What Theranos Got Right About Risk and Reputation Management. Summary. As lawmakers grill Facebook CEO Mark Zuckerberg this week, it's clear many are wrestling with whether and how the government should regulate tech . The reason? When Warren started out his early investment partnerships, he had established very stringent rules about what the investors were allowed to do. I really believe, that to a point, mHealth could be the next Theranos. 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. 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. This was Elizabeth Holmes masterstroke. A full-time MBA program for mid-career leaders eager to dedicate one year of discovery for a lifetime of impact. 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. Theranos leadership also distinctly lacked the expertise required to develop a sophisticated medical testing technology, Carreyrou said. Now, hopefully this is not the case for people who are on this call and who are in corporations or serving on boards. 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 culture at Theranos was toxic, Carreyrou said. Or once you've lost control, is that it? In this case, the health of patients was not taken into account. They want to look for rewarded risk. As she explained to colleagues at the company's headquarters, in Palo Alto, he was named after the world-famous sled dog . It included a lot of politically connected figures. When two would-be whistleblowers told the Theranos board that Holmes had exaggerated revenue projections . ", "What's the CEO's interaction with the board? It is amazing to me that Elizabeth Holmes got her start when she was invited to deliver a TED MED talk in 2014. But, Holmes was worried about saving face and she did not want to disappoint her investors with the truth and was also worried about her commercial partners. An interdisciplinary program that combines engineering, management, and design, leading to a masters degree in engineering and management. Elizabeth Holmes built her company Theranos on this invention she named the Edison. Theres a limit to that playbook, and it doesnt transfer well to the realm of medicine. 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. -0.79 -1.69%. 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. Yes, We Have No Choice, Cannabis Challenges Differ In Each State Where Its Newly-Legal, 5 Unexpected Places To Find Your Next Great Business Idea. Sonnenfeld states in the Harvard Business Review that when honest dialogue is not actively encouraged, it is common for groupthink to take over: Directors are, almost without exception, intelligent, accomplished, andcomfortable with power. They've got a lot of pressure and the board needs to have a harmonious enough working relationship with the CEO. The insolvency of the company attributed to the failure of its governance system that led to the inefficiency of the venture. 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 2016, a detailed report was released by the Business, Innovation and Skills Committee (ISC) which . Mar 2018. To read a transcript, scroll below. . 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. What were their motivations to continue to lie in bed with Theranos? March 14, 2018. And then when they hired a general counsel, she had a political background. She assured her investors that projected revenues would be approximately $100 million, when in fact the revenues in 2014 were closer to $100,000. And then they had no CFO until the final year. 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 company hyped itself up and secured massive funding, all the while failing to. No one was truly policing the businesss processes or offerings. 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. So far Theranos has raised about $750 million. In a normal healthy board, the board could, if they're not educated around labs, in this case for example, they could hire a consultant to be an independent consultant to the board, to help educate them on the types of questions they should be asking in order to fulfill their governance responsibilities. In some of the emails, the lab director talks about his Hippocratic Oath and how he felt ethically in a very bad spot. Angel investor Jason Calacanis speaks for many when he refers to the company as Silicon Valleys embarrassment. Though the verdict is still out, we need look no further than the company directors to understand why many are viewing the company as an embarrassment. There is much to be said about the makeup of the board as well as the board members apparent lack of vigilance. Ethical Failure at Theranos. 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. Until she couldnt and it all came crashing down around her. Have you looked at the control Tom, in terms of the voting shares? primarily composed of former diplomats and military personnel. I am an optimist and I would like to think that this is a healthy watershed moment for startups that have unicorn status, that get all this money, and that boards will be more careful and that CEO's frankly will be more open to being questioned. If you start from that place, you're going to avoid a lot of problems. Just three years later, in 2010, the company was valued at $1bn. Quote I just finished reading Bad Blood by John Carreyrou, the Pulitzer Prize winning Wall Street Journal investigative reporter. 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. Its a perfect example of how easy it is for all of us to make assumptions and believe what we want because of our goals. It is also an example of how important it is to. They did nothing to verify that her scientific claims were true. 