Ailing biotech startup Theranos just can’t seem to stop the bleeding.

Founded in 2003 by CEO Elizabeth Holmes, the healthcare technology company quickly became a Silicon Valley darling—valued at more than $9 billion—for its self-proclaimed “breakthrough advancements” in blood-testing technologies. Theranos claims that it has come up with a way for laboratories to run a broad range of medical tests using micro amounts of blood, rather than the traditional method of drawing several test tubes of blood through a needle in a vein.

Theranos’ promising future took a blow last year, however, after a Wall Street Journal exposé called its claims into question, alleging that the company is not using its proprietary technology for most of the tests it offers. After the story broke, the Securities and Exchange Commission, the Department of Justice, and federal health regulators launched civil and criminal investigations.

At its core, the question the government wants answered is whether Theranos violated the anti-fraud provisions of federal securities laws by misstating or omitting material facts in connection with the sale of its securities to venture capital firms. “The company continues to work closely with regulators and is cooperating fully with all investigations,” Theranos said in a statement.

The SEC’s investigation of Theranos isn’t particularly surprising and may even signal tighter regulatory scrutiny to come for private companies. During remarks made in March at Stanford University’s Rock Center for Corporate Governance Silicon Valley Initiative, SEC Chair Mary Jo White revealed that the SEC has a close eye on all “unicorns”—privately held start-ups with valuations exceeding $1 billion. “The concern is whether the prestige associated with reaching a sky-high valuation fast drives companies to try to appear more valuable than they actually are,” she said.

“The risk of distortion and inaccuracy is amplified because start-up companies, even quite mature ones, often have far less robust internal controls and governance procedures than most public companies,” White added. “Vigilance by private companies about the accuracy of their financial results and other disclosures is, thus, especially critical.”

That brings us back to Theranos and the broader corporate governance lessons that its missteps impart on all companies—public and private, large and small. After all, much can be learned about what could happen to a company if its board of directors is not properly structured, or if directors fail to be vigilant, or both.

Suits vs. scientists

Prior to finding itself under the scrutiny of investors and regulators, the composition of Theranos’ board did little to improve its image in the public eye. Its former 12-member board of directors at the time was top-heavy with diplomats, military, and political leaders. Aside from Holmes herself, other members included former Secretaries of State Henry Kissinger and George Shultz, former senators Sam Nunn and Bill Frist, a retired Marine Corp general and a retired Navy admiral.

“The risk of distortion and inaccuracy is amplified because start-up companies, even quite mature ones, often have far less robust internal controls and governance procedures than most public companies.”
Mary Jo White, Chair, Securities and Exchange Commission

Last year, however, amid all the scrutiny, Theranos decided to downsize its board to five members and renamed it a “governing board.” It also established a newly formed “board of counselors” to act as an adviser to the company, and further established a separate scientific and medical advisory board.

On May 12, Theranos announced that Sunny Balwani, its president and chief operating officer, will be leaving the company. It also added three new board members as part of its restructuring.

The newly added members include Fabrizio Bonanni, who retired in 2013 from his role as executive vice president at biotechnology company Amgen. “Bonanni will work in a special capacity with management as it builds on its operations and quality systems infrastructure,” Theranos said.

The other two additions to the board, both of whom formerly served on Theranos’ board of counselors, will now have “a more direct role in decision-making and shaping the company,” Theranos said. These members are William Foege, former director of the Centers for Disease Control and Prevention, and Richard Kovacevich, former chief executive officer of Wells Fargo.

Furthermore, Theranos last month said it expanded its scientific and medical advisory board by adding several new laboratory and medical experts in the relative fields of pathology, immunology, and epidemiology. “The board was expanded after the company hosted three scientific review sessions with leading laboratory and medical experts who were invited to review the company’s proprietary technologies. Theranos provided the experts full exposure to its systems, devices, and data,” the company stated.

It appears to be trying to clean up its tainted image. “The independent experts reviewed development and validation reports for tests performed on small-volume samples, including finger-sticks, using Theranos’ proprietary technologies for a variety of assays, including assays of their choice,” the company added.

