It was always a perfect storm.
A young female CEO with a uniquely charismatic presence? Check. A complicated new technology that few people understood? Check. A big-name board that seemed to govern with its eyes closed and ears plugged? Check. Media hoopla? Check.
The downfall of Theranos, the blood testing company launched by Elizabeth Holmes, has been covered ad nauseam: You’ve seen the documentaries. You’ve read the books and exposés. You’ve heard the jokes.
For CFOs, however, there’s a lesson lurking right under the surface of the existing narrative: So this is what happens when a company doesn’t have a CFO? Well, yes and no.
You’re fired! Before Elizabeth Holmes was a federal prisoner, she was just a young founder firing her company’s CFO, Henry Mosley, who only held the seat for eight months before he was sacked in 2006.
Mosley, a finance vet who had already taken two tech companies public by the time he joined Theranos, expressed concern that the company showed falsified test results to potential pharmaceutical investors, per Wall Street Journal reporter John Carreyrou’s 2018 book on the Theranos fallout.
When Mosley voiced trepidation, “Elizabeth’s expression suddenly changed,” Carreyrou wrote of the incident. “Her cheerful demeanor of just moments ago vanished and gave way to a mask of hostility. It was like a switch had been flipped. She leveled a cold stare at her chief financial officer. ‘Henry, you’re not a team player,’ she said in an icy tone. ‘I think you should leave right now.’”
He did—and the company never hired another CFO. That should’ve been red flag #1.
“That was relatively early days,” Ann Skeet, senior director of leadership ethics at Santa Clara University’s Markkula Center for Applied Ethics, told CFO Brew of Mosley’s firing. “For the CFO to be dismissed, a C-suite executive to be dismissed, and for there to be no inquiry from the board is remarkable. It’s an abdication of duty, really.”
For Skeet, who has interviewed Theranos whistleblower Tyler Shultz and developed business ethics teaching modules around his experience, one of the most intriguing aspects of the Theranos case “was the relatively young age and lack of experience of its CEO, which should be augmented and balanced out by a competent board.”
That was not the case at Theranos—and that became exceptionally clear with the firing of the company’s CFO.
Falling overboard. Reading off the names on the company’s board feels like flipping through flashcards for an APUSH quiz: Henry Kissinger, former US secretary of state; Jim Mattis, former secretary of defense; George Shultz, yet another former secretary of state, and Richard Kovacevich, former CEO of Wells Fargo.
“The board for Theranos was really a rock star board, more of ‘in name only’ high-profile people, but not people who had expertise in the industry that the firm was operating in, and I thought that was a real obvious miss,” Skeet noted.
Similarly, Bill Miller, a professor of accounting at the University of Wisconsin, Eau Claire, where he focuses on accounting ethics, says the Theranos board appeared to be “totally hands-off.”
“You can’t run a business without somebody watching the store,” he added. “The sheer lack of internal controls, controls in any way, is just scary, and so the need for really good financial leadership, but also then a strong internal audit component, has to be there, and without that, we see what happens.”
While seemingly every form of internal governance was missing at Theranos, Skeet noted that many boards “operate under this adage of ‘noses in but fingers out,’” meaning “it’s okay to be nosing around and asking a lot of questions, but you shouldn’t get involved in the day-to-day management of companies.” That can get messy, however, at “young companies and in companies that are working with brand new technologies, like artificial intelligence today.”
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At Theranos, both were true: “It was a relatively young company, and it had an unproven technology. You would expect the board to be more engaged,” she said.
“At a minimum, you’'d want to know, was the CFO fired because they were cooking the books? Was the CFO doing something that was irresponsible, and do we have some exposure as a company as a result of some missteps by them?” she added, in reference to the board. “But in this case, being summarily dismissed relatively early in the company’s history, without looking into that, is unheard of.”
So how on earth could a board seemingly fail to ask any follow-up questions of a fired C-suite executive? Both Skeet and Miller point to the unique charisma of Elizabeth Holmes, whose pull was so strong that even when Shulz, the whistleblower whose grandfather was board member George Shulz, “tried to draw his grandfather’s attention to the fact that there were problems, he was dismissed,” Skeet said. “People were taken in a bit by her, and didn’t do their due diligence as a result.”
Cautionary tale. If you’re a CFO reading this, you know your company has a CFO. And let’s assume your board isn’t wrapped around the finger of a cunningly charming young Stanford dropout CEO. And let’s also assume you’re not defrauding investors of hundreds of millions of dollars. Proud of you!
There’s still plenty to learn from Theranos and the firing of its CFO. If anything, the downfall of Theranos is a perfect storm of worst case…everything.
And if you’re curious what the exact opposite looks like: Skeet has conducted research comparing Silicon Valley and the Basque Country in Spain, comparing the two regions to “identify conditions that make it more likely for ethics to be used in organizations.”
The first condition is “a symbiotic relationship with society,” in which company culture stresses a sense of responsibility to society and acknowledges how things happening in society impacts the company in turn. Theranos had lofty goals on this front…but with fake results.
Next, companies more likely to use ethical practices foster a “climate of mutual understanding and trust,” which is identifiable, Skeet said, by whether or not “there’s a comfort level with decentralized decision-making, because there’s some kind of rubric for ethical decision-making in the company.” In short, executives can trust that employees know right from wrong, and can make their own decisions. At Theranos, “decisions were pretty tightly controlled by Elizabeth and Sunny Balwani, her COO,” she added.
Another hallmark of ethical leadership? People feel “comfortable coming forward and raising concerns” about the company, Skeet noted. “Obviously, when the CFO did that in this company, he was fired. So that isn’t creating a climate of mutual trust and understanding.”
Finally, the last key condition “is a set of ethical deliberation practices,” Skeet said, including “thinking about downstream effects, things that could go wrong, anticipating those, and then, whenever possible, sharing the thinking behind decisions that are made.”
“Those practices were not in place at Theranos,” she added. “Looking at it from the 30,000 foot level, it’s less likely for ethics [to be] used in a company where none of the conditions are present.”
This is one of the stories of our Quarter Century Project, which highlights the various ways industry has changed over the last 25 years. Check back each month for new pieces in this series and explore our timeline featuring the ongoing series.
