The board of directors plays a crucial role in the business. They serve as the representative of the company and have a fiduciary responsibility toward its shareholders and assets. Although they are not involved in daily activities and business decisions, they oversee corporate operations and strategic planning and set policies for the company. They also play an oversight role and evaluate the decisions made by the company’s officers and executives. Conducting Executive Due Diligence is crucial to ensure that these executives are making decisions that align with the company’s goals and risk appetite. The board of directors is responsible at a high level for the company’s performance, even from a distance, regarding what happens on a base and local level. This poses several risks unique to the board and, by extension, the entire company and employees at all levels. Numerous headlines in recent years show the damages that can occur when a board, and consequently the entire business, is not adequately protected.
Unaware of the possible threats to the board as well as the entire company in general, many companies do not have adequate security measures in place to protect against the risk. There are risks of causing damage to finances or reputation, morale of employees, and even government oversight fines and bankruptcy. If you are alert to the risks involved and what steps to take firms can swiftly put in place the proper protection steps.
Leveraging from Other Learners
Elizabeth Holmes, founder and CEO of Theranos A medical technology start-up, declared that they would change the way blood tests are conducted by enabling Theranos’ product to test blood in just a few drops. The device was designed to make blood testing simple, fast, and easy, and will eventually be accessible at the convenience of people’s homes. The company even said that the equipment for testing blood could detect 200 conditions that could be a health issue. But it did not work. In February 2022 Elizabeth Holmes was convicted of 4 of 11 allegations of fraud filed by the Department of Justice (DOJ), and her company, valued at around $9 billion, went under in the year 2018.
The board of directors of Walgreens, Safeway, and even Theranos the company’s own board all were enticed by the enchantment of Elizabeth Holmes and her imaginary technology. Certain board members have many years of experience as well as several awards. So what could have turned out so badly, and what can be taken to safeguard these boards and corporate members?
Theranos
Fortune declared Theranos board “the most illustrious board in U.S. corporate history.” It featured notable names such as James Mattis, a retired US Marine Corps general, the former Secretary of State Henry Kissinger, William Perry who was the ex-US Secretary of Defense, the former US Senator Sam Nunn, retired US Navy Admiral Gary Roughead, former US Secretary of Defense William Perry, Richard Kovacevich who was the CEO for the past at Wells Fargo, former director of the Centers for Disease Control and Prevention William H. Foege Heart transplant surgeon as well as the former US senator William Frist, and the chair of the board for Bechtel Group Inc. Riley. Bechtel.
The entire world seems attracted by the honesty and trustworthiness of the charming Holmes as well as her commitment to help save lives. If asked what he was thinking regarding Holmes, Mattis replied “integrity” and “competence” and “competence “both technical and scientific but also focused on human rights in the most classical sense of what human rights are about.” The appeal of a cause that is right could lead to people taking the wrong road without scrutinizing the reason or origin.
Boards must ask difficult questions and push the issue when the answers given are uncertain or ambiguous. A board member named Avie Tevanian who has been a lifelong acquaintance of Steve Jobs and former Apple chief software technology officer, did precisely this. He was deported from the board citing a series of fabricated lawsuit threats. Holmes did not budge and threatened legal action against any person she considered a threat.
Two employees in March of 2008 contacted the chair of the board. They provided evidence of how Holmes had lied to the board regarding the effectiveness of Theranos blood testing system and its anticipated revenue. The board decided to replace Holmes as CEO. But the moment they went to inform her of the decision they changed their minds. Homes just 2 weeks after, had fired the two employees who had voiced about it. The board of directors never investigated the firings, if they knew of them.
Directors are fiduciaries. They are accountable for oversight of the compliance functions of a business as well as ensuring that the actions that the business performs are compliant with current legal, regulatory, and regulatory guidelines. It is the United States Sentencing Commission (USSC) provides the guidelines for a comprehensive compliance plan within the Federal Sentencing Guidelines. SS8B2.1 of the guidelines states:
The authority that governs the company must be aware of the contents and the operation of the ethics and compliance program, and will exercise appropriate oversight over the operation and efficiency of the ethics and compliance program.”