Responsibilities of the scientific and medical advisory board include working alongside Theranos’ leadership and internal teams in various areas, “including advising Theranos regarding the full integration of its technology into routine clinical practice, and publication and presentation in scientific journals and at scientific meetings,” the company stated. “The members who are laboratory directors in their own institutions will work with the company to help inspect its clinical laboratories, and help the clinical laboratory directors with the implementation of best-in-class lab procedures and processes.”

A board of advisers plays a different role than a board of directors, and it may be wise that a company consider having both at the outset, which Theranos did not. “An advisory board doesn’t have the fiduciary obligations that a board of directors does,” explains Peter Gleason, president of the National Association of Corporate Directors. “They’re usually paid advisers in a specific technical area.” Directors, on the other hand, have fiduciary duties that they are obligated to fulfil to shareholders of the company, and they have legal obligations with liability attached to their role.

Theranos did not reply to requests for comment.

Board dilemmas

The issue faced by Theranos is one that all companies face: How to balance having enough industry expertise on the board to keep it relevant, but not so much as to tip it away from the strategic operations of the company.

“Venture capital companies very often will have people that are representative of stakeholders or investors, as opposed to independent directors brought in because of their expertise or connections in various core competencies,” says Richard Morris, a partner with law firm Herrick, Feinstein.

The benefit of having a subject-matter expert is that “they have more knowledge, so they can ask better questions,” says Morris. At the same time, you have to be careful not to load the board with too many subject-matter experts, because they’re not there to provide advisory services to the board. “They are there as a director,” he says.

Any time an organization brings a subject-matter expert onto a board, however, it must be mindful of conflicts of interest, corporate governance experts warn. An organization could run into non-compete issues, for example, if it appoints a director to its board who has recently retired from a competitor.

Directors must work together “to have meaningful conversations and to address and complement each other’s core competencies,” agrees Morris. What the board is trying to do is obtain the information it needs to help the company develop strategy and assess the risks of the enterprise in a professional and prudent manner.

Independence, like integrity, is critical and underpins everything. Theranos might learn this lesson the hard way, given that David Boies, who sits on the governing board, also acts as the company’s outside legal adviser.

Depending on how the government investigations unfold, Boies may find himself in a position where he has to either represent the company as its legal adviser or its shareholders in his capacity as a director.


Theranos’ Scientific and Medical Advisory Board is co-chaired by Theranos’ CEO Elizabeth Holmes and David Helfet, who previously chaired a Theranos Medical Board Task Force. Full bios of the board members are below.
Susan Evans, PhD. Evans has over 30 years of experience in diagnostics and health technology companies. She served as president, secretary, and member of the board of directors for the American Association for Clinical Chemistry (AACC). She also served as a member of the board of directors and president of the National Academy of Clinical Biochemistry, now the Academy of the AACC.
William Foege, MD. Foege is an epidemiologist and former director of the U.S. Center for Disease Control and Prevention, He is recognized as the health innovator behind the successful campaign to eradicate smallpox in the 1970s. Foege was a senior medical adviser for the Bill and Melinda Gates Foundation from 1999 until his retirement in 2011. He is a member of the Theranos Board of Counselors and has served on Theranos’ Medical Board.
Ann Gronowski, PhD. Gronowski is a professor in the Department of Pathology and Immunology and the Department of Obstetrics and Gynecology at the Washington University School of Medicine in St. Louis. She is board certified in Clinical Chemistry and is co-medical director of the clinical chemistry, serology, and immunology laboratories at Barnes-Jewish Hospital. She is a past President of the AACC and a past president of the American Board of Clinical Chemistry.
David Helfet, MD. Helfet is the director of the Orthopedic Trauma Service, Hospital for Special Surgery and New York-Presbyterian Hospital, and Professor of Orthopedic Surgery, Weill Cornell Medicine. He is former president of the Orthopaedic Trauma Association.
Larry Kricka, D. Phil. Kricka is a professor of Pathology and Laboratory Medicine at the University of Pennsylvania and was director of the General Chemistry Laboratory and the Endocrinology Laboratory at the Hospital of the University of Pennsylvania. He is a Fellow of the Royal College of Pathologists, and a member of the Editorial Board of Clinical Chemistry, and Analytical Biochemistry. He was president of the AACC in 2001 and was a member of the International Federation of Clinical Chemistry and Laboratory Medicine executive board.
Jack Ladenson, PhD. Ladenson is the Oree M. Carroll and Lillian B. Ladenson Professor of Clinical Chemistry at Washington University School of Medicine. He has been active in a number of professional organizations and has served as president of the AACC and the Academy of Clinical Laboratory Physicians and Scientists.
Andy Miller, MD. Miller is an assistant attending physician in Infectious Diseases at the Hospital for Special Surgery and New York -Presbyterian Hospital, and an assistant professor of clinical medicine at Weill Cornell Medicine. His areas of clinical expertise and research activity are orthopedic and rheumatologic infectious disease. He is board certified in Infectious Diseases and Internal Medicine by the American Board of Internal Medicine.
Steven Spitalnik, MD. Spitalnik is a professor of Pathology and Cell Biology and vice chairman of laboratory medicine at Columbia University Medical Center. As the medical director of the clinical laboratories on the CUMC campus of the New York-Presbyterian Hospital, he coordinates the clinical service, educational, and scholarly activities of the Division. In addition, he is the co-director of the Laboratory of Transfusion Biology, which pursues NIH-funded research aimed at improving transfusion practice. He is board certified in both Anatomic and Clinical Pathology.
Source: Theranos

