Take a Lesson from Theranos: Plan Ahead

Some early-stage, high-growth companies choose to stay private instead of going public in part so that they have the opportunity to grow under the radar without intense scrutiny from securities regulators and the press.  However, as Elizabeth Holmes, the founder, chairman and chief executive officer of Theranos, recently learned, staying private does not guarantee that a company will avoid becoming the target of investigative reports by major media outlets or coming under fire from business partners.  If a company has not prepared in advance to weather these storms, in the worst cases, a barrage of negative publicity could potentially cripple a company’s ability to operate.  As a result, even though private companies do not have the same regulatory compliance burdens as their public company counterparts, early stage companies with high-growth potential may benefit from adopting sophisticated corporate practices that will provide protection in the event they are scrutinized or challenged.

Misfortune Strikes Theranos, Once Labeled as Silicon Valley’s Darling

Theranos is a Palo Alto, Calif.-headquartered health care and medical laboratory testing company that has asserted that it has developed proprietary technology focused on disrupting blood testing.  The company has claimed it has been able to use a finger-prick test to draw blood from patients instead of the traditional, more invasive venipuncture.  Holmes, the chief executive officer, fits the profile of many of the most successful founders in Silicon Valley because she dropped out of Stanford at age 19 to found her own company.  Media sources estimate that, since the company’s founding, the company has raised $400 million or more from investors, is currently valued at approximately $9 billion and has entered into contractual arrangements with Walgreens, Safeway and others for the roll-out of its testing sites.  Because of the company’s rapid rise, some media outlets began calling Holmes the next Steve Jobs.

However, the company’s positive press quickly took a turn for the worse when The Wall Street Journal published an expose titled “Hot Startup Theranos Has Struggled with Its Blood-Test Technology.”  The article included a scathing critique of the company and made numerous allegations including that, despite the company’s multibillion-dollar valuation, the company is not using its proprietary technology for many of the tests it offers.  In essence, The Wall Street Journal alleged that the company’s technology has not kept up with its hype, thereby placing investors, business partners and patients at risk.  Subsequent articles indicated that the U.S. Food and Drug Administration informed the company that its proprietary vials used to collect blood were uncleared medical devices and suggested that partners such as Walgreens and Safeway were pausing or re-evaluating their relationships with the company.  Holmes also received criticism because the company, to date, has not subjected its proprietary technology to peer review.

At this point, at least to many outsiders, the future of the company remains unclear.  However, it is quite possible that the company will be able validate its claims and that Holmes is, in fact, a prodigy with the potential to disrupt health care.  Consumers, who have much to gain if the company’s claims are in fact true, surely are hoping this story has a fairy tale ending.  Nevertheless, even if the accusations against the company are false or misleading, for now, the company’s reputation has potentially been tarnished.  As Holmes surely has learned the hard way, vicious negative publicity alone, even if completely unfounded, has the potential to damage the company’s brand, thwart its growth and undermine its efforts.

Steps to Take to Protect Your Company Before It Comes Under Fire

As Theranos experienced initially, the media will continue to glorify some young companies and their founders because there is a robust market for content that features an exciting American success story.  However, companies should recognize that such positive attention can turn negative quickly, as it did for Theranos.  Given the heightened scrutiny some private companies may face, here are a few steps companies that may be in the spotlight should take to protect themselves.

Follow Corporate Governance Best Practices

Even though a company is private, especially if it is high-potential and may become high-profile, the company should consider following best practices in corporate governance.  A company with a high-performing Board that follows best practices will likely operate more smoothly in good times and more effectively in challenging times.

One of the critical components of good corporate governance is ensuring the Board is comprised of diverse, qualified directors.  The quality of the talent at the top of an organization matters immensely.  On the governance front, one of the critiques Theranos received is that the company’s Board was largely composed of individuals who, while prominent, did not have significant health care expertise.  This caused some to question whether the company did, in fact, have the requisite expertise at the helm to develop the innovative technologies it was claiming and to navigate the health care regulatory landscape.  To its credit, Theranos has now taken steps to redesign its Board.  However, the Theranos situation serves as an important reminder that companies should make a strong effort to recruit talented Board members who have deep industry knowledge and expertise.  It is imperative for companies to recognize that it makes sense to invest time in recruiting the right Board members, as a strong Board helps to improve the optics and may serve as a shield in the event the company finds itself on the defensive.

Adopt an Intelligently Designed Corporate Compliance Program

An intelligently designed corporate compliance program may also help to protect a company from harm.  The Wall Street Journal expose on Theranos relied heavily on anonymous sources, some of whom Theranos previously employed.  While it is unclear whether Theranos has adopted a corporate compliance program, a company that has adopted a corporate compliance program that is functioning effectively may receive advance warning that employees have concerns about the operation of the company.

A corporate compliance program should emphasize the company’s commitment to compliance with applicable laws, behaving with integrity and carrying out its operations with excellence.  Over time, effective corporate compliance programs become integrated into the fabric of the organization’s culture, and employees at all levels understand that high performance with high integrity is expected.  In addition, well-designed corporate compliance programs will include communication channels that allow employees to report concerns without fear of retaliation.  Such channels should include an anonymous reporting hotline that allows an employee to file a confidential report about potential misconduct without requiring the employee to disclose his or her identity.  A company that publicizes these reporting channels and regularly informs employees of its commitment to behaving with integrity may be at a lower risk of having a disgruntled employee disparage the company externally.

Ensure the Company Has Collected Strong Data to Support Its Claims

A high-potential company should take steps to ensure that it has developed data substantiating claims it makes online, in marketing materials and to investors, business partners and the media.  As Holmes herself has acknowledged, publishing data that proves the claims the company is making can go a long way in silencing critics and can help the company reclaim its narrative.

Just as a company should be careful with the statements it makes in online and print marketing materials and to the media, a company should also avoid over-promising when entering into contractual arrangements.  A company should also monitor its performance to ensure it complies with all contractual provisions during the term of its agreements.  Otherwise, the company may find itself on the receiving end of breach of contract claims if the company does not perform as promised.  

Adopt a Thoughtful Crisis Management Plan Before It’s Needed

To the credit of Theranos, not long after The Wall Street Journal published its expose, the company aggressively defended itself.  Instead of hiding or remaining silent, which can be perceived as being arrogant, Holmes granted multiple media interviews, including one at a conference hosted by The Wall Street Journal, the company’s most vigorous critic.  By taking these actions and passionately supporting her company, she ensured that her company had the ability to present its case in a compelling way.  While it is hard to determine whether the company adopted a crisis management plan in advance, the company’s strong efforts made it appear as though it had engaged in such advance planning.

Companies similar to Theranos that have lofty ambitions should avoid taking a passive approach that will leave them scrambling when a crisis hits.  Instead, they should thoughtfully consider and plan their potential response to crises before they occur so that they are in the best position to defend their companies effectively and mitigate their damages.