Theranos: When a Culture of Growth Becomes a Culture of Scam
One of the most shocking aspects of the stunning downfall of Elizabeth Holmes and her blood-testing company Theranos was the sheer brazenness of it all -- how could Holmes so blatantly and purposefully scam so many for so long, from shareholders to employees to the public?
It's a story that continues to fascinate us. Already, we've had an HBO documentary on the subject. Still to come is a movie, Bad Blood, based on John Carreyou's best-selling book, starring A-lister Jennifer Lawrence. Hulu, meanwhile, is adapting ABC Nightline's investigative series, The Dropout, as a series starring Kate Mackinnon.
Why all the attention to the Theranos story? One reason might be the millions of us still trying to understand how a company valued at $9 billion from some of the most prominent investors out there could be such a complete sham.
As somone who started her career at another "downfall" company -- Enron -- I think I can offer some perspective on the Theranos saga. Specifically, while appalling and even tragic, that rise and fall is not especially surprising. In fact, a perfect storm of external and internal factors built the right climate at Theranos to allow a culture of scam to grow and thrive.
What I mean is that on one hand, Silicon Valley today is synonymous with innovation -- a world where ingenuity is rewarded and growth is the penultimate goal. From Elon Musk’s rules of productivity to the IPO race between Lyft and Uber, “innovate, innovate, innovate” has become the mantra as companies continuously push to do more: deliver more earnings, please shareholders and expand into new markets.
But in the growth-centered environment that the Valley boasts, despite the wonderful innovations that result, and despite the companies genuinely developing outstanding, world-changing products, it becomes easy for bad actors to behave badly in the name of “innovation.”
On the other side of the spectrum, companies are being pushed to go further than ever, at the same time that there is also increased pressure on business leaders to show upstanding character and take a stand on global issues. The result is that today's demands for ethical leadership are unprecedented. And employees are paying attention: From Google’s diversity walkouts to Amazon employees' speaking out for climate change policies, leaders today are expected to no longer just be the head, or even the face of a company -- but also its heart and soul.
This leaves company leaders teetering on a tightrope between innovation and ethics. So, if you're a leader, how do you balance these demands and ensure your culture of growth doesn’t become one of scam? Here are three guidelines based on my experience at Enron and what I witnessed of the Theranos spiral:
Watch out for those “little” decisions.
In reality, most criminals in business -- Holmes likely included -- don’t wake up one day and say, “I think I’m going to architect a large fraud today.” A scam doesn’t come about in one single moment. Rather, its creation is more like a slow trail of breadcrumbs, the end result of many little, seemingly innocuous decisions made along the way.
As Bad Blood tells it, there was a moment early on when the team in Europe realized a demo of the technology wasn’t working but chose to pretend otherwise. This may have seemed a small part of the wider narrative, but that one decision to fudge the results created a precedent: the implication that it was acceptable to lie.
And the second this type of thinking became institutionalized, it served as the foundation and thread across the business.
As a business leader, you must realize the importance of each little decision you make in the long haul of your company’s integrity. It can seem easy to convince yourself that those small flubs were okay or done “for the greater good,” but one “small” decision inevitably leads to another, and suddenly you’ve moved from white or gray territory to territory that is definitely black.
Today, the stakes have never been higher. According to a recent PwC study, 39 percent of 2018 CEO turnover was due to ethical lapses, the highest in the report's 18-year history and the first time ethics took over financial performance as the largest cause of dismissal.
Ask your grandmother and 5-year-old.
Now that we know just how big “little” decisions can be, how can you make sure you’re making the right ones? I recommend what I call the “grandmother and 5-year-old" approach. With every decision you make, first examine it through the lens of both these personas.
Start by asking yourself, "Can I explain this decision to my grandmother in understandable terms?" You should be able to clearly break down the decision’s value and impact in a way your grandmother could grasp. Then, when it comes to the 5-year-old, his or her first question will likely be, “But why?” You must be able to describe the “why” behind each decision in terms that 5-year-old understands. You need to determine whether the decision is right or wrong, kind or unkind, fair or unfair.
Consider the legacy of Uber founder Travis Kalanick. Had he run any of his uber bad decisions -- from evading the authorities, to price-fixing, to yelling at drivers, to sexual misconduct -- past the lens of that grandmother or 5-year-old, he probably would have gotten a hard "no" for each.
Give employees a voice.
The importance of culture when it comes to corporate ethics cannot be understated. Because of this, it’s absolutely critical to give employees a voice. At Theranos, we saw Holmes and company president Sunny Balwani take the reins, clouding their moves in secrecy and rarely letting outsiders into their circle. Nobody asked questions because nobody was given the power to do so.
Typically, the higher up you move within an organization, the more curated -- and potentially clouded -- your view becomes. If as leader, you encourage other voices, that action not only empowers employees to speak up and flag bad behavior, but also helps you garner enough perspectives to take smart, ethical actions.
Nike likely could have avoided a New York Times investigation about alleged gender discrimination, a lawsuit and a drop in public perception had its leaders listened to employee complaints and gotten rid of the bad apples that tainted their culture.
Innovation and risk-taking are what make companies great -- but there is a fine line between “grow” and “grow at all costs.” As you work to push the envelope before you and to change your industry and the world for the better, keep these three lessons top of mind. Make sure your cover story is something your grandmother and 5-year-old can not only understand -- but be proud of.
If not, consider that Elizabeth Warren may get her way. If that happens, you may not just lose your legacy and your job -- you'll also go to jail.