The recent conviction of Elizabeth Holmes, founder and CEO of Theranos, on four counts of defrauding investors misses an opportunity to help protect future investors.
By ignoring the important role of a corporate board, it is more likely that the verdict will be remembered for the trial’s sensationalism rather than the dangers of an ineffective and enabling board.
Even four-star General James Mattis, a Theranos board member for several years, testified he “didn’t know what to believe” and like others on the board seemingly relied on their positive impression of the charismatic founder, rather than any understanding of whether the Theranos blood testing technology worked.
Surprisingly the interest and intrigue around the trial and verdict has not included much discussion thus far of the Theranos board during its spectacular rise and fall.
Unfortunately the Theranos board is not alone in its negligence.
In the case of emerging markets or start-ups, boards have an even more crucial role to play to lend credibility, expertise and transparency to attract and protect local and foreign investment.
Over the last few years headlines flaunt failures of American corporate boards from Uber to the Weinstein Company and others to maintain shareholder or public interest, while hailing their star power or fundraising prowess.
What is often glossed over, and seemingly missing from the deliberations around the Theranos trial, is the vital safeguarding role that boards must play.
A well-functioning board is needed to understand, monitor implementation of, and if necessary help adjust the strategic vision of any organization.
While the Holmes verdict may pose a momentary question on the “fake it till you make it”, founder focused start-up culture, analysis of the proper and vital role of a start-up board is essential to prevent fraud and protect investor value.
In turn any board is only as effective as its members. Recent long overdue attention to board diversity and the focus on ESG (environment, sustainability and governance) should not ignore the fundamentals.
The proper role of a corporate board member is tied to the purpose of a corporate board of directors - to ensure good governance and enforce fiscal management towards greater shareholder and societal value.
The Theranos board along with its leadership took the company valued at billions, to one which cheated its employees and customers and was charged with massive financial fraud.
This is a cautionary, potentially all too common tale.
The 5 Cs
Whether publicly or privately held, old or new companies, five Cs help guide effective board membership.
First clarity and consensus on member selection is a prerequisite. It is essential that the potential member and corporation be aligned as to why individuals are asked to serve, as conflicting ideas may hamper their impact.
A start-up may seek credibility or fundraising support, whereas a board member should focus on oversight.
A family board may select family members without considering qualifications. Board members can fill various functions but must prioritize independent judgment.
Second, the potential board member should be competent. Sounds simple, but not so much. When a board member’s value is their expertise or qualifications, these must be assessed, not just assumed.
Their skills need to be relevant and most importantly, ethically exercised as required to set the right strategy and protect against reputational risk.
Where were the experts on the Theranos board, amongst the big names meant to attract investors, but who couldn’t appraise the technology?
Third, the member ought to have the courage to inquire, confirm and act for shareholder and stakeholders’ benefit.
They cannot be afraid to ask the obvious, “does our product work? Are we compliant?” or to verify the marketing assertions.
If they do not know or understand something, others also may not. They must have the ability to hold management, even their sponsors, accountable rather than ‘going along to get along.’
Did no one on the Theranos board ask or bother to find out whether the “Edison” actually worked, rather than just taking its founder at her word?
The actual value of a board member is to see through the “hype” of founders and VCs.
Fourth, the board must ensure real consequences if they suspect malfunctioning or malfeasance. Management should realize that the board is actively engaged and will take necessary action.
If something does not seem right, the board is required to find out why. Soon after initial questions about Theranos emerged publicly, the board should have sought credible answers and accountability to protect the whistleblowers.
Too often companies on the wrong track count on a passive, disengaged board who either does not know what is happening, nor know what to do.
Neither will absolve board members of balancing their fiduciary duties of care and loyalty.
Lastly, board members need to be comfortable with constructive conflict. Today too many “yes men” literally and figuratively fill boardrooms.
They may function as an echo chamber for senior management whereas they ought to be a check and balance.
Healthy, robust informed disagreements and discussions will ensure that issues are spotted, questions answered before they become headlines.
Diversity
Therefore, diversity is key – diversity of experience and perspective to be gained from actual diversity, which was glaringly missing from this board of homogenous “insiders.”
Board members who know why they are on a board, have the skills to add value, ask questions and seek answers and accountability, as well as facilitate dialogue will serve their companies and society well.
We will never know if a more functional board rather than its gaggle of fans could have pushed Theranos and Elizabeth Holmes to find the technology it claimed it had.
The board of directors is the vital link between shareholders and corporations.
Common sense attention to these five points will guide board members, companies and investors towards real innovation, profit, sustainability and the public trust.
Rather than just piling on to what Elizabeth Holmes did wrong, it is time to ask where her board was to prevent future fraud.
The author is an American lawyer and strategic advisor to international companies and organizations.