Loyola University Chicago School of Law, JD 2020
Theranos, the health-tech and medical lab startup, was once one of the most hyped companies to come out of Silicon Valley. In 2014, after catching the attention of high-profile investors, the company reached a valuation of $9 billion. Following several employee and journalistic leaks in 2015, however, the public began to see the company for what it was, a fraud. An October 3, 2016 Inside Compliance article titled “Theranos: New Compliance Program Hopes to Save the Company,” was written following Theranos’ appointment of two outside executives to oversee regulatory, quality, and compliance standards. It is now clear that these efforts to save Theranos were too little too late, but we see some useful takeaways from Theranos’ downfall. This article will explore the key lessons learned as it relates to leadership, ethics, and compliance.
No Compliance Officer
Theranos was incorporated in 2004 but did not hire a compliance officer until 2016, more than twelve years later. By then, Theranos and CEO Elizabeth Holmes were accused of making false claims about the blood testing technology. So why was there no push for a compliance officer at an earlier time? After all, this was not simply a technology company, but a company that would likely have direct control or an influence on the public’s medical decision-making. At any point, the board of directors could have named a compliance officer, but they chose to instead side with the young CEO’s decision not to, says FCPA Blog author Richard L. Cassin.
No Compliance Program
Directors have a duty to make sure corporate information is available to employees and that a reporting system is in place in the case of misconduct. A director may be held personally liable for not doing so. A board of directors should be comprised of diverse, qualified directors. Board members should be privy to these important aspects of corporate governance and guide the company’s day-to-day actors, by making sure accurate information and resources are available to its employees. Young companies like Theranos might argue that their company was in its early stages and did not have the resources or capital to hire a compliance officer. While this may be true for very young start-ups, this is likely not a defense for a company like Theranos. Best-practice calls for a compliance program, or something similar to a compliance program, at even the earliest stages of a business. This program can even be informal and resemble a town-hall meeting. Regulators and prosecutors just want to see that company risk has been assessed and management is responding to those risks with policies and programs. No matter the size of the company or how early it is, there should always be a compliance program in place.
Several ex-employees of Theranos described the Theranos workplace culture as a “culture of fear.” Employees were required to sign non-disclosure agreements before the interview, physical barriers existed surrounding certain areas of the lab, and there was even a list of words employees could not use in describing their work at Theranos. All of these factors created a dysfunctional corporate culture. Employees who raised concerns were deemed nay-sayers and usually marginalized or fired. Theranos’ top management often gathered employees for an employee meeting in which they were required to pledge their allegiance to the company or leave. The corporate culture of secrecy forces employees into isolation and as a result, they become less productive. Furthermore, employees who voiced their concerns would be met with retaliation which included private investigators following them around and surprise visits from Theranos lawyers. A culture of compliance means employees know what they need to know and if they don’t, they know where to get it. The problem with Theranos, however, was that employees who tried to report concerns to management officials, were shut down and often fired. Communication is key to creating trust among employees and with top management officials. Theranos did not communicate with its employees and further shaped the culture of fear and secrecy leading to its ultimate demise.
New Offerings, New Compliance Concerns
Today’s technology allows companies to expand into new territories like the ones promised by Theranos. Compliance is more important than ever as young entrepreneurs try to realize their dreams, especially as risky new technology and medical innovations become a reality. A great deal of the innovations in Silicon Valley and other areas involve advances that effect human life. With these advances, it is increasingly important to remain within regulatory standards. There must be a balance of the two. Companies coming up in the age of innovation should work hard to realize these dreams but should also consider the risk to humans that their inventions might pose. A transparent and effective compliance program from the company’s inception will aid in the balance of being innovative, yet safe and compliant in this new age.