The Washington PostDemocracy Dies in Darkness

Theranos teaches Silicon Valley a hard lesson about accountability

Theranos and chief executive Elizabeth Holmes had to void two years of tests. (Glenn Chapman/AFP/Getty Images)

The Theranos saga hit another low last week when the company informed regulators that it was voiding two years of tests from its Edison blood testing devices and sending of tens-of-thousands of revised tests results to doctors. This means that thousands of patients received incorrect results and were likely given the wrong treatments. Surely the doctors and the patient victims were not responsible for this misplaced trust.

They trusted Theranos relying upon the brand value of the gilded names promoted by Theranos as its governance oversight, presuming somebody truly conducted some genuine diligent reviews.  These names included such diplomatic and military titans such as two former U.S. Secretaries of State Henry Kissinger and George Schultz, former U.S. senators; Sam Nunn and Bill Frist, former U.S. Secretary of Defense William Perry and – surprisingly – the tough-minded former CEO of Wells Fargo Richard Kovacevich.

Here's what you need to know about Theranos, a biotech company founded in 2003 by Stanford dropout Elizabeth Holmes. (Video: Jayne Orenstein/The Washington Post, Photo: Jeff Chiu/The Washington Post)

Didn’t Theranos CEO Elizabeth Holmes and her executive team realize that they were risking lives by using unproven and faulty equipment? Didn’t the all-star board ask tough questions about the workings of the technology? Didn’t they understand that ethics is a slippery slope; that once you compromise on this, there is no turning back?

Sadly, we have seen too much of this in the technology world — ethical lapses and lack of disclosure to shareholders. We have written about Silicon Valley’s careless and arrogant frat-boy culture; warned Uber’s CEO that he risked being known as modern day robber baron for his dubious business practices; and battled tech titans who pay children to drop out of school before they have developed important social skills and ethical values.

We can list over 50 tech firms which died when their governance failed long before their technology. Just one example was Informix — a fallen star of Silicon Valley and a darling of Wall Street. Founded in 1980, it towered over its rivals Oracle and Sybase as the first of the database giants to offer object relational database support with superior multi-media storage built in.  Nonetheless, its poor governance drowned out its technological triumphs as misstated revenue recognition, accounting fraud led to the imprisonment of its celebrity CEO Phil White and firm’s ultimate collapse.

Silicon Valley often thinks that it can live by a different set of rules than corporate America because it is developing world-changing innovations and start-ups need the freedom to innovate. Yes, we need to allow entrepreneurs to take risks and break some rules so that they can do their magic. But these rules cannot be ethical ones. The lines on ethics are usually clear as they were with Theranos and there can be no compromise.

Profiteers are always ready to exploit markets fueled by hope, hype, and emotion.  Here are some lessons:

1. Question the over-hyped founders.

Theranos’s CEO notoriously chased testimonial media appearances self-aggrandizing promotional materials and strutted before cheering and unquestioning audiences of wannabe disrupters at TED-talks. Look for leaders who engage in debate with people who understand the core technology and may fortify or enhance the original concept. Robert Noyce at Intel; Paul Allen at Microsoft, Steve Wozniak at Apple, David Filo of Yahoo; Sergey Brin of Google; etc. are not the media’s reflexive names attached to these great enterprises but, of course, they were vital to each firm’s future technical, commercial, and moral trajectory. The wisdom of Abraham Lincoln’s Team of Rivals has value beyond politics.

2. Beware of leaders who hide behind the cloaks of marquee names.

Celebrity roll-ups are used as governance smoke screens from substance. It seems too obvious to state what must yet still be stated, that boards must be recruited from the ranks of those with relevant skill and knowledge, not from the gossip pages. The three board members who seemed to understand Theranos’s technology quit en masse three years ago.

3. Dissent is not disloyalty.

Tech leaders should embrace critics from the outside and listen to internal challenges rather than disparage and even threaten dissenters. Reportedly, the chief science at Theranos killed himself telling his wife that the technology did not work.  His wife was threatened by Theranos with libel litigation. Frustrated internal whistleblowers revealed to The Wall Street Journal that the firm’s celebrated systems were no longer even used for most of the several types of tests they ran.

The boards of start-ups must also be held to higher standards. When they join a board, venture capitalists have a fiduciary duty to represent the interests of all shareholders, not only their funds. While Theranos is not a publicly listed enterprise, its board still staked their good names to reassure investors, strategic partners, employees, and the public — in this case not just verifying financial health but also physical health.

During the dizzying days on the eve of the dot-com crash, many innovative firms skyrocketed as they disrupted the defensive old order. Anyone questioned the hype were trashed as neo-Luddites defending the past. Their prominent governance apologists celebrated “e-board governance,” a self-righteous term replacing traditional diligent governance. Such new age board oversight encouraged venture capitalist service on scores of boards; misleading pro forma financial reports; backdating stock options; illegally booked barter deals; and other reckless practices while waving away oversight through marquee names. Two decades later, “The Valley” should ascend such governance lowlands.

Sonnenfeld is senior associate dean for Leadership Studies, Lester Crown Professor of Management Practice at the Yale School of Management as well as President of the Yale Chief Executive Leadership Institute. He is the author of The Hero’s Farewell (Oxford University Press) and Firing Back (Harvard Business School Press). Follow him on Twitter.