Malpractice and the all-star board at Theranos

So much went so wrong at Theranos that it’s hard to know where to begin.  At its core, it is another case of deeply flawed, if not failed, governance at a company that too quickly achieved global recognition and a $9 billion valuation.

Some might say that as a private company, there is no harm or foul.  That would be a mistake.

The Food and Drug Administration is investigating whether Theranos administered diagnostic blood tests despite knowing its system was inaccurate and whether the company modified its equipment during the FDA approval process, a violation of research practices.  Recently Walgreens announced that it has postponed deployment of blood testing centers in partnership with Theranos and Safeway has delayed the launch of a similar program.

Thirteen years in, Theranos’ technology has never been independently tested.

Despite longstanding questions about the efficacy of its technology, the firm has surrounded itself with an all star cast of investors and advisors, including:

• Riley Bechtel, chairman, Bechtel Group (director)
• David Boies, attorney (director)
• Timothy Draper, Draper Fisher Jurvetson (investor)
• Larry Ellison, CEO, Oracle (investor)
• William Foege, former director of the U.S. Center for Disease Control and Prevention (medical board member, former director)
• Bill Frist, former Senate majority leader (medical board member, former director)
• Henry Kissinger, former secretary of state (advisor, former director)
• Richard Kovacevich, former CEO and chairman, Wells Fargo (advisor, former director)
• Don Lucas, earl investor in Oracle (investor)
• Sam Nunn, former senator (advisor, former director)
• William Perry, former U.S. Secretary of Defense (advisor, former director)
• George Schultz, former secretary of state (advisor, former director)

Among a recent flurry of highly skeptical media coverage, The New York Times credits Theranos founder Elizabeth Holmes with executing the Silicon Valley playbook perfectly from dropping out of college to embracing quirks worthy of Steve Jobs to championing a humanitarian mission.  “But that so many eminent authorities — from Henry Kissinger, who had served on the company’s board; to prominent investors like the Oracle founder Larry Ellison; to the Cleveland Clinic — appear to have embraced Theranos with minimal scrutiny is a testament to the ageless power of a great story.”

Last year, $633 million in new investment flowed into Theranos.  This demonstrates the degree to which many investors will suspend disbelief for a hot commodity.

While Silicon Valley and the VCs who typically speak for innovative technology companies are known for their skewed views on governance, the executives and board at this company appear guilty of large scale malpractice.  Reports that in October the company had filed to issue more shares suggest that the board could have been complicit in Ponzi-like plans to cash out early investors, even as the company’s troubles continued to mount.

Despite the setbacks experienced at Theranos, the board hardly appears chagrined.  A press release from the firm attributes this quote to the board and other advisors: “Theranos’s technology is both transformative and transparent: Our blood tests are faster, less expensive and require less blood than traditionally required. As a group, we embrace this promise and stand with Theranos.”

This saga demonstrates how boards of directors, despite their pedigrees, can be far, far out of touch with the companies they are supposed to oversee.  Many directors are simply spread too thin to be effective.  In the case of Theranos, Bill Frist is on 3 public company boards, seven private company boards and six non profit boards.

Theranos is just the latest proof of the need for continuous vigilance in our markets.  It shows how the system continues to benefit from, even encourage activist hedge funds, whistle blowers and regulatory watchdogs to ensure that investors get reasonable protection and, when it comes to health and public safety, rigorous standards based on peer reviewed science.

Breaking Views says that they Theranos case could reflect badly on unicorns, privately held startups valued at more than $1 billion.  Good, it should be hard to achieve a high valuation and it should be harder still for companies which hide behind walls of secrecy like Theranos, regardless of who is on their board.