5 Lasting Board Lessons From The Theranos Debacle

The Legacy of the Theranos Board Should Be Indelible in Directors' Minds

(Originally appeared in the October 14th, 2020?'Across the Board'?publication, a Board Director, Board Advisor, C-Level, and Business Leader publication reaching 48,000+ exceptional business leaders in over 70 countries with articles focused on leadership, strategy, and governance topics - sign up here )

Boards can be an interesting, yet conflicted, group. Sworn to the success of the organization, yet sometimes complacent. Dedicated to the purpose and values of the organization, yet sometimes conflicted.?Early stage private companies?as well as established multi-national public companies?commonly aspire for well-known names to join their Boards.?After all, successful and?famous names automatically correlate into proficient, dedicated and focused Board Directors, correct? This is why they are in such high demand,?right??Not so fast...

History has shown that many?of the biggest debacles in modern corporate history have happened under the so-called watchful eyes of extremely well-known, historically successful, even famous, Board Members. How can this be? Aren't they supposedly?great for the organization, drastically lowering risk due to their experience and expertise? It could be argued that this is becoming less true due to their increasingly?competing priorities,?overboarding (serving on too many Boards), lack of next-gen Director qualities,?or simply the thought process that their?'involvement'?is enough.

Interestingly, from a?'boots on the ground'?perspective, if I compare those Boards I consult and advise that are made up of household names vs. Boards of?virtual unknowns, which do you think (on average) are more effective and efficient? You guessed it. In a?majority of the instances, those Boards with lesser-known members are commonly more engaged, more effective, ask more valid questions,?and are thus more valuable to the organizations they serve.

In perhaps the greatest fraud in the history of Silicon Valley, the infamous Theranos?case is a prime example of an all-star?'Board in?name only'?-?what I like to call a BINO. By 2015, this?who's who?cast of powerful names, including Henry Kissinger, James Mattis and George Shultz,?led?instant credibility to the organization.?However, in my self-initiated research and?implementation (out?of?curiosity and for fun)?of a?Board Architecture Assessment ?(BAA),?it became obvious that there was little structure, or architecture, to how the Theranos Board was formed or expected to operate, other than for name recognition purposes only. For then founder, CEO, and Chairperson Elizabeth Holmes, this was no doubt her plan. Famous names would instantly?elevate her organization. Lack of Board?structure would ensure pesky governance mandates from getting in ambition's way. Both outcomes allowing a massive fraud to perpetuate for years.

Actual Theranos Board Architecture Assessment (BAA) Findings:

What the Theranos Board may not have fully appreciated is that it is often the nature of passionate and extroverted founders and CEOs to?'sell'?themselves as much as their company strategy. As with all good things, there can be a dark side to this kind of charisma. While conviction and magnetism can move an audience, they can also create conflicts if and when the goals of the leader shift, almost always imperceptibly at first, into conflict with the organization's values, vision, and mission.?"There is nothing inherently wrong with founders or CEOs channeling their lofty vision (‘put a ding in the universe’) or their boundless energy and commitment (‘no days off!’) to generate excitement and followership - in fact, it can be a real asset,”?states?Mark Nevins , President of?Nevins Consulting .?“However, Board Members and other influential stakeholders must maintain vigilance that the CEO is walking the walk, not just talking the talk. Prudent governance demands that Directors probe statements and claims, demand supporting data, and hold their CEOs accountable to transparent forecasting and measurable results in an engaged and active manner. There are too many sobering examples of powerfully-voiced CEOs who stifled or misdirected the kinds of honest conversations that must happen in the boardroom.”

From a Board Director's viewpoint, an interesting case is that of Theranos Board Member?George Shultz, former U.S. Secretary of State. He joined the Theranos Board in November?2011 and assisted in attracting and recruiting additional dignitaries from his network to?the Board. Additionally, his seemingly tireless promotion of Holmes led to numerous large investments in Theranos.

Then, in 2013, Tyler Shultz, George Shultz's grandson, was hired by Theranos shortly after graduating from Stanford University having earned a degree in biology. He?very quickly encountered blatant acts of fraudulent claims and other actions that continuously put patients requesting blood tests at risk.?Tyler was one of the early whistleblowers to the?burgeoning fraud, reaching out and alerting?regulators in the spring of 2014 under a fake name. He knew first hand, having been closely watched and required to sign ironclad nondisclosure agreements, that an army of legal representation?including private investigators?awaited those who deviated from the plan - hence his use of a fake name.?In an interview with CBS' 60 Minutes, Tyler stated?that he?"...had a personal relationship with Elizabeth, she was close to my family, and I felt like she was deceiving my family and the public.?He also stated that?"the Board was completely sold"?that Holmes could be the next Steve Jobs.

Soon after an avalanche of growing public condemnation, Tyler was outed as the leaker?and forced to leave the company in 2014.?In an interesting turn of events,?George Shultz still did not believe Tyler's claims.?At Holmes' and the Theranos?Board's urging, they?leveraged George to?pressure?Tyler into silence.?George summoned Tyler to his house to discuss his claims in what was believed by Tyler to be a 1:1?discussion with his grandfather, but was surprised to find?Theranos attorneys waiting in another room. The pressure to sign additional nondisclosure documentation must have been immense for Tyler. He didn't sign anything, thus?leading to over $500,000 in?legal fees for Tyler (and his family) to defend himself.?

It wasn't until some time later when the entire fraud was fully uncovered that?George Shultz thanked Tyler?"...for his courage and great moral character."?In what became the Board's?self-perpetuating character elevation of Holmes and the Theranos organization, any sense of governance and?accountability was lost - even when a?Board Member's?'own flesh & blood'?witnessed?wrongdoing firsthand.

This is not to say that even the most cautious and discerning Board Director cannot be fooled or led astray.?However, risks can be reduced by Board Directors remaining objective and truly supporting proper governance, thus purposefully avoiding groupthink and?covert risk. As a Board Member, the 5 best ways to do this include:

1. Remain Respectfully Skeptical:?The best Board Directors?ask tough questions and expect logical, as well as easily understood, answers. They also 'inspect what they expect.'?Never be?fearful of?respectfully?deviating ?from accepted norms, but always be sure to apply the right amount of emotional intelligence (EQ) and mindfulness intelligence (MQ) in your approach.
2. Ensure?Audit & Compliance Committees are?Properly Enabled:?All too often, audit responsibilities?are heavily weighted or solely focused in financial areas, missing the opportunity to assess and mitigate other equally significant?risk areas. Look for, enhance, and fully?support robust Audit Committee and Compliance Committee accountability. With a focused and dedicated effort in these areas, many uncharted risks can be?identified early?on.
3. Evaluate The Structure of the Board:?Is the Board properly structured?to root out risk simply based on its architecture? Are there missing components of expertise, experience, or skill sets that you notice are?blatantly?absent? Is there a healthy cohort of personality traits across the Board leveraging?its uncanny effect of driving discussions to much deeper levels? Question?how the Board was constructed ?and know that the?majority of chronic issues with?Boards stem from improper?structure.
4. Remain Cautious of Boards Containing?All Famous Members:?This is not commonly discussed, but there is validity to this?comment. It is not to say that 100% of these cases can pinpoint problems, but it can be a glaring indicator that the Board is a figurehead group (again, think BINO). Your initial elation of joining an all-star team can quickly unravel into a full-blown?crisis, increased personal risk, and the potential for reputation loss on a much larger scale.
5. Personally Experience the Organization's Products and Services:?Understood that this is not always possible, but in many cases it absolutely?is.?If you are able?to do this anonymously, or through a proxy, even better. What better way to validate claims of the organization's professed abilities. Did you actually experience what the founder, CEO, or Board claimed the company is capable of doing? Did anything strike you as odd? Your intuition and reasoning skills should be on high alert throughout this exercise.?Additionally, when experienced misalignments are not egregious, it can greatly assist in making the decision to either join the Board, or if already on the Board, in?formulating strategies and governance plans for Boards to monitor corrective actions.

Following the incredible and mounting fraud?claims in 2015, the?Theranos Board stayed in place through this?time of high controversy, then changed?its title to a?'Board of Counselors'?in 2016. It is not fully clear what exactly this Board of Counselors was tasked with, other than the likely counseling of each other?in coming to terms with what had happened and offering advice to protect their reputations.?In?December of 2016, Theranos announced its plans?to retire the?Board at the start of 2017.?

The Theranos trial?of Holmes was?originally scheduled for July 2020 and then October?2020, delayed both times due to the COVID-19 pandemic. It is currently scheduled to begin in March?2021. Former Theranos?COO and President Ramesh?“Sunny”Balwani's trial is planned?to begin after Holmes’ trial has ended. Both have pleaded not guilty.?It will be interesting to see if the Board does indeed get dragged into the legal proceedings after all ...and if so, what interesting?D&O insurance ?clauses could possibly be tested or invented from the?outcome.

Are you asking the right questions in the boardroom?

Reach out ?directly to Mark A. Pfister?to assess and enhance your Board's effectiveness with his?Board Director Coaching ,?Consulting &?Advisory ?offerings, and?International Speaking Tour ?topics.

Mark A. Pfister - Board Consultant?|?Non-Executive Director?|?Strategist?|?Board Macro-Influencer?|?Speaker?|?Author - www.PfisterStrategy.com

About the Author:?In addition to serving?on numerous Boards, Mark A. Pfister is a renowned Board Consultant,?'Board Macro-Influencer,'?certified Board Director, speaker, author, and advises public, private, and nonprofit Boards in efficient and effective operations. Known as?'The Board Architect,'?he is also the inventor of the?'Board as a Service'?(BaaS) engagement model and an expert Project Executive?frequently advising on strategic global initiatives in their initiation and operational phases......?<< read full bio?here ?>>

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