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4 Management Problems Evident in the Theranos Downfall

On my spring vacation, I had the chance to read several books. Although my typical preferred beach read is a juicy crime fiction* novel, I strayed a bit from my usual genre and now have a recommendation for you--Bad Blood: Secrets and Lies in a Silicon Valley Startup by John Carreyrou.

Bad Blood is about a now-defunct company called Theranos, helmed by Elizabeth Holmes, who was at one time the world’s youngest female billionaire. I hadn’t heard anything about the Silicon Valley startup when it was thriving and only recently learned about this fascinating case through “The Dropout” podcast.

Big Promises, Big Lies

Theranos was built on the promise of a small blood-testing machine that could run over 100 simultaneous tests with just a few drops of blood from a finger prick. Yet, after years of work to develop it—including a roll-out of some of the machines at Walgreen’s stores—in truth, the technology never did work.

Despite this, nearly everyone involved (including Theranos’s Board of Directors) was misled into believing that the technology was not only working but was more accurate than traditional blood tests. Patients were given erroneous results, corporate deals fell apart, investors lost millions, and Holmes and her former COO now face charges by the Securities and Exchange Commission that could mean jail time for them.

As a management educator who teaches best business practices and ethics, I was floored by much of what I read about Theranos and how Holmes and COO Sunny Balwani ran their company. Some of the red flags in Theranos’ operation are ones that we should look out for in our own organizations, as they can signal problems we may not see.

1. Lack of Transparency

Probably the biggest complaint about Theranos from both its employees and former partners was lack of transparency. The company claimed to be protecting its trade secrets, but in truth, it was hiding flaws and poor quality control results. Notably, several employees were fired from Theranos for asking too many questions.

This all flies in the face of a new trends in some organizations, one of which is open book management. This approach goes beyond traditional open door management by allowing employees to have some information previously reserved only for managers. This helps them understand not only how to do their jobs effectively, but also how to help the company overall. Open book management is certainly not an approach that can be used in every company, but there are some compelling reasons to consider it, as laid out in this article by Forbes. Even something small, like sharing an overview of meeting minutes that affect employees, can go a long way towards fostering engagement and trust.

Similarly, pay transparency, in which employees have open access to knowing other employees’ pay, has some benefits, including as reducing pay gaps among workers with similar performance. This article relates how effective this can be, even in the tech industry. Again, it’s not for every firm, but as secret pay policies are now illegal in many circumstances, it’s worth thinking about how being open about compensation decisions can be a benefit to your organization.

2. Siloed Workers

Keeping company divisions separated and restricting information flow is one way that a lack of transparency can manifest itself. In today’s era of collaborative work teams and participative leadership, creating silos goes against the grain. More importantly, it can create distrust, replication of work, and frustration for employees.

Theranos not only created silos, it fostered them. At one point Holmes, frustrated with the development pace of the company’s blood analyzer, hired a completely separate second engineering team to work independently of the first, without the first team’s knowing it.

In most companies, having different divisions operating on a need-to-know basis will slow everything down.

How can your company be sure that information important to the success of the company is being shared among those who need it most? It’s worth taking a look at formal and informal communications and determining whether you’re inadvertently creating silos and what you can do to correct this.

3. Abusive Supervision

Abusive supervision is when managers engage in hostile behavior towards employees. At Theranos, this involved inappropriate blame heaped on employees, being berated and bullied by executives, and the constant threat of legal action. One whistle-blowing employee, whose leaks to The Wall Street Journal helped expose the company’s fraud, spent $400,000 on legal fees to protect himself from Theranos’ lawsuits.

Abusive supervision doesn’t necessarily mean that a company is engaging in fraud, but this supervisory behavior is unethical in and of itself. If your supervisors are behaving this way, it’s not a minor problem. Abusive supervision leads to a host of negative outcomes like lack of trust, job dissatisfaction, low organizational commitment, and even poor employee well-being. If you’re not sure how your managers behave with employees, it’s time to engage more to find out.

4. Excessive Turnover

Lots of industries have high turnover, and that doesn’t necessarily mean that anything unethical is going on. But, turnover can often be a symptom of other problems. So many of the former employees interviewed for Bad Blood talked about the excessive turnover at Theranos. Highly talented employees, recruited away from powerhouse companies like Apple, quit after only a short time working at the company.

Not only was the turnover at Theranos expensive, it was seriously damaging to the ongoing work of the company. What does your company’s turnover rate look like? How does it compare to industry or regional averages? If it seems high, there’s probably something you can do to reduce it. Improving employee engagement is one way to begin to address and remedy the feelings that can lead to turnover.

Even if your company isn’t struggling with one of these four major issues, many companies still have smaller issues they need help resolving. Want to get a read on how your company is doing? Call me today for a full review of your company’s management and HR practices.

*If you haven't read any of Michael Connelly's books, do yourself a favor and pick one up.

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