The board did not have a proper oversight plan in place. This is very common in startups as well as emerging firms. The board did not investigate the underlying principles of the firm, despite investing in millions of dollars in very early times. In the case of Theranos, there was no control system for the compliance of medical and laboratory laws. Holmes repeatedly flouted regulations and blatantly claimed that her product was not effective. her product. Holmes’ blood tests failed to conduct the test Holmes claimed they were competent to do, and even went so they even hacked blood analyzers to run clandestine tests using them, rather than her own.
If the abrupt firing of whistleblowers did not raise a red flag The departure of the Chief Financial Officer Henry Mosley in 2006 should be a subject of more scrutiny. Mosley was removed by Holmes after he raised concerns about The “reliability and integrity” of Theranos’ blood test system and the equipment.
Many other instances of egregious acts committed by Elizabeth Holmes that the board was not aware of. A prime example occurred in the year 2015 when the Centers for Medicare and Medicaid Services (“CMS”) performed unannounced lab inspections. It found staff members who weren’t qualified as well as blood samples handled incorrectly as well as expired test reagents. CMS additionally demanded that Theranos void the up to one million tests resulting from the Theranos equipment, and the company was banned from operating a laboratory for blood tests. The board wasn’t aware of this, too.
Safeguarding the Board
The Theranos Board wanted to be charitable. However, charity and goodwill do not suffice. The board required protection from its own. How is it that safeguarding the board so important? And what lessons can we learn from Theranos and other similar cases?
It is essential to protect the board as the board has an important role within a business and could be extremely beneficial to a company’s employees as well as shareholders.
What Can be Learned
- The board is the one who sets the standard on ethics and integrity. This can be quantifiably measured and a monitoring system has to be developed and regularly evaluated. It is essential to establish a process that is at the board level to oversee and ensure compliance with the company’s legal and regulatory requirements.
- It is essential to have a solid and safe inside risk control and anti-corruption, compliance as well as a due diligence program. Alongside financial and legal due diligence, a skilled investigation firm that has global exposure and experience at the highest level can assist companies evaluate their leadership team as well as senior posts such as laboratory directors. Evidence of problematic behavior is always a good indicator to be considered.
- Reports regularly, containing substantial information, are mandated by the board regarding risk investigation, complaints correctional actions as well as compliance initiatives.
- An environment of openness and transparency must be created and the capability for employees to raise concerns without fear of retribution from an external third-party firm that reports directly to the Board needs to be made mandatory.
- It is also essential to establish a culture of accountability. every employee in the business is expected to behave morally and face consequences for acting the opposite. A code of conduct needs to be clearly defined as well as the rules for ethical behavior must be clearly stated.
- It could be a benefit if a person on the board is knowledgeable in the field of business for the organization or when the board is regularly in contact with the Risk management specialist. In Therano’s situation, this could be a scientific or medical advisory board, which works alongside the CEO and another internal team. If an expert in the subject is invited to participate or sits on the board, they mustn’t have a conflict of interest. They do not have to sign an NDA or similar agreement from another company as well as being on the board of a competitor.
- Regular deep due diligence background screenings of board members and executives must be conducted. The checks should be performed by an experienced external investigation firm capable of conducting extensive due diligence investigations. This can be a way to ensure that, as mentioned previously the board member or another executive, does not have conflicts of interest and is who they claim they are. It should be also done in M&A processes, as well as when creating partnership agreements with vendors of the supply chain as well as in the hiring process of internal recommendations relatives, friends or colleagues.
Take Away
The Board of Directors plays a crucial part in any company, and it is essential to establish safeguards to ensure that they can steer the right direction for the organization. Theranos is a powerful insight into the many ways that things can go wrong in the workplace. Financial, personal investment, jobs, and lives of many were adversely caused by the unethical actions committed by Elizbeth Holmes and Ramesh “Sunny” Balwani. The board was seized by Holmes and Balwani, along with several others, outside of Theranos.
It does not mean, it does not mean that all companies have no problems with malfeasance, or are protected from criminals. Even if certain executives or board members and employees are trustworthy is not a guarantee that everyone does If a company does not establish an atmosphere of accountability and honesty, and using the appropriate safeguards and precautions implemented, a business cannot be protected or minimize risks. The risk starts from the top.
The board must be protected by taking measures to secure the entire company, from shareholders and investors to employees to partners and clients. The good news is that setting up appropriate monitoring, due diligence compliance, risk management accountability, and a culture of integrity will ensure their future success, and in turn the long-term future of the company.
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