What happened with Theranos will remain one of the best examples of how corporate greed and misplaced hype can cost billions of dollars while endangering the interest of the public. This article explores the management and leadership problems that plagued Theranos in an attempt to understand better the factors contributing to its scandalous downfall.
Management and Leadership Lessons from the Theranos Scandal: A Look at the Key Problems Leading to its Downfall
The company, led by Elizabeth Holmes, had claimed to have developed a revolutionary blood testing technology that could perform a wide range of tests using just a few drops of blood. The tech was implemented through the Edison and MiniLab devices.
It was a promising proposition that attracted the attention of investors and the media. Holmes became a superstar and her startup was set to disrupt the multi-billion-dollar blood testing industry and the entire healthcare sector.
However, damning information about the company surfaced. The company made false claims about its capabilities. Its technology was not as advanced as it had been represented.
The company ceased its operations in 2018. Holmes, who served as its chief executive officer, together with Sunny Balwani, who served as the president and chief operations officer, were found guilty of committing fraud in 2018.
Understanding better what happened to Theranos entails looking at its foremost management and leadership problems: destructive leadership styles, unethical principles and practices, and problematic corporate governance.
Destructive Leadership Styles: Inefficiencies in the Workplace and Toxic Corporate Culture
Remember that Theranos is a healthcare technology company. It aspired to develop and commercialize a next-generation technology for blood testing.
It is normal for most tech companies to protect their trade secrets and other intellectual properties to manage threats from existing and potential competitors. The key to their success rests on the outcomes of their research and development initiatives.
The company took confidentiality to the next level. It used surveillance to monitor the activities of its employees while grouping departments and teams into separate silos.
Members of a particular silo were not allowed to communicate with employees from other silos. Going against this policy resulted in either unofficial demotion or termination. Tasks and other deliverables were also confined in their respective silos.
The overall organizational structure was hierarchal and linear. The dominant leadership styles of key personnel such as Holmes and Balwani were authoritarian and transactional.
Hence, from how the organization was managed, one of the management and leadership problems inside Theranos was its destructive leadership. Its siloes made communication and collaboration inefficient if not impossible.
The strict adherence to secrecy on top of overbearing leadership created a corporate culture that was toxic to both individual growth and collective welfare.
Unethical Principles and Practices: Misrepresentation of Capabilities and Misleading the Public
Researcher Medina Williams from Purdue University noted that Theranos abandoned standard procedures broadly used in the scientific community. These include refusing to subject its research or technologies under peer review.
Holmes earned the confidence of several influential people such as Stanford professor and dean Channing Robertson. She even got them on board.
The purported groundbreaking idea about a next-generation blood testing technology was promising. Initial investors believed that it was possible given the right amount of time and resources. There was nothing wrong with this.
However, the problem emerged when Holmes and her team began claiming that it had a working concept to secure additional funds from venture capitalists and other investors.
She even lied that its Edison and Minilab devices were operational to enter into partnerships with companies like Safeway and Walgreens. Holmes maximized media mileage to generate buzz while also appeasing her board of directors and investors.
The truth is that Theranos overestimated its capabilities and had to misrepresent what it could do to keep its board satisfied while also ensuring its investors remain on its side.
It was clear that Holmes lacked moral judgment while she dealt with the difficulties arising from the demands and expectations of her investors, business partners, and the public. She lied to them while forcing her people to lie as well.
Theranos has become a classic example of how problems in management and leadership can arise from the absence of moral and ethical leaders.
Remember that the company did not just lie to its investors and the media. Its principles and practices cost hundreds of millions of dollars while its commercialized technology endangered the health and overall welfare of the public.
Problematic Corporate Governance: Failure to Perform Due Diligence and Inclination Toward Hype
The management and leadership problems of Theranos can also be traced further back to both its board of directors and its team of executives or senior managers. The board gave Holmes and Balwani free reign while other managers failed to step up.
It is also interesting to note that media reports commended the company for forming the most illustrious board of directors in the history of corporate America.
Some of its board members include former secretaries of state Henry Kissinger and George Schultz, retired general Jim Mattis, former Wells Fargo chief executive Richard Kovacevich, and former Centers for Disease Control and Prevention director William Foege.
Holmes and Theranos also attracted several notable or high-profile investors from the different facets of business and politics.
Rupert Murdoch, the chairperson of News Corp and Fox Corporation, was its biggest individual investor. Other investors include the Walton family of Walmart and Larry Ellison, executive chairperson and co-founder of Oracle Corporation.
It was quite perplexing how these seasoned and respected individuals were convinced to place their confidence in Holmes and her supposed blood testing tech.
However, upon further inspection, what was clear is that its board of directors and its investors failed to observe due diligence. They became investors without examining the full merits of the claim. Some might consider them victims of hype and greed.
It also has become clear that Theranos lacked corporate governance. The board did not have a system to direct and control its executives headed by Holmes.
There were also no mechanisms that would mandate accountability, transparency, fairness, and responsibility. As mentioned, considering how Holmes managed to fool its investors and the public, she was exempted from a suitable amount of scrutiny.
FURTHER READINGS AND REFERENCES
- Carreyrou, J. 2018. Bad Blood: Secrets and Lies in a Silicon Valley Startup. Penguin Random House. ISBN: 9781524731656
- Carreyrou, J. 2015. “Hot Startup Theranos Has Struggled With Its Blood-Test Technology.” The Wall Street Journal. Available online
- Williams, M. 2022. “Elizabeth Holmes and Theranos: A Play on More than Just Ethical Failures.” Business Information Review. 39(1): 23-31. DOI: 1177/02663821221088899