By: Stuart White 10-09-2021
The last time I was interested in a legal trail was during Oscar Pistorius case which had not only me but much of the nation hooked as though it were the final episode of Game of Thrones. My interest has been re-ignited this week by the start of the Elizabeth Holmes case who was the once and future billionaire start-up female tech, now charged with “massive fraud.”
Elizabeth Holmes and her company Theranos were once the darlings of the media. It was a success story, starring the red-hot biotech and a formidable female founder who took a page out of Steve Jobs’ fashion manual and spoke in a deep voice. Deals were cut with large pharmacy companies, such as Walgreens, and Holmes was the toast of the bold-faced panel circuit. Then, a Wall Street Journal investigation in October 2015 unravelled a big cover-up and potential fraud at the company which became the beginning of the end for Holmes and Theranos.
You may accuse me of schadenfreude (a feeling of pleasure or satisfaction when something bad happens to someone else - delighting in how the mighty have fallen) but it’s more than that. It’s a fascinating tale with a sting which could see Holmes jailed for up to 20 years and has been described as one of the wildest cases of Silicon-Valley hype run amok to come along in the last decade. My interest is the recruitment angle, but first a little bit of background.
If you haven’t heard of Miss Holmes, she dropped out of the prestigious Stanford University at 19 to start a blood testing company which was pitched as a technology offering a cheaper way to run dozens of blood tests with just a prick of a finger and a few droplets of blood. She rapidly grew the business to a value to $9 billion. In 2006 Forbes listed her as the world's youngest self-made woman billionaire. Fast forward 10 years and technology flaws were exposed, proving that the product didn’t, and actually couldn’t, work. Theranos, which had dazzled Silicon Valley with its revolutionary blood testing machines, was revealed as a big fat lie. The accusation is that Holmes knew all along. She must have! Holmes’ defence claims there was there was a missing link between what she knew and what Theranos employees told doctors and regulators about the company’s technology. But it was the staff of Theranos who became the whistle-blowers, even to the Board.
Now the Board was made up of entirely old white men which is interesting for the female - and feminist icon - CEO and founder who often appeared on the leadership speaking circuit talking about breaking the glass ceiling. She had done a remarkable job of convincing two former US Secretaries of State and other big boys like Henry Kissinger, James Mattis and George Shultz to join the Board with good reason: this group was highly credible and had the connections to raise funds and gain attention, which they did. However, don’t think that having people with weight around you is a sure fire way to becoming a successful entrepreneur, because despite the impressive line-up of diplomats, military leaders and politicians they couldn’t save her or the company in the end.
It’s interesting to me that no Board member is facing prosecution or even the threat of indictment because none of them are considered participants in the fraud. Although each member was highly accomplished, none of them had any substantial scientific or health care industry experience so some say that they were perfectly positioned to be duped. That was the first recruitment of the Board mistake - composition.
You could argue that it might be useful to have a retired government official or two on your board to teach and offer good leadership skills but, when there are six with no medical or technological experience and with an average age of 80 (fact) you have to question the likeliness of them being plugged in to the company’s day-to-day activities, much less the complexities of modern healthcare technologies. Additionally, the fact that there was no one with formal accounting or auditing expertise or legal expertise kind of set it up for potential problems. In common parlance and with the benefit of hindsight, you might say she hand-picked a bunch of gullible patsies, the corporate equivalent of sugar daddies, if you like.
The second mistake was getting a group of ‘yes’ people who could be wrapped around a CEO’s finger. Apparently, Holmes maintained complete control of the Board and did not tolerate dissent. In fact, the only board member who did stand up to Holmes and asked tough questions was forced to resign under a specious threat of litigation (Holmes routinely threatened to sue anyone perceived as standing in the way). There is no indication that any other member, however, was even interested in asking questions or challenging Holmes. But, isn’t that crucial for a Board to do its job?
After the Wall Street Journal article in October 2015, she was kept on as CEO. You would have to think though that with the amount of management experience on the board they would have acted when the fire began to smoke but they didn’t. Only when Holmes was indicted for fraud by federal prosecutors did they replace her. The big problem with the company was that the product didn’t work and NEVER worked yet the Board never pushed for proof of the product’s efficacy, either because they did not know any better—having no industry experience—or because they were not encouraged to be vigilant and involved. In any case, no one demanded the proper data, and this is ultimately the Board’s responsibility.
Metaphorically where was the Board In this story? Were they asleep at the wheel when the company lost investors over a billion US dollars? Probably. Why else would they remain in the vehicle while it drove over a cliff? Were they incompetent? With no understanding of the industry I would have to say ‘yes’. I think there is a lot to learn from this story, not least of which is that its time that we rethink how our corporate boards are structured and further, impress upon its members that they are not merely accepting a lucrative sinecure but ought to be prepared to sing for their supper occasionally.
In this instance, of course, it’s the company whistle-blower who are going to be singing like canaries inside the courtroom – I can scarcely wait to hear their song!