So Amii, with that incredibly long winded introduction, welcome and thank you for taking the time to visit with me today. How did the board never know about the changing faces of leadership at every level within the company? The gap between what she claimed and what she had really achieved became a massive fraud, Carreyrou said. 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. Strong companiessuch as GE and Home Depotare known for ensuring their boards do an effective job. What's the worst case scenario and what do we always need to keep in mind?" 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 . In the case of Theranos, we are seeing what can happen when such a board does not exist. Text. 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. ", "What are some recent examples of board suggestions that have been adopted by management?" First, Theronos put powerhouse lawyer David Boies on to its Board of Directors to help navigate the current crisis. 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. Elizabeth Holmes is not Bernie Madoff, Carreyrou said. The most effective boards are also the ones where dissent is welcomed. Soltani (2014) argued that "the ethical dilemma is coupled with ineffective boards, inefficient corporate governance and control mechanisms moreover, dysfunctional management behaviour" (p. 251). 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 . This podcast will help you understand, as a board member, your role and your role going forward in this type of situation. Amii:Until January 2015. It is amazing to me that Elizabeth Holmes got her start when she was invited to deliver a TED MED talk in 2014. Boies Schiller Flexner LLP is not your run of the mill law firm. NameEmail*, Posted by The Bart Organization, anInternet Marketing company, Your email address will not be published. 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. The only problem? 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 . As a matter of fact, any time someone spoke up about their disagreements with the decisions being made, they were fired. The ones that dont often self-select out. And that comes down to the super voting shares that Elizabeth had. That should have been a big red flag to the board to investigate, "Gosh why is our lab director resigning? Theranos was a privately held healthcare technology company founded by then 19-year-old Elizabeth Holmes in 2003. 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. It was formed in 2003 by then 19-year-old Elizabeth Holmes, who dropped out of Stanford University to launch the company. They didn't have a general counsel for a long time, until I think it was 2015. Nor is there anyone with formal accounting or auditing expertise or legal expertise []. 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 board has an oversight responsibility. A new study concludes that successful tech firms are often discovered and not planned., Navigating Corruption: A Case Study from India. 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. He wants board members that are 1) business-savvy, 2) shareholder oriented, and 3) have a special interest in the company. Holmess passion for the venture and Steve Jobs-like image (black turtlenecks and all) gained her the support of luminaries like Oracle founder Larry Ellison and former Secretary of State Henry Kissinger. Corporate Governance failures have the capability of inflicting the deadliest attack on Investors' Trust. Have you looked at the control Tom, in terms of the voting shares? 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. 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. You have to get your product working first.. ", "Who are in the key management roles and what are their qualifications and how's it going? But, it is also a reminder that business owners often make bad decisions when faced with certain pressures that are perceived to be rigid. 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 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. Furthermore, Theranos maintained extreme secrecy in the name of protecting their proprietary technology. She made false claims as to who were her clients. Carreyrous first article appeared in October 2015, and revealed: Theranos did less than 10 percent of its tests on Edison machines.. And then you have an older gentleman who had no training in biosciences or medical devices, had business and IT experience in Microsoft and Lotus software, and then became president when he joined in 2009. She just went full force ahead. I really believe, that to a point, mHealth could be the next Theranos. In Bad Blood, Carreyrou states that employees tried to warn Holmes that the Theranos technology was not ready to go live on humans. As a board member, even if you don't know anything about the science behind the company, any key departure like that should have been investigated. First, we review the stakeholder approach to corporate governance as an alternative to the shareholder-focused conception of the firm. The board knew this was the investors money she was spending right? Did the public, investors, board members, potential customers, and employees ignore obvious red flags? Getting a . Theranos's fall from grace is one large-scale compliance failure. I particularly like "If you don't do an appropriate investigation, you're basically inviting the government to do it for you. 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. It is very easy to notice here how none of these people have any affiliation to medical science. 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. Here are the main takeaways from Carreyrous discussion of the scandal. Elizabeth Holmes built her company Theranos on this invention she named the Edison. We touch upon a wide variety of institutional corporate governance controls and other failures of the company which led to its demise. She specializes in accelerating the success of executives and partners with leaders and teams to help scale their businesses. 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 fast-growing startup is now under civil and criminal investigations by the U.S. Securities and Exchange Commission, the Department of Justice and federal health regulators. 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. She was a wannabe prodigy and wanted to mimic Steve Jobs. For example, Home Depot requires directors to regularly visit stores and engage in the operational review of stores throughout the year.. Steve jobs was fired from Apple because the board agreed that he needed to go. Tom Fox: There's been a lot written about the Theranos case, so lots that both you and I have digested. 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. I came at it from the medical perspective with my East Coast skepticism.. To read a transcript, scroll below. 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. Keep in mind that one reporter did have the courage to pursue the truth, but what all the other so called journalists? Summary. A lot of people have commented on that that was the case here. Theranos was involved in high complexity testing and the lab director quit abruptly one day, before the Carreyrou reporting hit. By Erin Griffith. When an employee asked why, she said it was because when she made a promise to a customer, she intended to keep it. Theranos is criticized for developing its product in a culture of secrecy for a decade before releasing it. And she wouldnt let anything get in the way of that. To this date, most people in the media are not being held accountable for their part in building up Ms Holmes without asking tough questions. Elizabeth was intelligent but arrogant. 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. | 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. 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. Zenefits did this, and then they fixed it and then they started up again. The other red flag was Elizabeths security detail. In total, Volkswagen installed defeat devices in 11 million cars across the globe between 2009 and 2015, 500,000 of which were in the U.S. Volkswagen were forced to pay a heavy price for their governance failures in the aftermath of the scandal, most notably a mammoth $18 billion fine from the EPA. 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. Earn your masters degree in engineering and management. 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's all about internal controls, writes The Man From FCPA. 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. And then when they hired a general counsel, she had a political background. 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. 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. We touch upon a wide variety of institutional corporate governance controls and other failures of the company. 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 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. 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. Im not sure what law you could pass that would catch someone intent on lying, Carreyrou said. The Theranos scandal has dominated headlines, and both fascinated and appalled readers worldwide, since John Carreyrou's shattering report first broke in 2015. See Theranos founder Elizabeth Holmes charged with $700m fraud. bbc.com. 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. This begins by ensuring that the right people are on board. 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. The issues that Theranos faced were repeatedly raised internally by employees. When you enter industries where lives are in the balance, you cant really just iterate and debug as youre going. Complex dependencies that required progressively bigger risks or face complete failure. 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 Silicon Valley Can Learn from the Theranos Fraud Case. www.Knowledge.wharton.penn.edu. 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. In a court filing, prosecutors argue Holmes "likely benefitted," from the loss of the LIS. That dream garnered buy-in from numerous leaders in both the business and political fields.