How self-styled wunderkind Elizabeth Holmes conned a blue-chip board into believing her blood-testing technology would be The Next Big Thing.
by Gael O’Brien
It seems fitting. Actress Jennifer Lawrence, the star of American Hustle, will play Theranos founder Elizabeth Holmes in an upcoming film. The movie is based on The Wall Street Journal reporter John Carreyrou’s new book about Theranos, Bad Blood: Secrets and Lies in a Silicon Valley Startup.
Holmes was indicted for fraud in June 2018 (with her former boyfriend and former Theranos COO Sunny Balwani) as a result of an investigation federal prosecutors confirm is still ongoing. In September, Theranos was dissolved. Holmes started the company when she was 19 in 2003 with a vision to disrupt healthcare with a blood-testing device she planned to invent. “Her tragic error,” Marketwatch columnist Francine McKenna wrote, “was touting financial projections that never materialized based on technology that she never delivered.”
The obvious question – “Where was the board?” – becomes more complicated in privately-held companies where, in a situation like at Theranos, a founder is CEO, has close relationships with board members, gains control of voting rights and becomes chairman. The question is also complicated by the reality that Holmes, while outwardly acting in an adult role, was operating in times of challenge or crisis with the same huge wisdom deficit in making decisions that the teenage Tom Cruise character displayed in the film Risky Business. (It turned out a lot better for Cruise’s character; if convicted, Holmes faces up to 20 years in prison.)
Based on stories and interviews in Carreyrou’s book, two things are evident: board members were set up to fail (except in fundraising and providing access) by lack of independence, and board structure; the advisor role was also doomed as these men, savvy in governance had to know, if there wasn’t any independent fiduciary role in place. As advisors, they trusted, but didn’t verify, advised but were clueless about whether Holmes could lead responsibly through challenges or if she was delivering on promises. And, when her mistakes were evident, their ownership in working with her to learn the CEO ropes didn’t seem part of their job description. The board let itself fall prey to the myth of the wunderkind.
Theranos’ first board member, Emeritus Professor of Chemical Engineering Channing Robertson, taught Holmes at Stanford University before she dropped out. He described her abilities as akin to looking into the eyes of Steve Jobs. (Jobs had co-founded Apple when he was 21.) Former board chair, venture capitalist Donald Lucas, Sr., and others were struck by what they saw as parallels between Holmes and Jobs. It was a comparison Holmes thrived on and cultivated in what she wore and in her mimicked behavior.
The media hype ramped up Holmes’ image in 2011 when she recruited economist and four-time U.S. presidential cabinet member George P. Shultz to become a board member. He then recruited elder statesmen and military and business leader colleagues to join him. Fortune Magazine in 2014 dubbed the board as what “may be, in terms of public service, the most illustrious board in U.S. corporate history.” Between 2013 and 2015, the board raised more than $700 million from investors, including themselves.
Board members saw in Holmes a very smart, extraordinary young woman focused on the company 24/7. They were protective of her, loyal to her and trusted her. It’s unclear if they were captivated by her vision, or by the considerable return on investment if she succeeded….or both. Shultz was especially loyal to her, even taking her side against his grandson who was a whistle-blower about Theranos practices. He believed her vision for healthcare aligned with his sense of doing good. “My belief,” Shultz said, “is that if you’re making a contribution, you’re living. If you’re not making any kind of contribution, well—. That’s my motivation, and it’s very parallel to Elizabeth’s.”
In a lawsuit deposition this year, former board member Richard Kovacevich, a former CEO of Wells Fargo, explained he invested in Theranos “because I believe if she was successful in creating a less painful, cheaper, faster, easier blood-testing process … she’d gain great market share and … my investment would be worth a lot of money.”
The danger in believing a CEO is a wunderkind is in giving credit before it is earned. It creates false confidence that can miss or not address inevitable human weaknesses that can derail a company if unattended, as Holmes’ criminal indictment reinforces.
