Board of Director Lessons from Theranos

by Jamie Flinchbaugh on 01-07-20

Theranos has captured the attention of many, in part because the hype surrounding its founder reached such massive peaks, and partly because the degree of fraud is on par with 19th-century snake oil salesmen, except on a billion-dollar scale.

To be sure, we’ve seen large-scale fraud or misconduct before. We had Enron and WorldCom, and Bernie Madoff. Giant fraud has gone on for a long time, such as the time Roman soldiers sold Rome to Julianus, who was Emperor for 9 weeks before being ousted and killed, or almost 100 years ago when Charles Ponzi created the namesake Ponzi Scheme to sell stamps. But this event feels different. Some would say because the perpetrator was so young. Or because she was a woman. Or because she was backed by some of the most respectable men of their generation. All these might be true. But I believe the biggest reason is that while most of the other frauds affected people’s finances, this one affected people’s personal health, and that may be the only thing more personal than financial fraud.

Photo by Max Morse for TechCrunch TechCrunch

This story isn’t even finished yet, with Elizabeth Holmes and Sunny Balwani‘s trial, or trials as there are likely to be further claims and actions, not even started yet. But a couple of months ago, at the NACD Summit (see more on that here), there was a fascinating panel discussion that included two significant actors in the story. One is Tyler Schultz, grandson of George Schultz. Tyler is credited as being the whistleblower that unveiled the fraud of Theranos, although whistleblower perhaps oversells his actions. The other was Jan Stern Reed, who was General Counsel of Walgreens when Theranos blew up. The discussion was preceded by a shortened version of the HBO documentary, The Inventor which captures the story, although I preferred the podcast series The Dropout.

Most people, including the panelists, have focused more on what when wrong. And this story is so new, that it is completely understandable. But what are the lessons? Many are baffled because the post-mortem appears like it was obvious and everyone should have noticed. But they didn’t. We know for sure that stories like this will happen again. But it’s never too early to start examining what we can learn from the failure.

FOMO is just as powerful as fear of risk

Boards and executives focus a great deal of attention on risk, ranging from commercial, to legal, to regulatory, to talent. Risk can be managed objectively, but there is always an emotional aspect to risk as well. Most of these risks are about bad things happening, but FOMO, or Fear Of Missing Out, is fear of what might NOT happen and can be a powerful force.

Walgreens never received all the information that they asked for, as Holmes proved able to deflect and delay to avoid showing Walgreens what was really going on, including their financials. If Walgreens didn’t lock down the Theranos deal, someone else might (in retrospect, that might have been unlikely), and based on that fear exclusively, being second might as well be last.

This all happened while Walgreens also had many other distractions that increased the desire for something breakthrough and simultaneously limited bandwidth for proper due diligence and consideration. Walgreens was under pressure to innovate and grow and eventually had to deal with the Boots-Alliance merger, pressure for inversion, and reporting significant reductions in earnings. All of this increased the FOMO because they needed the home run.

Down by 3 in the bottom of the 9th inning in the 7th game of the World Series, full count and bases loaded. Do you take the ball, hoping that more good things will happen next, or will FOMO force you to swing for the grand slam? FOMO is a powerful emotional force, and if left unchecked and unfiltered, can lead to bad decisions.

This is why the truism of never make a decision in just one meeting is so valuable. At that moment, knowing you have just one meeting to decide, there is often much pressure to say “yes.” I know I’ve been in board meetings where the management team was pressuring the board to say yes, because of FOMO. Some of my proudest moments have been to say “not yet,” and force the management team to reconsider and readdress the board. Yes, speed is a factor, but then have a special meeting to consider the decision. Every time this has happened, the outcome was either the management team reconsidering, the board being more confident in their “no” answer or the factors surrounding the “yes” were improved.

Don’t let FOMO drive your board or your company.

Board process can matter more than its membership

Consider the board membership of Theranos: George Schultz, former Secretary of State, Henry Kissinger, former Secretary of State, General Jim Mattis, former head of US Central Command and former Secretary of Defense, Richard Kovacevich, former CEO and Chairman of Wells Fargo, Sam Nunn, former US Senator, and Bill Frist, former US Senator and heart surgeon, who should have been better equipped to ask questions (more on that later).

This is an incredible board, possibly the greatest set of resumes ever compiled for a board (that would be an interesting study). There were men (more on that later) with impeccable integrity, with experience (including the types of experience that should make you naturally suspicious), with global perspective. So how could they have failed at such an epic level?

Being on the board is a process. How is the agenda set? Who else in the company does the board talk to? How is information compiled for the board? How do committees work, and who do they work with? If the board was more thoughtful about ANY one of these questions, they might have gotten to the truth.

How the board works is very important, not just the talent you recruit for it.

Diversity does matter (practically, not just morally)

Diversity does matter morally, but the lesson here (one often repeated), is that diversity of perspective, expertise, and thought is tremendously valuable for insight and decision-making. For starters, let’s get the elephant in the room out of the way. Tyler Schultz, being fully aware he’s throwing his grandfather under the bus, commented on how Elizabeth Holmes was a young, tall, blonde, blue-eyed woman, and the board were made up of men of a certain age. They were transfixed and seduced by her charm. Tyler also admitted they weren’t the only ones, as her charm was substantial, and he noted that he would have concerns, approach her and after 5 minutes, be fully convinced and recommitted to the vision.

There were no women on the board. The average age of the board was 80. And there were no scientists on the board (although as mentioned above, there was a cardiac surgeon who should have at least been equipped to ask better questions and understand the core science). Diversity on any team is about bringing DIFFERENT thoughts, perspectives, skills, and experience. First, you have to have diversity and they did not. And then you have to leverage diversity which to my point above about process, they also failed.

Due diligence AFTER you’ve won

One of the most insightful and actionable points of the evening was shared by Jan Stern Reed, who asked about what more could have been done by Walgreens. She noted that they did indeed try to get more information but were thwarted by Elizabeth through all sorts of mechanisms, with the default being to claim trade secrets. And all of that was true, even while they were signing the deal and setting things up.

But then, the Theranos story began to pop. Elizabeth was a sought-after speaker and interview subject. She was on the covers of magazines. Stories were being written on how smart Walgreens was to engage with Theranos.

Jan’s suggestion: that’s when we should have doubled-down on our due diligence. Why? Because now the leverage and importance of the Theranos story is more important to the Walgreens story. Do you just count your lucky stars that you’ve made this decision and it’s turning out well? Or do you investigate further and be confident of your situation? They still would have to get the information, but they did have more leverage at this point given that the Walgreens deal is everything that Elizabeth was banking on (literally) for her rising success.

Who DOESN’T have to worry about saving face?

I think one of the most interesting parts of the storytelling was the role of Tyler’s step-grandmother, George Schultz’s wife. She played a key role in helping Tyler get the proper legal protection in the process, and shared her perspective at key moments which perhaps helped Tyler’s confidence on his path. As was noted by the panel, she might be the real hero, or at least the unsung hero in this story.

While we can’t all pick our step-grandmother, I still believe there is a lesson to be learned. George Schultz had his reputation to protect, as did the other board members. Holmes had her company to protect. Tyler had his financial future to protect. But when there is a role player who BOTH cares about the outcome and but has nothing vested in that outcome, they can speak with perspective and honesty that might be lacking in the other role players. That can be a tremendous asset to a process, especially when the consequences are high, and often binary (win/lose), which amplifies people’s focus on the outcome. Her role, in key moments, wasn’t planned, but she was in the right place at the right time and could speak with unbiased honesty.