audited financial statements. While a lot of tech companies maintain secrecy around their products, this was at a different level. It is alleged that Holmes saw the board as a 'necessary burden' that would lead to further funding and an increase in Theranos' profile. . In response to the Wharton podcast, Robert Talbot-Stern said in a comment: As for Theranos, There was a toxic mix of an unseasoned, untethered or ethically loose (take your pick) founder in control and a board woefully short of corporate governance skills (whether or not purposely hand-picked by Holmes because of that skill shortage and regardless of their impressive but meaningless credentials for their board role). Rather, she says it shows what investigative reporting can do. 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 . First, we review the stakeholder approach to corporate governance as an alternative to the shareholder-focused conception of the firm. 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. Amii:Yeah, and then one near and dear to our hearts Tom. Narcissistic CEOs Can Mean Big Legal Bills, Big-Data Initiative in Intl. 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. Elizabeth Holmes, founder of Theranos (Credit: Vanity Fair) T heranos, the infamous biotech startup, has been the topic of many conversations in media. Preprint. Volkswagen's share value plunged 30% in the . It is a lesson in many things you should look out for and all things you should avoid. Steve Jobs while demanding and difficult to work with at times, was extremely focused and aware of the needs of his customer. 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. Frankly, when you've got ethical management in place, they would prefer to have an independent investigation as well. 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. What fast-growing startups and their boards must understand about building culture. She wore black turtlenecks and was extremely stubborn about her vision. These were speakers that were there to talk about corporate governance. Elizabeth on the other hand, emulated Steve Jobs by attempting to look like him, talk like him and be stubborn like him but was unwilling to demonstrate his most important quality being obsessed with quality. Conclusion. This could have been an opportunity for that to happen. 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. Under scrutiny, the company faced lawsuits from investors, pharmaceutical partners, and the state of Arizona, where it provided blood-testing directly to consumers. 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? As she explained to colleagues at the company's headquarters, in Palo Alto, he was named after the world-famous sled dog . Now, hopefully this is not the case for people who are on this call and who are in corporations or serving on boards. 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. The Indian market-regulator SEBI has taken significant steps in ensuring sufficient controls to manage Corporate Governance standards. Her 50 percent share of the company was worth $4.5 billion. 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. See all articles by Lawrence J. Trautman . Some companies, as you know, when they find a problem like this, they self-disclose. 5. This 20-month MBA program equips experienced executives to enhance their impact on their organizations and the world. In essence, it kicked the can down the road, hoping that salvation would come at some point. Would-be whistleblowers were threatened with lawsuits. Criticism of leadership or practices was unwelcome. Corporate governance failures Corporate governance was also touted in many instances as the main reason for corporate failures. The fishy excuse provided by Holmes was quickly and carelessly accepted and not questioned. March 14, 2018. Theranos and FTX show a broad failure by investors to ask enough questions before handing over cash, . 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. 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. Take our quiz to find out. 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. Partner Fund purchased 5.6 million shares of Theranos at a price of $17 a share in February 2014. Oversight of the leadership was what you did as a board member. A miniaturized blood analyzer that would disrupt the $60 billion lab testing industry dominated by giants LabCorp and Quest Diagnostics. Amii:Until January 2015. But, it is also a reminder that business owners often make bad decisions when faced with certain pressures that are perceived to be rigid. Once she managed to convince Larry Ellison, the founder of Oracle to become an investor and board member, there was no looking back.