Ethics in Entrepreneurship: Learning from Elizabeth Holmes' Lies

How the failed startup Theranos can teach us valuable lessons.

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By Jason Hennessey

Opinions expressed by Entrepreneur contributors are their own.

Have you watched The Dropout on Hulu? It's a true story that documents the dramatic rise and fall of Elizabeth Holmes and her biotech start-up, Theranos. The limited series follows Holmes from her time at Stanford University, to her decision to drop out of college and use her tuition money to fund her start-up. From there she rises to a stunning apex, becoming "the world's youngest self-made female billionaire" and, just as quickly as she rises to the top, she dramatically falls from grace.

Related: The Career Rise and Fall of Theranos Founder Elizabeth Holmes

After an investigative report in the Wall Street Journal, things begin to fall apart. The article brings the attention of regulators to potential fraudulent actions at the company and Holmes is hit with a two-year ban from owning or operating a certified clinical laboratory. Subsequently, Homes is charged in a multi-million dollar scheme to defraud investors. Earlier this year, Holmes was found guilty of one count of conspiracy and three counts of wire fraud. She now faces a maximum sentence of twenty 20 years in prison, a fine of $250,000, and restitution.

Potential pitfalls

I followed the story with particular interest as an entrepreneur. "Doing what is right, always" is one of my company's core values. But start-ups have potential pitfalls that may differ from well-established companies.

For example, as you grow from one employee to perhaps hundreds, you need systems in place to manage accountability. You need to learn to delegate, but also keep in mind that you have ultimate responsibility for your company's actions. This means hiring workers with proven integrity is essential. You need people who align with your company's values and who have proven themselves trustworthy of adhering to those standards. If they believe expectations are unachievable, they may be inclined to cut corners.

Defining a company's culture early on is essential. Develop a core value statement and live it everyday. Your staff will look to you for guidance; how you deal with vendors, co-workers or customers will set the standard.

Related: Seven Elements of a strong work ethic

The downfall of Theranos was triggered in part by two whistleblowers, Erika Cheung and Tyler Schultz. They both worked in the lab and grew concerned about what they believed was faulty technology. When they attempted to convey their concerns to Holmes and the management team, they were shut down. Creating a culture where employees feel empowered and listened to goes a long way to heading off problems like this one. Your employees are your first line of defense. They deal with things daily that you may be further removed from. A quick response to issues shows that you are listening and responsive. It's not just what you say, it's how you react.

Accepting responsibility versus assigning blame

When Holmes took the stand at her trial, the media was quick to say that she refused to accept full responsibility for her actions and tried to place the blame on others. This signals a weakness in her leadership style and portrays her in a negative light. To be a CEO of a small start-up, or a large Fortune 500 company, bestows tremendous responsibility. Accept it, make corrective action and move forward in a no-blame environment. If employees make a mistake in this type of environment, they'll be less likely to try to conceal or cover up their error.

And it is worth noting that a recent survey conducted by Herbalife Nutrition for National Small Business Week found that 84% of small business owners and employees viewed "making mistakes" as an opportunity for growth.

How a whistleblower created a good outcome from a bad situation

Erika Cheung took the challenges she faced at Theranos and channeled them into a non-profit organization called Ethics in Entrepreneurship. The core values of EIE are beliefs in service and community, innovation, integrity, transparency, diversity and inclusion. Cheung recognized the need for support and education for entrepreneurs to navigate the waters of starting a business with a focus on ethics each step of the way. EIE believes that addressing ethical issues early in the business cycle is the most cost-effective approach and avoids larger problems down the road.

Tyler Schultz is an advisor for Ethics in Entrepreneurship, and CEO and co-founder of medical diagnostic company Flux Biosciences, Inc. I was encouraged to see evidence that it's possible to have a good outcome from a bad situation.

Do what's right, always

While doing what is right should be a no-brainer, there may be hurdles that start-ups need to address as they begin their entrepreneurial journey. It's crucial to start things on the right foot.

  • Create core values that convey your principles.
  • Live those values in all your interactions.
  • Watch for potential conflicts of interest.
  • Hire people who are aligned with your values

When you start out, your reputation as an entrepreneur may be the only thing you have to gain a client's trust. Create a culture and system that cultivates an environment of trust amongst your employees. The long term impact will be immeasurable. How will you instill ethics in your company based on the lessons learned from The Dropout?

Related: Your Startup's Core Philosophy Is The Secret Weapon For Long-Term Success

Jason Hennessey

Entrepreneur Leadership Network Contributor

Entrepreneur & CEO

Jason Hennessey is an entrepreneur, internationally-recognized SEO expert, author, speaker, podcast host and business coach. Since 2001, Jason has been reverse-engineering the Google algorithm as a self-taught student and practitioner of SEO and search marketing.

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