Theranos Directors Pay No Price for Holmes’s Fraud

(Bloomberg Opinion) -- Tyler Shultz, a former Theranos Inc. employee and whistleblower, shared his relief Monday night that the company's founder, Elizabeth Holmes, had been convicted of fraud.

“This has been a long chapter of my life. I am happy that justice has been served and that this saga is finally in my rearview mirror,” he wrote on Twitter. “Hope to inspire other young professionals to hold their leaders accountable.”

Shultz isn't a household name, but his late grandfather, former Secretary of State George Shultz, sure was. The elder Shultz also sat on Theranos's board of directors and ignored his grandson's warnings that Holmes was staging an elaborate farce at her company rather than revolutionizing blood-testing.

Tyler Shultz began ringing alarms in 2014 about doctored research and shoddy quality controls at Theranos. But Holmes and the company's president, Ramesh “Sunny” Balwani, shunted him aside, according to John Carreyrou, the author and reporter who first chronicled the grift. George Shultz allied himself with Holmes and Balwani, creating a family rift and prompting his grandson to alert regulators and talk to Carreyrou instead.

George Shultz was one of several marquee names on the Theranos board. And with Holmes now facing the possibility of years behind bars it's worth remembering that feckless directors failed to rein her in. It's also a reminder of how weak corporate governance — and overly compliant but handsomely compensated directors — have regularly plagued Silicon Valley startups and larger companies across the business landscape.

At one point, Theranos's board also included former Secretary of State Henry Kissinger; former Defense Secretary William Perry; former senators Sam Nunn and William Frist; Richard Kovacevich, a former chief executive officer of Wells Fargo & Co.; William Foege, the former director of the Centers for Disease Control; Gary Roughead, a former U.S. Navy admiral; Riley P. Bechtel, a former board chairman of Bechtel Group Inc., and James Mattis, a former U.S. Marine Corps general who later served as a defense secretary in the Trump administration.

That's an illustrious collection. But I'd guess that many of those men were on the board for window dressing. Some may have been there to help raise funds, and at least a couple (maybe only two?) were directors because of their medical expertise. Others may have offered useful connections to a company planning to sell its blood-testing devices to the military. But fame and bragging rights seem to have been at work in their selection as much as anything else.

There's an argument to be made that the Theranos board was an outlier in Silicon Valley. Institutional investors with meaningful financial stakes — and an interest in successful outcomes — typically populate startup boards. Other directors are routinely recruited for specialized knowledge that helps a new venture navigate a complex industry. Still others, the argument goes, don't rely solely on reassurances and communication from a startup's leaders (as George Shultz did) but instead dig deeply into its operations to learn more.

Perhaps that's the case, but some of the clown car crackups that have stained Silicon Valley suggest that well-functioning and vigilant boards are not nearly as prevalent as some advocates claim.

Even if you accept the idea that these things eventually sort themselves out and that's the price of admission if you want an innovative and kinetic ecosystem for startups, Theranos should also nag. Holmes burned through $600 million of other people's money, and lied without remorse. Patients who relied on Theranos's services said that their lives were upended by faulty readings. Holmes was convicted of defrauding investors but not of harming her company's patients, a measure of how hard it is to fully levy justice when it comes to white-collar crimes.

Tyler Shultz had been working for Theranos only for several months when he became convinced something was amiss. Yet Theranos's board sat by for years as the company's problems snowballed, and it did so without consequence. Holmes now stands to serve prison time for her handiwork, while her former directors merely stopped cashing their checks and attended to their reputations.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Timothy L. O'Brien is a senior columnist for Bloomberg Opinion.