Six years after its founding, in 2009, at 25, Elizabeth Holmes, founder and CEO of Theranos, a company based in Palo Alto, California, that manufactured and marketed medical devices for testing blood, told a small group at Stanford University that her ticket to success was "conviction" that you could "make something work, no matter what." On June 15, 2018, Holmes and Theranos's former president Ramesh "Sunny" Balwani were indicted on multiple counts of wire fraud and conspiracy to commit wire fraud. According to the indictment, investors and doctors and patients were defrauded. Holmes herself had falsely claimed in 2014 that the company had annual revenues of $100 million, a thousand times more than the actual figure of $100,000. Prosecutors claimed they had engaged in an

Question

"elaborate, years-long fraud" wherein they "deceived investors into believing that its key product-a portable blood analyzer-could conduct comprehensive blood tests from finger drops of blood." It was alleged the defendants were aware of the unreliability and inaccuracy of their products, but concealed that information. If convicted, they each face a maximum fine of $250,000 and 20 years in prison. Normatively speaking, which actions should Theranos's board of directors have taken to provide good governance oversight and prevent this fraud from occurring?

What will be an ideal response?

Answer 1

Theranos's board of directors failed to fulfill at least some of the following four important obligations:

1. Overseeing the company's financial accounting and financial reporting practices.
2. Critically appraising the company's direction, strategy, and business approaches.
3. Evaluating the caliber of senior executives' strategic leadership skills.
4. Instituting a compensation plan for top executives that rewards them for actions and results that serve shareholder interests.