As Theranos Proceedings Continue, Here’s What Private Company Boards Can Learn
While it has been nearly four years since Theranos collapsed under the weight of legal, commercial, and media scrutiny, we’re still seeing the health technology company all around us.
The high-profile trial of former CEO Elizabeth Holmes ended in a conviction on four fraud charges in early January, and she’s scheduled to be sentenced on September 26, facing a maximum penalty of 20 years in federal prison for each count. Additionally, the trial of Ramesh “Sunny” Balwani, the company’s number-two executive and Holmes’ former boyfriend, began this month. Movies and other media focused on Theranos and its leadership are coming out, too, such as The Dropout, which premiered earlier this month on Hulu.
As the case continues to make headlines, it is worth reflecting on private-company governance lessons from the Theranos scandal related to accountable capitalism, reputation risk, and business oversight. The conversation can be framed around the following four governance principles:
1. Ensure the board has diversity of experience. Elizabeth Holmes’ vision and skill set were remarkable. She understood the leverage she could create by attracting high-profile, “rock star” directors to her board, such as former Secretary of State Henry Kissinger and former Defense Secretary James Mattis;encouraged investor confidence based on directors’ achievements and success. But this board was devoid of health care or life science experience—in retrospect, a remarkable deficiency.
The compelling lesson for all directors and investors is to ensure that the board culture reflects a wide range of industries and life experiences, which enables engaged, high-level strategic conversations around deploying capital and achieving the organization’s mission. This holds true whether you are on a start-up, family-owned business, or nonprofit board. Having the board populated with people that can be additive to the company’s future growth is a critical differentiator, and a lack of these types of people will become painfully clear as time progresses.
When I was the lead director of Gentiva Heath Services (a leading home health care company), it struck me that we had at least three people on the board with deep health care experience. I believed the shareholders would benefit if we added a standing committee on quality outcomes. When the initial discussions occurred at the board level, the idea met resistance around the time, complications, and cost of another committee. But we eventually voted to create the new committee, populated by those three independent directors with health care experience. The creation of that committee sent signals throughout the entire organization and to other stakeholders that we were committed to and serious about quality outcomes for our patients. When a board is appropriately diverse and focused on the industry at hand, better oversight, strategic, and reputational decisions will follow.
2. Retain independent advisors. The Theranos board was enthralled by the CEO’s style, vision, and personality. Holmes sold herself as the next Steve Jobs. Allegedly, she resisted having outside independent advisors, stating that all her work was proprietary and that she feared a breach related to her leading-edge technology. This desire for secrecy and opacity became a roadblock for the board in exercising its right and responsibility to retain independent advisors.
Every board has the right to exercise independent judgment. It is imperative for all organizations today to retain independent advisors, especially in cybersecurity and technology support, and boards and committees should always periodically have access to independent review. Especially if a company board lacks newer skill sets, such as those related to technology, human resources, and sustainability, and it also does not retain independent advisors in these fields, it exposes the company to significant risk.
3.Build a dedicated whistleblower system. The system should allow employees and vendors to communicate directly with the board without fear of retribution. The Theranos board and shareholders would have benefited greatly from an active, clearly defined whistleblower program, one allowing individuals to share their concerns about the clinical efficacy of the Theranos product. The construction of that system of communication would have reinforced common sense values and strengthened the culture of the organization. Data collected by the board through this system would have stimulated important conversations, director to director, that naturally would have led to an engaged discussion with the CEO and an adoption of a more defined dashboard.
4. Take “class trips” that will give you a chance to exercise your own independent judgment and oversight. If the Theranos board had gone into the field to get firsthand experience with how the product was working, its members could have exercised independent business judgment, looked further, and discovered gaps in what they were hearing from the CEO.
Years ago, when Northwell Health System was being built, I chaired the quality committee for Ambulatory Surgery Center Association. What struck me about those meetings was that we as directors had not met the people we were serving in the system. So, we organized “class trips.” We took the committee in vans to visit sites, which provided us the opportunity to visually understand our mission, whom we were serving, and the clinicians that were providing the services. In the Theranos case, visiting the manufacturing labs or sites where blood tests were being administered could have tipped off the board that something was amiss—and saved investors hundreds of millions of dollars.
Theranos was lacking in all four governance principles, which not only cratered the business but will most likely send its leadership to jail. Private company board members can learn from the mistakes made at Theranos and avoid personal reputation risk by starting with the principles noted above.
In addition, before joining a private board, individual directors should exercise due diligence. During the interview process, ask questions regarding how the board has retained independent advisors related to the operations of the company. Understanding how the company historically has responded to employee or vendor concerns will provide insight into the corporate culture. Once you join a board, ensure access to firsthand knowledge that will help you participate in strategic discussions going forward.
Stuart R. Levine is chair and CEO of Stuart Levine & Associates.
Stuart R. Levine is chair and CEO of Stuart Levine & Associates.