As for attaching any Steve Jobs’ comparisons to any budding entrepreneur, it is foolhardy. The idea of Jobs spawns visions of fame, wealth and success that create a halo effect for someone who has yet to prove his or her products can be made or can deliver on what is promised. A recent Forbes article, “The Theranos Scandal: What Happens When You Misunderstand Steve Jobs,” explains five critical differences between Jobs and Holmes: Jobs had other people run Apple; he teamed with a technical wizard; he didn’t try to invent what hadn’t yet been invented; he wanted to delight customers; and secrecy wasn’t what drove his success.
Board Structure and the Velvet Glove
Holmes’ immature board view had an amoeba-like, shape-shifting capacity designed to accomplish her goals:
- The initial board reflected more traditional responsibilities; votes were taken, according to Carreyrou. However, the velvet glove was evident in 2007 when Holmes asked former board chair Lucas to obtain the resignation of former Apple executive Avie Tevanian, a board member who was challenging her pattern of rosy revenue projections (based on deals that never materialized). Tevanian resigned. A few months later in 2008, the new head of sales and marketing, with the general counsel, met with Lucas over the same concerns. Lucas called an emergency board meeting. The board decided to replace Holmes as CEO saying she’d proven too young and inexperienced. She responded to their decision by being contrite, promising to be more transparent, saying that she would change, and promising it would never happen again. The power of her charm and contrition, a former board member told Carreyrou, was sufficient after two hours to persuade them into her letting her remain CEO. A few weeks later, she fired the head of sales and marketing and the general counsel.
- By late 2015 board prestige seemed secure. However, they were advisors without fiduciary responsibility. They had connections but not relevant expertise in the fast-growing, nearly $9 billion valuation company. A former employee told Carreyrou that when he was interviewing at Theranos in 2011 and asked about the role of the board, Holmes replied the board’s role was as a placeholder. He remembered her saying, “I make all the decisions here.” In 2013, Carreyrou wrote, “she forced through a resolution that assigned one hundred votes to every share she owned, giving her 99.7 percent voting rights.” Going forward, the board couldn’t reach a quorum without her, he added.
- October 2015, the first in a series of Wall Street Journal articles challenged Theranos technology and expertise; by mid-2016, the advisory board disappeared and a fiduciary board was created. By 2017, scientific and medical and technical boards were established. It became evident that audited financial statements hadn’t been prepared since 2009.
Where Was the Board?
The early years of the company would have been a critical time to exercise oversight in supporting a CEO in her twenties (with little, if any, relevant leadership training or experience) in the inevitable challenges ahead. She initially hired, according to Carreyrou, incredibly talented people from Apple and other companies with skills the company needed. Like Tevanian, the board member who challenged her, she fired employees as disloyal or not team players if her instructions were met with concern or resistance, according to Carreyrou. Turnover was very high. Tevanian had also called attention to turnover. Why didn’t others step up and challenge her? When she got a second chance at CEO, why didn’t the board insist as a condition of the agreement that she work with some independent relevant experts to help her develop leadership skills and increase her limited knowledge of medical devices? And what was the follow up to ensure financial projections were accurate? The indictment indicates that misrepresentation of financial and other information continued. Where was her accountability and verified proof of change?
In her 2014 TEDMED talk Holmes had talked about her vision (and that of her company) for disrupting healthcare. She said “Diseases often begin so much earlier than when symptoms appear. We see a world in which everyone has access to actionable health information at the time it matters….a world in which no one has to say goodbye too soon.” However, when she allowed unreliable analyzers to be used commercially to run blood tests, she jeopardized patients’ health and safety, compromising the ability of doctors to make accurate diagnoses.
Holmes had an “end justifies the means” leadership style. Not surprisingly, it backfired. One thing is pretty clear, she chartered her own course. As she said to the job applicant in 2011, “I make all the decisions here.
Gael O’Brien, a Business Ethics Magazine columnist, is an executive coach and presenter focused on building leadership, trust, and reputation. She publishes The Week in Ethics, is a Kallman Executive Fellow, Hoffman Center for Business Ethics, Bentley University and Senior Fellow for Social Innovation at the Lewis Institute, Babson College.