AE 115

JESSICA C. ONG

THERANOS
A CRITIQUE PAPER
“THE TRUTH UNVEILED”
Overview:
With the advancement of today’s generation, many people yearns for fame and
power in the different fields using the most useful means- the technology. As an
aspiring and ambitious individual, Elizabeth Holmes used her little knowledge plus
the confidence that she has to fulfill her goal: instantly becoming one of the well-
known innovator in the field of technology and medicine. And so, she created the
Theranos which demonstrated that it is possible to do the impossible- running
multiple of diagnostics with just a small amount of blood sample, varying from
cholesterol levels to advanced chemical sequencing such as cancer.
With this idea that she has, she succeeded to build her reputation and gained
the trust of many famous individuals with her invention. She made herself known to
many and was proclaimed as "the world's youngest self-made female billionaire” by
Forbes as well as featured as the “new Steve Jobs” by Inc,a business magazine. As her
career was rising up to its highest peek, the truth was unveiled as a controversial issue
arouse in the year 2015 when the writer John Carreyrou exposed the deception hiding
within the Theranos Company which uncovered the fact that the tests they run using
their lab testing Edison machine was all based on an inaccurate data, falsified
measures which all falls into one pit- a huge fraud in behalf of the investors and
employees. What is much more worse more than the loss of money is the risks
associated to health of the customers believing in their product.
Application:
As a corporation who successfully built its name and gained the confidence of
its investors, Theranos indeed should’ve contributed a large part of economy of the
United States if it effectively works as how it claims. However, it didn’t work and as
the deception was revealed, the US jury finds Holmes guilty of fraud just recently
(January 2022) and it needed to give up all that it has started. Holmes needed to face
the committed federal fraud with 20 years in prison for each four counts where she
was convicted.
 As we study the case of the Theranos scandal, applying the recommendations
by the SEC Code Of Corporate Governance of the Philippines, there are a lot of
principles and ideas that the company failed to apply in managing its operations with
integrity and truthfulness.

1. ESTABLISHING A COMPETENT BOARD

Being the CEO of the Theranos company, Elizabeth Holmes failed to meet the
criteria given by the SEC which includes the experience and expertise that is relevant
to the company’s industry or sector. We all know that Holmes was a drop out student
after it’s second year in chemical engineering. Although Holmes was still recognized
as a clever individual, transforming the medical technology environment without
having the same degree of skill as someone who had spent years acquiring a Ph.D. or
a Master of Engineering may have been a bit foolish. She didn't have any Ph.D.s in
medical technology on her executive team, thus she really can not count on them to
provide her sound advise (Winter, 2019). Her experiences and the little knowledge
that she has was not enough to run a huge medical related lab testing corporation
using the technology. It is a proof that Holmes, the founder herself, was really not a
competent leader of the board thus resulted to the downfall of the company.

2. FOSTERING COMMITMENT
As stated in the SEC Code of Corporate Governance, the directors should
invest the time and effort required to properly and professionally carry out their duties
and obligations, including enough time to get familiar with the company's operations,
to demonstrate their entire dedication to the company.
The Theranos’ Board indeed has intelligent and hardworking employees who
wanted to prove that their product works. To begin with, no board member is facing
criminal charges or even the danger of being convicted. Nobody of them were
involved in the deception because they were deceived, just like practically all the
others. However, Holmes failed to maintain the good relationship between her co-
leagues because she did not gave hem enough time to train and enhance their
knowledge in making decisions for the company. She was just the main decision
maker and all that matters is her choice. This is also one of the causes of the downfall
of the Theranos. They all became dependent on the charismatic deception of Holmes.
3. ESTABLISHING CLEAR ROLES AND RESPONSIBILITIES OF THE
BOARD
The code of corporate governance states that the Board of Directors is jointly
accountable for the institution's long-term profitability, as well as its competitiveness,
sustainability, and industry-leading position, in accordance with the institution's
corporate objectives. Theranos also failed to meet this recommendation by the SEC.
In their case , The Board did not performed in the best interest of the company
because they did not clearly established the roles of the board and the CEO, Holmes
became the brain of everything. They did not collectively worked for the best interest
of the company and the investors.

A. FIDUCIARY DUTY
-SEC suggests that The Board members should act on a fully informed basis, in good
faith, with due diligence and care, and in the best interest of the company and all
shareholders. However, Theranos did not act in the best interests of the firm and all
shareholders. It did not based their decisions on complete information as well as they
did not act in good faith while managing the business.
i. Duty of Obedience
- Obeying the law, rules, and court orders is part of the duty of obedience.
Even so, the directors of Theranos did not carry out their responsibilities in
accordance with the law and sound corporate governance norms. The CEO, Holmes,
did not act in accordance with the law and just used her power to deceive its investors
and even her co-leagues inside the company.
ii. Duty of Diligence
- They are held accountable because they failed to act in good faith, with due
care when performing their duties. They exposed the health of consumers in the risk
of giving falsified data using their product.
iii. Duty of Loyalty
-The duty of loyalty requires directors and trustees to put the corporation's
interests ahead of their own personal advancement. However, Holmes the company to
put her own personal interest to acquire what she wanted.
4. STRENGTHENING BOARD ETHICS
 - The company did not focused on improving board ethics, did not adhere to
high ethical standards, and did not considered the interests of all stakeholders.
Theranos’ boards did not adopt this Code of Business Conduct and Ethics because
they did oversee adequate and efficient implementation of their ethical standard.
It is showed when they made their stakeholders work in an overtime and
forced way with the fear that they will immediately be fired when they cannot finish
their work.
5. STRENGTHENING THE INTERNAL CONTROL AND RISK MANAGEMENT
SYSTEMS
- In addition, the company's internal control system and enterprise risk management
framework were not strengthened. This principle emphasizes that a company's
internal control system and enterprise risk management framework should be strong
and effective to assure integrity, transparency, and proper governance in the conduct
of its business. Theranos, on the other hand, has provided investors with false and
deceptive financial figures. This shows how the management failed to demonstrate
honesty and integrity within their internal reports.

CONCLUSION:
The Theranos issue is just one of the proof that companies need to have a cautious yet
strong foundation in establishing corporate governance or else the company will
eventually fail to sustain its operations. It is also an example of how important it is to
apply code of ethics in the business world. If the truth was not revealed,many
investors would have lost their money and many patients must have lost their lives
using the product that they created.
Therefore, it is recommended that every corporation should make certain that the
board of directors has the right knowledge, or that the management such expertise in
the field they are working with. This will help the board identify risks, evaluate them,
and decide on what will be the best for the company and its customers.