Theranos & Corporate Execs: Analysis of Elizabeth Holmes’ Trial in relation to Corporate Leadership

What is in the Elizabeth Holmes trial for directors and other corporate executives?

Answer: A LOT!

As a matter of fact, the Theranos case is a test case for director responsibility in the second decade of the 21st Century. We all remember how the spate of mega corporate collapse cases set the tone for major corporate governance in the past two decades. The corporate moral hazards of Enron, Lehman Brothers and WorldCom prompted the need for widespread reforms in the way companies were led.

Sarbanes-Oxley and other SEC regulations changed the “hard” aspects of corporate governance. These legal arrangements set the tone for specific laws that placed direct responsibilities for corporate executives in America and around the world.

What these laws did not really cater for were the “soft” aspects of corporate governance. To what extent should a company be mindful of the products they sell? Directors are not required by law to have minimum qualifications in any field, which leads to the next question – to what extent should directors be held accountable for technical failures?

Naturally, the broad principles of the Anglo-American legal tradition are expected to be applied in such a case to rule on cases that fall outside the scope of such tight-knit regulations. That is where the Elizabeth Holmes Trial acts as a precedent for directors’ responsibility for the technicalities of products they could not understand fully from the onset.

Corporate Failure of a Director Versus Liability for Deliberate Fraud & Deception.

The prosecution is pushing for a criminal conviction on the grounds that Elizabeth Holmes lied and willfully defrauded prospective customers who would rely on her submissions about the blood test products that she sold.

In presenting their claim, the prosecution needs to prove that Elizabeth Holmes was in control and took significant decisions about selling the product and also transferring profits from the venture.

On the other hand, Elizabeth Holmes’ defense argues on the grounds that she was not fully in control and was not an agency to the entire process. She is claiming she was misled and someone else – most likely those who took technical decisions about product development are ultimately responsible.

Corporate Executives’ Liability

A corporate executive leads an organization that takes inputs from the society, process them into outputs and make them available to consumers on a specific market. The corporate executive is given the legal right to use the resources of a company to trade and increase the wealth of the shareholders by making and retaining profits.

Aside the obligation a corporate executive owes to the shareholders, they owe responsibilities to stakeholders outside the internal structures of the company. This includes two key categories of stakeholders protected by law:

1. Government and its regulatory framework &

2. Consumers and their overall health and safety.

Directors are responsible to shareholders by default. However, governments and consumers are a category of stakeholders who have protections under law which gives them distinct interests and power in an organization.

First of all, governments make laws and have the sovereign rights to enforce the laws. Therefore, any company that falls short of the law can be held accountable or restricted through the three arms of the law – executive, judiciary and legislature.

Secondly, consumers have an absolute right to protection under law. This means they have a right to sue a company when the produce things that causes them any form of injury.

When Directors are Held Personally Accountable

Corporate law creates a separate legal existence for (a) the company (b) shareholders and (c) directors. Each of these groups have their own unique personality under law. Corporate law protects shareholders and directors in most cases and prevents actions to be taken against them.

Thus, for the most part, governments and customers affected by a company sue the company as a legal entity. In rare cases, where the company’s actions affected people (for example where customers lose their money and file a class action suit), the directors or shareholders could be held personally liable.

Theranos versus the Key Stakeholders (Product-buyers and Share-buyers)

In this case, the key director of Theranos is being held accountable for the sale of defective products that have not yielded any results to consumers although these results were promised.

Theranos was valued at $9 billion and its primary products were the "nanotainer" which drew just a little blood for a small prick. And little blood was to be analyzed in a machine called the "Edison" which would screen this incredibly small quantity of blood for so many health issues. It was an almost too-good-to-be-true product. However, biotech is the future and everyone seeks better solutions.

On the basis of this promise, Theranos' market value increased and people were ready to pay a lot of money for their shares and products.

At the moment, the share-buyers and product buyers are at the forefront of the legal action against the company. The drug authorities have stated clearly that the product does not meet the goals that it promises clients. Therefore, rendering it a fraudulent and dangerous product to clients.

The US government needs to set the records straight to prevent future events from happening. As the case proceeds, we will be monitoring it closely. However, there are some lessons that cannot be overlooked.

Implications of the Theranos Case to Up-and-Coming Corporate Executives

The main point worth mentioning is that directors can be held accountable if their products cause injury or damage to consumers and are over-valued in ways that mislead share buyers. These two "key" stakeholders - consumers and the stock environment can always force the government to act if a firm's primary product is found to have been advertised on the basis of misleading or false information.

As a corporate executive, you must be sure of the product you are marketing. Hire experts to analyze and review a product to a level where you can be certain it would deliver the promised value to clients. That is because publicizing a product falsely could have legal consequences. This risk is further intensified by the growing technological markets. Therefore, all directors and corporate leaders must make the effort to forecast a new product's impacts on the product users and/or the share markets.

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