She defrauded the Board members, who lost a lot of money.
She defrauded the Board members, who lost a lot of money.
This article is particularly on point.
It is important to be clear on a few things about the board’s role in the company’s failure. First, no board member is facing prosecution or even the threat of indictment. None of them participated in the fraud. They, like almost everyone else, were duped. Second, Holmes maintained complete control of the board and did not tolerate dissent. In fact, the only board member who stood 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). So it is not clear that additional governance activity by Theranos’s board would have demonstrably prevented the course of events for the company.
There is no indication that any other board member, however, was even interested in asking questions or challenging Holmes. Each Theranos board member was highly accomplished, but none of them had any substantial scientific or health care industry experience. Holmes recruited famous diplomats, statesmen, and political and military leaders with significant connections for a reason, namely to work those connections, raise funds, and gain attention. Theranos’s board was window dressing. From a compliance perspective, Theranos is a good case study.
Perhaps this helps:
**The Board’s Role in Compliance Oversight and Potential Liability**Directors are responsible for oversight of a company’s compliance function. Foremost, whether in a for-profit or non-profit entity, directors are fiduciaries. As such, directors are responsible for ensuring a company’s activities comply with applicable industry, legal, and regulatory frameworks, the broad protections of the business judgment rule notwithstanding. The Federal Sentencing Guidelines set out the required elements of an effective compliance program, including the board’s role: “the organization’s governing authority shall be knowledgeable about the content and operation of the compliance and ethics program and shall exercise reasonable oversight with respect to the implementation and effectiveness of the compliance and ethics program.”
And, lest there be any doubt, this is an example of serious and severe Board failure:
In March 2008, two high-level employees approached the board chair with evidence Holmes misled the board about the effectiveness of Theranos’s blood testing technology and revenue projections. Faced with this information, the Board decided to remove Holmes as CEO. Holmes convinced them to change their minds. Less than two weeks later Holmes fired both employees. Not one board member looked into the firing of two high-level employees who only a few weeks earlier provided evidence that had convinced them to remove Holmes.
Here’s a capsule evaluation from Fast Company:
While Holmes and former Theranos COO Sunny Balwani were held to account for their actions, the board of directors escaped any criminal liability. Any rational historic retrospective of Theranos would hold that the board should have been held liable just as the company executives.
But we know how that worked out, eh?
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This line is the bull pucky spewed by the program traders in an attempt to justify their existence. We had speculators and liquidity long before there was high speed program trading.
High speed program trading adds nothing to the market. If anything, it can distort markets on short term news that has little to do with the long term health of the company.
Why do stock markets jump around a lot during earnings announcements? High speed trading. Why do company managers manage quarterly earnings instead of long term profits? Because high speed traders push prices around based on those quarterly earnings. (Along with silly incentives that reward short term performance over long term profits - getting back to corporate governance by BoDs.)
Why do we need the various “circuit breakers” in all of the major stock exchanges? High speed traders.
Send them all out of existence with small per-share fees and free up all of those admittedly pretty brilliant computer programmers to do some work that actually benefits the economy.
–Peter
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You’re not exactly wrong here. Corporate governance isn’t working today, and it hasn’t been working for a long time. The bolded part of your excerpt from HBR is right on point. Outside directors being selected because they won’t rock the boat is exactly the problem. They should be rocking the boat from time to time.
Even the phrasing is a description of the problem. “Outside directors are selected…” Candidates for BoD positions are being selected by the CEO and others at the highest level of management - the very persons whom the BoD should be managing. If you select your own managers - and can effectively replace those manages at your whim - you don’t have managers. You have lackies who rubber stamp whatever you choose to do.
My understanding of the historical perspective is that this problem as described in 1972 has become more and more wide spread. It existed in the largest companies then, but now it exists in virtually every public company out there.
Poor corporate governance was identified as a problem back then, and it still exists today.
–Peter
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It adds profit to the trader and higher share prices.
The easiest way to fix it is to TAX high speed trade PROFITS at very high rates on those profits. Say 50% (or more). Could go to the historically documented rates of 91%. Tax those profits based on how long the shares are held. The longer they are held, the lower the tax rate on that profit. Which is merely replicating (on different time scales and different rates) the existing short- and long-term tax rates on investments.
Tax rates (on profits) could be based on holding a stock up to (say) three minutes (91% tax rate), up to 10 minutes (80% tax rate), up to 30 minutes (64% tax rate), and so on. It will quickly discourage much high-speed trading. Whatever high speed trading continues will be highly rewarding–to the govt.
Or we could go all Tsar on the whole mess.
I think saying more would be unwise.
Cheers
Qazulight
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How much was it that they were “duped”? How much of it was the business plan and tech were not going to work?
Amazing where the word dubed comes in.
Honestly I do not know Theranos’s product. But the word duped is not working for me.
They were pretty duped. Holmes had this almost Svengali like ability to make people believe in her. Apparently she was really smart too. So people would talk to her and be incredibly blown away and feel like they were in the presence of a genius.
But she was also an inveterate liar. As her lies grew, they started becoming almost completely disconnected from reality. Employees and associates tried to blow the whistle on her but no one would believe them.
Theronos had a device called the Edison which was supposed to be able to provide blood tests at a scale and low cost never seen before. But it didn’t work very well. So Holmes was creating fake data to show it worked. In the meantime, everyone was raving about how awesome she was.
Ultimately, there was so much evidence the whole thing was take it all fell apart. But she did some real damage. Besides Holmes walking away with investor’s money, people were getting wrong diagnosis for medical conditions based on the crappy Edison results. Holmes is currently doing 11 years in the pokey.
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