One of the unexpected pleasures of interviewing remotely has been the chance to glance at candidates’ bookcases. A recent recommendation was John Carreyrou’s Bad Blood, detailing the multi-billion-dollar Theranos scandal. The suggestion was hugely timely, given the high-profile trial which is currently taking place in San Jose, California where Elizabeth Holmes, the founder, is facing 12 counts of wire fraud and conspiracy to commit wire fraud after the spectacular rise and fall of her blood testing start-up. The 37-year-old could face up to twenty years in prison and is pleading not guilty. Founded when she was a 19-year-old Stanford drop-out, Theranos promised to offer a revolutionary quick-turnaround blood testing service using only a drop of blood to monitor all manner of conditions. Instead, it was a façade: the science was dubious, the technology wasn’t ground-breaking but ‘off-the shelf’, test results were dangerously inaccurate – and all the while shareholders were misled, and regulatory bodies obstructed.
By complete coincidence, immediately afterwards, I was recommended The Cult of We, in which Eliot Brown and Maureen Farrell look at the inside story of co-working former unicorn, WeWork, and its charismatic (and ultimately, ousted) founder, Adam Neumann. The Cult of We details WeWork’s journey from a startup that promised to change the way we work and live, commanding a valuation of $47bn, through to its semi-demise after a failed IPO and resulting decline, with 80% of shareholder value destroyed.
For those interested in leadership and governance, these stories provide useful lessons for any business – particularly those going through significant growth. Common to both Theranos and WeWork was the complete absence of effective and appropriate non-executive governance. A few years ago, I wrote about the need for veteran industry talent on boards. Why, I asked, do so few boards include NEDs with decades of sector experience, who can provide the domain knowledge to properly challenge and scrutinise the executive? The stories of Theranos and WeWork give an insight into what happens when a business’ board isn’t equipped with a sufficient understanding of the sector in which it’s operating.
“Instead, the boards were populated primarily with high-profile figures appointed to generate prestige and garner influence. Under the (non-)governance of these boards – with founders whose sole focus was growth – the businesses were allowed to overpromise and overspend, with minimal oversight.”
Not one of Theranos’ board members had a basic understanding of blood science – or indeed, any real depth of healthcare knowledge. Likewise, despite being in essence a property company, WeWork’s board had no proper real estate expertise. Instead, the boards were populated primarily with high-profile figures appointed to generate prestige and garner influence. Under the (non-)governance of these boards – with founders whose sole focus was growth – the businesses were allowed to overpromise and overspend, with minimal oversight.
Bad Blood in particular looks closely at what happens when high-profile figures accept seats on boards – and the message this sends out to prospective investors, employees and regulators. Members of the political elite – like former US Secretary of State George Shultz and Henry Kissinger – were by all accounts taken in by Holmes’s passion and drive as a young entrepreneur, but ultimately failed to do their proper due diligence. Upon taking up board positions at Theranos, Shultz and Kissinger gave their personal seal of approval for the enterprise – and therefore, a verified invitation for others to join and invest in the business. For anyone taking up a board seat, Bad Blood provides a much-needed reminder of what it means to be an NED. Taking up a non-executive position – particularly if you have a high profile – is not just about providing effective governance, but also about associating your personal reputation with the business.
More than that, Bad Blood and The Cult of We illustrate the perils of not having proper governance around founders.
At Theranos, Elizabeth Holmes forced through a resolution that assigned one hundred votes to every share she owned, giving her a laughable 99.7% of the voting rights. At WeWork, Adam Neumann’s shares were worth 20 times that of ordinary shareholders and he personally held ownership positions in buildings leased by the company. With no sector expertise, and no authority or real inclination to control founders, these boards were effectively window dressing, allowing the businesses’ leaders to make questionable, and often downright bad, business decisions.
At WeWork, for example, Neumann frittered away capital on unnecessary acquisitions. Some M&A – like a Singapore-based coworking startup or architecture design firms – did fit within the company’s mission. But other acquisitions, for instance the company’s large stake in a Spanish business that makes inland wave pools, speak only to Neumann’s misuse of company funds… and his avid interest in surfing. WeGrow – WeWork’s entry into private schools, led Neumann’s wife Rebekah – was another folly, far from the core business of office letting.
Likewise, over in Palo Alto, Holmes was left unchecked to mislead business partners, signing deals with the likes of Walgreens and Safeway to provide blood analysers in-store, long before they had anything to launch to the retail market. Safeway spent over $300 million to build out clinics in hundreds of its grocery stores in anticipation of blood-testing technology that never materialised.
Most crucially, Bad Blood and The Cult of We are textbook examples of what can happen when founders build a business around the cult of their own personality, and a one-track mindset geared towards growth.
At Theranos and WeWork, Holmes and Neumann became the product. Both sets of investors weren’t won over by strong business models, but by charismatic founders who made promises that seemed too good to pass up (they were). As former Safeway CEO, Steve Burd said in his testimony at her trial this week: “I was very impressed. There are very few people I had met in the business that I would actually say are charismatic. She was charismatic, she was very smart and she was doing one of the hardest things you can do in a business, and that’s to create an enterprise from scratch.”
While leveraging a founder’s personality can be a critical business move when looking to raise capital, rapidly growing startups need their leaders kept close and focused on their business. Holmes and Neumann spent much of their time away from their companies at interviews and public appearances. This left their organisations without the engaged leaders promised to employees, and drew further attention away from the actual products and services on (or not on) offer. Moreover, it created a distance between the founders and their businesses that allowed Holmes’ and Neumann’s versions of the truth to prevail, even without data or evidence to back them up.
“Most crucially, Bad Blood and The Cult of We are textbook examples of what can happen when founders build a business around the cult of their own personality, and a one-track mindset geared towards growth.”
It is not surprising that Holmes and Neumann surrounded themselves with ‘yes men’, and fostered a culture in which there was no room for challenge. When authority is established through fear – both books are peppered with anecdotes of brutal public firings – impressing and appeasing the founder comes second to honest and effective decision-making.
Moreover, what starts off as mismanagement from a power-hungry founder can lead to serious and illegal wrongdoings when not addressed. Examples of bullying, fraud, harassment and drugs misuse are illustrated in both the Theranos and WeWork stories. The toxic nature of these businesses then makes it harder to hire the best talent – particularly in critical roles like CFO, COO and General Counsel – creating a vicious circle of governance and strategy failures.
“The toxic nature of these businesses then makes it harder to hire the best talent – particularly in critical roles like CFO, COO and General Counsel – creating a vicious circle of governance and strategy failures.”
Adam Neumann and Elizabeth Holmes’s stories don’t end well – for Holmes, probably far worse than Neumann who left with a severance payment reported to be close to $1bn. There is no doubting that both Neumann and Holmes were creative and visionary leaders, who had the potential to disrupt their sectors in a positive way. However, both resisted the governance that would have kept them grounded, focused, honest and realistic. Ultimately, good governance could have set them both up for success. With the right controls, support and team, one can’t help thinking that they could have been the iconic business leaders they dreamt of becoming. Instead, their insistence on complete freedom to operate ultimately destroyed billions of investor cash, and – most worryingly in the case of Theranos – put an unsafe product into the consumer market.