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. eventually fail to sustain its operations. What we continue to learn about Theranos is that the level of deception was unprecedented and that Homes surely belong in jail. However, these changes came too late for Theranos to win the benefit of the doubt when it comes to standards of good governance. I really hope that Elizabeth and Sunny Balwani get what they deserve. 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. But there was apparently no one on the board to point out that this approach doesn't work very well for technology startups. When misconceptions like this propagate within a company and its leadership, it is the responsibility of the board of directors to provide necessary oversight. Originally published at worldofdtcmarketing.com on May 21, 2018. You might argue that they are in fact looking out for the investors by protecting the intellectual property but you dont necessarily need a firm on a retainer for that. Furthermore, Theranos maintained extreme secrecy in the name of protecting their proprietary technology. If you look with hindsight at how the company was structured, there's evidence that all the decisions were made by Elizabeth and, at least while he was there, her second in command - Ramesh "Sunny" Balwani. Usually this means finding a new CEO or voting on the right board member to take over. 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. Amii:Until January 2015. 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 . 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?" Can We Save Social Media? While a lot of tech companies maintain secrecy around their products, this was at a different level. I think they really did try to develop a technology, they just never got to the point where it worked, he said. That's interesting in this case as well. ", "Are there regular reports by key employees? 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. 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. 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. A board needs to both give a CEO wings to be innovative and to come up with new ideas and to take calculated risks. In this podcast episode, former general manager Billy King discusses the decision-making process of assembling a team. This is third in a series - let me know what you'd like to hear and I'll do more. The health companys plummet carries valuable lessons for Silicon Valley. Required fields are marked *. They briefly had a CFO very early on in the company. 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. Did the public, investors, board members, potential customers, and employees ignore obvious red flags? Holmes "chose fraud over business failure. In the case of Theranos, we are seeing what can happen when such a board does not exist. Theranos also exploited a regulatory loophole: Laboratory-developed tests like those the business offered didnt (and still dont) fall under the exclusive purview of the Food and Drug Administration or other health care-focused agencies. For the media, Elizabeth Holmes story proved irresistible: a bright young woman revolutionizing blood testing, in Silicon Valley no less. The Theranos scandal highlights the need for transparent corporate governance. It's almost a situation of where to begin, but with regard to the board of directors, where would you suggest we begin? Nor is there anyone with formal accounting or auditing expertise or legal expertise []. How companies use AI to reach customers, innovate, Creating change through collaborative participation. Or rather were not allowed to do. Due to the various causes of corporate failures, corporate governance failures . This podcast will help you understand, as a board member, your role and your role going forward in this type of situation. John Carreyrou, Carreyrous outside perspective helped him break the story. Amii Barnard-Bahn (amii@barnardbahn.com) is an executive coach and strategic advisor to business executives and directors. 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. Tom Fox:That's a great tagline. PDF | On May 16, 2018, Karl J. Lackner and others published The Theranos saga and the consequences | Find, read and cite all the research you need on ResearchGate Once she managed to convince Larry Ellison, the founder of Oracle to become an investor and board member, there was no looking back. Carreyrous first article appeared in October 2015, and revealed: Theranos did less than 10 percent of its tests on Edison machines.. Amii:Lets start with an acknowledgement of what a board should do, which is to make informed business judgments. What we're going to focus on today is the failures at the board level. Where it became fraud is that she and Sunny lied about the fact that they had succeeded when, in fact, it was still very much a work in progress.. But, who was she and what did she promise? 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. That it was just a prestige board designed to help get investor money for Theranos, which it did quite well. 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. These were speakers that were there to talk about corporate governance. Theranos attracted an all-star board of directors. | Reuters/Brendan McDermid 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. Others have emphasised the failure of the market to see through a founder who was celebrated as a 'visionary', . Elizabeth was intelligent but arrogant. Elizabeths number 2 and boyfriend Sunny threw them out in a fit of rage.