UK: An Epic Tale

Last Updated: 25 July 2019
Article by Ibi Eso

At its height, Theranos was the darling of Silicon Valley with a valuation of $9 billion, but it is now facing fraud charges and a loss of hundreds of millions. So what went wrong?

The Theranos story started in 2003 when Elizabeth Holmes dropped out of Stanford University to set up a promising health technology business that claimed to be able to accurately diagnose health conditions from a single drop of blood. It is ending with investors losing hundreds of millions, employees out of work and out of pocket, while its founder and COO are facing multiple fraud charges.

In my opinion, put simply, Theranos experienced ongoing governance failures on an epic scale. The science at the heart of the company was allegedly deeply flawed but this crucial fact was allowed to remain hidden by a corporate culture of secrecy and a startling lack of checks and balances.

Pulitzer Prize-winning journalist John Carreyrou of the Wall Street Journal, who uncovered the deception, detailed the company's downfall in his book Bad Blood. It was also the subject of a five star-rated ABC podcast, 'The Dropout'. Having listened to this, I had a growing sense of disbelief at what went wrong and, in my mind, the governance shortcomings were clear.

Failure to challenge groupthink

The Theranos board failed to carry out its duties properly and challenge the accepted wisdom. Not one individual, it appears, was courageous enough to confront their fellow directors and ask difficult questions for fear of being branded either stupid or a troublemaker. Non-executive directors (NEDs), being a step removed from the day-to-day running of the business, should feel able individually to challenge what they were being told.

Section 173 of the Companies Act 2006 clearly establishes the duty of directors to exercise independent judgement, with its explaining notes clarifying that:"directors must exercise their powers independently, without subordinating their powers to the will of others."

This means it is important for directors to make an effort to question the popular opinion, even at the risk of being controversial or being seen as an outlier, as there could be a slim possibility that the majority view is wrong. At Theranos this did not happen.

Allowing judgement to be clouded by hype

Let's not forget that everybody involved desperately wanted the company's premise to be true and feared missing out on 'the next big thing'. They were simply unable to be objective. It is fair to say that gender and wishful thinking both played a part. Carreyrou said: "There was a yearning to see a female entrepreneur break out and succeed on the scale that all these men have: Mark Zuckerberg, Larry Page, Sergey Brin, Steve Jobs and Bill Gates before them".

Holmes seemingly had the ability to charm high-profile older men – including the then US Secretary of State James Mattis – into investing in or endorsing her venture, lending it unwarranted credibility.
It is significant that the story was eventually broken by a sceptical employee, who was able to resist falling under the spell of Holmes and Theranos president, Ramesh 'Sunny' Balwani. "One of the first things that struck me as 'off' in this story was the notion that she had dropped out of Stanford with just two semesters of chemical engineering classes under her belt and [had] gone on to pioneer a groundbreaking new medical science". Having attended many board meetings, you do come across people such as Holmes that 'talk the talk', but don't necessarily have the ability to deliver. It is important that people like Holmes, who happen to be in senior managerial positions, are grilled at board meetings. Here, NEDs should fulfil their duty by constructively challenging, using their professional experience to uncover the facts behind the glossy exterior.

Lack of Scientific Expertise

None of Theranos' directors had a scientific background. Best practice dictates board composition should include non-execs with sector-specific knowledge and experience. I can't remember how many times I've advised boards I'm working with to ensure directors have the right combination of skills, experience and independence to deliver on the agreed strategy. This can be tested by carrying out a skills audit of board directors and checking this against an agreed statement of desirable skills. All boards should ensure they have a statement that lists the desired combination of skills and experience to lead their organisation and deliver on its agreed strategy.

Company Culture of Secrecy and Intimidation

As governance professionals, we advocate that businesses strive for a culture of openness and transparency but, according to Carreyrou, "The culture at Theranos was toxic". This meant would-be whistle-blowers were threatened with legal action and any criticism of leadership or business practices was met with anger. Those who persisted were usually either fired or marginalised and forced out. It appears that the board was out of touch with the business and deaf to the whispers of increasing disquiet around them. So much so that one of the key whistle-blowers, Tyler Schultz, felt the only way his concerns would be addressed was by taking them directly to a newspaper.

In businesses with transparent cultures a concerned employee should feel able to share their doubts directly with business leaders without fear of recrimination. As a governance professional, I always advocate that every organisation has a whistle-blowing policy and that it is promoted throughout the organisation: it's pointless having such a policy if no one knows it exists or understands that it's the proper channel to raise concerns.

The culture of any organisation is also crucial. This can be promoted through agreeing to a set of values the organisation should live by. The UK Corporate Governance Code 2018 places a welcome emphasis on organisation culture. Principle B of the Code states: "The board should establish the company's purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and promote the desired culture".

Unwillingness to Question

The blind acceptance by the board of Holmes' narrative created an environment in which she was reportedly able to falsify test results. She claimed the company's finger-stick tests were performed using Theranos machines, rather than the Siemens machines that it's alleged were actually used.
According to whistle-blowers, Theranos made active efforts to deceive, cherry-picking data to make test information appear accurate. When lab associates raised issues about equipment failures, data inconsistencies and flawed methodologies, they were repeatedly knocked back. Carreyrou notes, "The gap between what she claimed and what she had really achieved became a massive fraud".

Readers who remember the TV programme Back to the Floor will recall this was about the most senior person in an company - usually the CEO - going back to the operational heart of the organisation. The benefit of leaders visiting operations and seeing for themselves what is happening on the 'shop floor' cannot be over-stated. It is vital that directors, and non-executive directors particularly, make the time to see how things are run and satisfy themselves that operationally the organisation is running well. I doubt any of the Theranos directors actually took the trouble to verify that the machines tasked with performing the pin prick blood test really did work.

Ignoring Warning Signs

The signs at Theranos were there had anyone looked for them. The problems with the Theranos devices would have been apparent even to those with no scientific background. During Tyler Schultz's deposition, he revealed the devices had everything from mechanical errors to parts breaking off to temperature issues and experiment contamination.

Priorities were constantly changing with deadlines and expectations in constant flux. And unsurprisingly, given the chaotic environment, the majority of Theranos employees were unhappy at work, which resulted in high staff attrition. This fact alone should have raised red flags. Staff turnover and sickness levels can be markers for what's really going on in a business and exit interviews should always be conducted to delve into the reasons why people are leaving. The UK Corporate Governance Code 2018 recognises this and strives to raise the profile of the employees' voice in the boardroom. This is a welcome addition to the Code as employees are an organisation's most valued asset.

Theranos now looks set to join the corporate fraud wall of shame and should act as a cautionary tale to any short-sighted business that still questions the need for, and value of, governance. 

Ibi Eso is Managing Director at Bridgehouse Company Secretaries

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions