Theranos directors trusted Elizabeth Holmes more than their own eyes

When employees and media started raising concerns, the board did nothing.

When former US Secretary of State George Shultz underwent a Theranos blood test, it involved a standard vein draw—not the company’s proprietary finger prick blood collection. Though at the time Theranos claimed to only use its proprietary testing, the discrepancy didn’t bother Shultz, then a member of the company’s board of directors. In fact, according to newly unsealed court documents reported by The Wall Street Journal, he continued to believe that the company could and did use its own technology for all blood testing.

“There would be some, you know, excuse about why they needed to take a venous draw for him, but you know, for everyone else it was a finger prick. And, he continued to buy into that,” Shultz’s grandson, Tyler, a former Theranos employee and whistleblower, testified.

Regulators and media reports revealed last year that Theranos used commercial equipment for most of its testing and had critical technical problems with its own technology.
The unsealed court documents, filed in a now-settled lawsuit by former Theranos investor Partner Fund Management LP, offer a glimpse of how top members of the blood testing company reacted—or failed to react—as Theranos became engrossed in scandal. In particular, the documents highlight how the elder Shultz and another former director, former US Navy Adm. Gary Roughead, seemed unfazed by incongruities and allegations and failed to look further into matters at Theranos.

When lawyers asked the two what they thought of reports that Theranos was having problems with its technology, both said they didn’t know anything about it and didn’t ask. “It didn’t occur to me,” Shultz testified.

An expert, reached by the WSJ, speculated that the directors didn’t break any laws but did fail their corporate responsibility by taking no action. “The point of having a board of directors is to operate as some sort of constraint and check on the founder,” Jill Fisch, a law professor at the University of Pennsylvania who studies corporate governance, told the Journal.
Prior to the damning revelations about its technology, Theranos and its CEO and founder, Elizabeth Holmes, had turned heads and earned a $9 billion valuation for promising to revolutionize the blood testing business with their new technology. And one of the singular features of the company was the makeup of its board of directors. While it was packed with illustrious, powerful government figures, such as former Senators Bill Frist and Sam Nunn as well as former Secretary of State Henry Kissinger, it seemed oddly ill-equipped to help oversee a blood testing company.

Shortly after the scandals broke, most of the directors shifted to the company’s “board of counselors” and then left the company altogether by the end of last year.

Theranos is still limping along, shifting to device manufacturing with dwindling funds and ongoing legal disputes. It has settled some cases, including the one brought by Partner Fund Management LP. But it has some significant challenges ahead, including a $140 million suit brought by former-partner Walgreens and ongoing investigations by the Justice Department and Securities and Exchange Commission.