The article by Yglesias (2018) zeros in on Theranos, a startup biotech firm that was embroiled in a scandal that led to the prosecution of its president Ramesh Balwani and CEO Elizabeth Holmes. At the same time, serving secretary of Defense James Mattis is also facing possible questioning as he was a member of the board starting 2013.
The core of the scandal revolves around Theranos claims that it had founded a technology that could enable faster, cheaper, painless blood tests. As it later turned out, it was all a fake claim, and it had no such capability. Its machines, popularly known as Edison did not work, and instead, the company was using older Samsung equipment. All this time, stakeholders in the health sector fell for the scam because they were desperate for technologies that could improve access to healthcare and at a cheaper cost.
The firm also claimed that its revolutionary equipment had been deployed by the Departments of Defense (DoD) to Afghanistan and on medevac helicopters, hence putting it in a position to earn over $100 million as of 2014. In fact, the military had serious misgivings about the equipment and never used it.
To buttress its fake claim, it exploited the Americans political, business and media establishments. It brought to its board some well-known personalities including former Secretaries of State, Henry Kissinger, and George Shultz. Later on, current Defense Secretary James Mattis joined the board after retiring from the army in 2013.
The executives of Theranos and board members are facing allegations of having been reckless or concealing the information about the scandal. Already, Holmes and Balwani have been charged, while it remains to be seen whether Mattis will also face questioning.
There are some stakeholders who are impacted by the scandal at Theranos. First, the venture capitalist who put in their money. The venture capitalist has a right to earn a return on their investments, and the company had an obligation to make full disclosure. However, it appears the investors have lost millions in this scam, as materials evidence has been concealed from them.
Secondly, the Securities and Exchange Commission (SEC) is very much involved. Under the Sarbanes-Oxley Act, the SEC must protect investors by ensuring that corporate information is accurate and reliable (Yu & Yu, 2011). Hence, they have a right to access relevant information as part of this endeavor, and in accordance with the established rules.
The customers also are an important stakeholder because they have a right to high-quality goods and services. They have a right to be protected from products that may expose them to harm. Therefore, institutions that may have been sold the Edison machines are at risk of misdiagnosing their patients and exposing themselves to harm, including being sued, loss of business and lost reputation (Yu & Yu, 2011).
The general public also has an interest in this issue because it goes to the heart of the quality of healthcare they receive in health institutions. The public has a right to quality healthcare and actions of Theranos infringes on this right. Hence, the public will be interested in knowing the extent to which they were exposed.
Looking at the situation of Theranos, there are no real choices available to them. They have to stop marketing the Edison machines forthwith. In fact, it appears that the company was only built around these machines, and this means that they may have to wind up. If it goes that way, there are some costs to be borne. First, the venture capitalist is certainly going to lose their money. They invested in a fraud, and there is very little that can be salvaged. On the other, Theranos, as a company has had its reputation damaged, and it may find it difficult to continue trading. Reputation is a major asset in the corporate world, and once it has been buttered like in this case, it becomes difficult to reinvent the organization because customers will end their contracts.
How to Resolve the Situation
The entry of SEC into the picture is certainly the right step. SEC is prosecuting those who bear the greatest responsibility for the fraud. However, the issue could have been brought to light and resolved much earlier, and save the investors from losses that they will definitely. In fact, the article raises pertinent questions regarding the role of board members. If indeed they knew what was going on, they should have informed the authorities and brought to an end the scam earlier on.
Aside from prosecutions, it will be important to look at any adverse impact on the public. If there are people who have been harmed because of using the equipment, then the company should be held responsible, and be made to pay damages.
Investigations should also be expanded into the role of board members such as secretary of defense James Mattis. It would be in order if the authorities took action, even if symbolic, to show the board members of all companies that they hold positions of trust, and must ensure that the interests of the stakeholders are protected.
Groups Impacted by Decision
Whether or not the decision is taken, the venture capitalists have already lost huge sums of money in the startup. It means that venture capitalists should be more careful in future when choosing where to put their money. They should be more thorough in evaluating beneficiaries of their funds.
Secondly, the career prospects of those prosecuted may take a turn for the worse. Organizations find it difficult to employ people who are having a serious indictment of their reputation. This may be the reason why CEO Elizabeth Holmes has decided to have an out of court settlement (Yglesias, 2018), to have leverage and maybe save her career.
The SEC will also be asking itself why it took long to unearth what was an obvious scam. The scam brings to the fore the interconnection between politicians, business, and good marketing, and it will be important to devise ways of catching up with such crooks much earlier before the public can lose money. In this case, the DoD almost lost money.
There are some issues that come up, and which should help add substance to the case. First, Theranos managed to fool people by leveraging on politics, good media coverage and connections with the corporate world. Hence it was very much like any other legitimate business. Hence, people must ask what more can be done to identify such firms in the future. Secondly, the article has also raised important questions regarding the role of board members to an organization. In particular, whether board members to understand the operations of their corporations, or they restrict themselves to making policy. In this case, Mr. Mattis was used to sourcing business form the DoD, yet Theranos was by all intent, a fraud.
Davies, H. (1999). Falling public trust in health services: implications for accountability.
Yglesias, M. (2018, March 16). James Mattis is linked to a massive corporate fraud and nobody wants to talk about it. Retrieved from Vox: https://www.vox.com/2018/3/16/17124288/mattis-theranos-board-trump
Yu, F., & Yu, X. (2011). Corporate lobbying and fraud detection. Journal of Financial and Quantitative Analysis, 46(6), 1865-1891.
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