The culture of the board plays a valuable role; the types of behaviors directors need to demonstrate to achieve this are open-mindedness and the ability to foster constructive dialogue. This means being able to challenge management, while still contributing to a productive and collegial boardroom environment, which requires mutual respect.

An ineffective board, thus, is one with a dominant CEO who is not letting any of that dialogue happen and is pushing forward with the agenda no matter what, says Gleason. The board effectively isn’t afforded the time it needs to have constructive dialogue around critical issues that need to be addressed and, instead, simply hear presentations from management rather than engaging with management, he says.

The size of the board, which generally correlates to the size of the company, is another important consideration. “There is no magic number, but you want to have a number that is conducive to good dialogue, so you’re not over-relying on one person versus another person, that you’re getting feedback from a variety of perspectives and a variety of individuals,” says Gleason.

Director tenure and age are also important factors. Before Theranos restructured its board, the average age of directors was 80, which raised questions about their real level of familiarity and knowledge of emerging economic and technological trends in the fast-evolving science and medical fields.

According to newly revised Global Governance Principles issued in March by CalPERS’ Investment Committee, boards should consider “all relevant facts and circumstances” to determine a director’s independence, including the director’s years of service on the board. “We believe director independence can be compromised at 12 years of service. In these situations a company should carry out rigorous evaluations to either classify the director as non-independent or provide detailed annual explanation why the director can continue to be classified as independent,” CalPERS stated.

Additionally, CalPERS recommended that boards have routine discussions “as part of a rigorous evaluation and succession planning process surrounding director refreshment to ensure boards maintain the necessary mix of skills, diversity, and experience to meet strategic objectives.”

Director liability

Imagine, for the sake of argument, that Theranos was found in violation of the anti-fraud provisions of federal securities laws. That does not necessarily mean the directors themselves breached their duty of care. “Directors are not guarantors,” says Morris.

In the event of an investigation and alleged wrongdoing, directors are allowed to rely, to a reasonable extent, on the due diligence of legal, audit, and other experts. Theranos’ board, for example, likely would have relied on the company’s officers to attest to the validity and accuracy of the reports it received about the company’s lab conditions and procedures.

To be found not liable, however, the directors would have had to properly exercised their fiduciary duties of good faith, care and loyalty, which would include being reasonably prudent, says Morris. That would require taking a close look to determine the sufficiency and effectiveness of the policies and procedures of the company, based on the information they receive from company officers and other experts, as well as their own expertise, he says.

“It’s really hard to detect fraud from a board of directors’ standpoint,” says Gleason. If someone is intentionally trying to commit fraud from within the management team, and that management team is providing the board with information they were reviewing, detecting the problem can be very difficult.

Affording directors enough time to have open dialogue and discussion, and being able to provide their insight, is critical. “If I just show up at a meeting and listen to 15 presentations and leave, what did you really get from me? What’s my value add?” says Gleason.

“Boards should be engaged,” Gleason adds. “They bring their experience. They bring their insight. They bring their expertise to the table to help the company move forward. If you don’t take advantage of that, you’re missing that opportunity.”