Elizabeth Holmes was once the shooting star of Silicon Valley. With a lifelong hatred of needles, she set out to turn the world of healthcare on its ear by developing a more efficient and inexpensive way to draw and test blood in order to screen for serious diseases. In a world where access to affordable healthcare is a hot-button issue, Holmes was slated to become a revolutionary of her own making, with Forbes magazine dubbing her the “youngest self-made woman billionaire.” Now, Holmes is a pariah in Silicon Valley and heads are left spinning in the wake of the Securities and Exchanges Commission having issued a 24-page document revealing just how her duplicity left investors in Theranos’ research out $9 billion dollars.
To litigators and legal commentators, Holmes’ fall from grace is a familiar narrative. Intention to defraud aside, they say the roads in Silicon Valley are paved with ambitious young entrepreneurs who are more than willing to stretch the truth in order to sell their business. They have the determination to succeed and the naivety their deception will be forgiven once their investors are flush with wealth from returns. Since this has happened before and will likely happen again, how was Holmes able to mislead investors under the radar of Theranos’ board of directors? A breakdown of the board’s composition might hold the answer.
Prior to the release of the SEC complaint, the members of the Theranos board of directors had impressive backgrounds that might leave little doubt in their abilities to supervise the good of the company. There were former politicians such as U.S. senators and former cabinet members, who dealt with high-stakes situations every day in their capacities. There were former executives with previous experience in making decisions and placing trust in competent individuals. But despite their differences in resume, they all had one glaring similarity: They were all white men, over the age of 65. Research has shown while their backgrounds might have been impressive, their homogenous nature may have played a huge role in preventing them from identifying Holmes’ fraud before it was too late.
According to Prof. Andras Tilcsik, who holds the Canada Research Chair in strategy, organizations, and society at the University of Toronto’s Rotman School of Management, diverse boards are what prevent problems in large companies, “Companies with more gender diversity on their boards, for example, are less likely to reissue financial statements because of error or fraud. Diverse groups also tend to consider more factors when making a decision. Racially mixed juries deliberate longer, share more information, discuss a wider range of relevant factors and even make fewer mistakes when recalling facts about a case. Ironically, lab experiments show that while homogeneous groups do less well on complex tasks, they report feeling more confident about their decisions.” What the research is telling us is this: The more a person looks like us, the more we are willing to trust them. The attention to detail that might have been shown by a more outwardly diverse board was not shown by the Theranos board of directors in the case of Elizabeth Holmes. The similarities shared between members of the Theranos board likely created a false sense of security and allowed Holmes’ deceptions to go unnoticed.
Diversity in expertise prevents boards from becoming too comfortable with business practices and makes them open to new ideas. Given the research on homogenized groups, it is reasonable to think this group of white men with an average age of 76 may never have questioned the veracity of Holmes’ research and her promises to deliver the next big thing in medical technology. This has happened before and is likely to happen again, because while the source of the fraud is often dealt with and forgotten, there is no examination of how board composition can enable fraud.
Carie McMichael is the Communications and Media Specialist for Lauth Investigations International, writing about investigative topics such as missing persons and corporate investigations. To learn more about what we do, please visit our website.