A Case Study of the Leadership of Elizabeth Holmes

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27th Apr 2020 Business Assignment Reference this

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Abstract

Effective leadership affects organizational success or failure. Elizabeth Holmes experienced success as the CEO of the start-up company Theranos and downfall because she engaged in unethical behaviors. Holmes’ strengths explain the success of the company. She excelled at creating connections and networks to boost her credibility, building a positive personal brand image, charismatically promoting her blood testing technology, and the narcissistic drive to market her technology and gain investors. However, narcissism became a weakness when her drive for personal gain and glory led to unethical practices that caused the demise of the company. Holmes crossed a number of ethical boundaries. She succumbed to confirmation bias by preventing the scientific scrutiny of her blood testing technology. This caused low morale, dissatisfaction, and distrust within the company. She put the lives of customers at risk by disregarding and concealing reports on accuracy issues with the blood testing technology. Holmes also defrauded investors. Holmes committed unethical actions because a hierarchical top-down corporate culture gave her exclusive control over decision-making, the board of directors failed to monitor top management, and hierarchical relations dampened criticisms from below. External factors, including the demand for alternative blood testing services, a regulatory loophole, and limited third-party reviews, influenced the decision of Holmes to commit unethical behaviors. An effective leader optimizes strengths while addressing or mitigating the negative effects of weaknesses, such as narcissism. An effective leader does not cross ethical boundaries even with limited organizational and external deterrents because it leads to the demise of the organization.

Keywords: effective leadership, ethical leadership, successful leadership

A Case Study of the Leadership of Elizabeth Holmes

Effective leadership is important to the success or failure of an organization. A leader’s traits, motivations, decisions, and behaviors affect not only the organization but also other stakeholders. Elizabeth Holmes exemplifies a leader who experienced success as the CEO of a start-up company and downfall because of her decisions and actions as a leader. The case study on the leadership of Elizabeth Holmes covers the situation she was involved in, her strengths and weaknesses as a leader, the ethical boundaries she crossed and the impact on the community, the aspects of organizational culture that influenced her behavior, external factors that influenced her decisions, and the results and lessons learned from her case.

The Situation

Elizabeth Holmes is the former CEO of the start-up company Theranos. She established the company in 2003 to develop a portable blood testing technology that conducts a broad range of tests using only a pinprick amount of blood (Jaeger, 2016). This blood testing technology was highly functional, convenient, accessible, and cheap. It had a disrupting and transforming potential in the medical diagnostic industry (Coffin, 2018). By 2013, the company was far from its targeted level of technological development but it was running out of money. Between 2013 and 2015, the company went public and fraudulently raised $700 million in investment capital (Coffin, 2018). Investments raised the company valuation to $9 billion (Waltz, 2017). In 2015, an article on the Wall Street Journal alleged that the company was using the blood testing products of other companies for most of its tests instead of employing its own proprietary technology because of accuracy issues with its own testing device (Jaeger, 2016). This prompted the Securities and Exchange Commission (SEC), the Department of Justice, and the Centers for Medicare and Medicaid Services (CMS) to conduct civil and criminal inquiries into the blood testing services of the company. In 2015, the CMS ordered the company’s laboratory in Newark, California to stop operations for two years due to deficiencies. Walgreens cut its ties and filed a lawsuit against the company (Waltz, 2017). On 14 March 2018, the SEC reached a settlement with Theranos. Holmes received a fine of $500,000, a 10-year prohibition from managing a publicly held company, and loss of control over company profits until the full return of the money defrauded from investors (Coffin, 2018). In September 2018, the company dissolved and Holmes faced criminal charges for several counts of fraud that involve a fine of $250,000 for every count and a prison sentence of at most 20 years (Neff, 2018).

Leadership Strengths and Weaknesses

As a leader, Elizabeth Holmes exhibited strengths and a weakness. Her strengths explained her ability to condition public perception of her blood testing technology, attract talents, advocates and investors, and raise the company’s valuation. Her weakness accounts for her involvement in unethical activities that eventually led to the filing of civil and criminal charges against her and dissolution of the company.

A strength of Holmes is her ability to create connections and establish networks based on her intellectual prowess in health technology to boost her credibility. She obtained most of her initial key contacts through Stanford University (Waltz, 2017). Holmes first made important connections through a Stanford Professor who introduced her to a person with the connections vital to a health technology start-up. It was through this initial network that Holmes was able to build her credibility and a positive reputation for her company.

Another strength of Holmes is her positive personal brand image. She had a compelling story (Neff, 2011). She developed a visionary and scientific genius persona by dropping out of university and using her tuition money to establish a company that seeks to develop a health technology with the potential to benefit many people around the world. She also adopted the attributes of Steve Jobs. She mostly wore a black turtleneck to make her look sensible. She spoke in a deep and low voice. She had large unblinking eyes that made her look passionate, driven, and committed. She also worked 16 hours a day and rarely left her office. She zealously guarded her company’s trade secrets. She was on the cover of several major magazines.

Still another strength of Holmes is the charismatic promotion of her blood testing technology. She successfully drew support for her self-proclaimed technological breakthrough in blood testing through personal but widely relatable stories (Jaeger, 2016). Holmes recounted the story of a relative who died young because of cancer. A cheap and quick blood testing could have detected cancer earlier. Treatment could have saved the life of her relative. She was also afraid of needles. A blood testing technology that requires a pinprick amount of blood for performing multiple tests is more bearable for people who are afraid of needles. These stories made Holmes’ blood testing technology easy to understand and useful for many people.

Narcissism served as both a strength and weakness of Holmes. Narcissism enhances the motivation of a leader to achieve individual gains, including praise and admiration for engaging in new initiatives (Tucker, Croom, & Marino, 2017). Holmes relentlessly pursued her vision of developing her breakthrough blood testing technology for more than a decade. A successful launch of the blood testing technology could have led to praise and admiration from the scientific community, health practitioners, governments, and consumers for addressing a health problem and changing the health industry to benefit a broad range of stakeholders.

However, narcissism became Holmes’ weakness when her focus on individual gains drove her to ignore recommendations on ways of rectifying the accuracy issues of the blood testing technology, misrepresent the results of the tests on the capability of the blood testing technology, and commit fraud by misrepresenting the value of her company to attract investments.

In analyzing the strengths and weakness of Holmes using the five stages leading up to the decline of a company (Collins, 2009), Holmes’ strengths allowed her to experience the first stage of ‘hubris born of success’. Through her strengths, she succeeded in building her credibility, the positive reputation of the company, and widespread acceptance of her blood testing technology. However, success led to hubris due to her narcissism. She guarded her trade secret fervently and prevented scientific reviews of her technology. This led to the second stage of ‘undisciplined pursuit of more’ as Holmes sought to widen the distribution of her blood testing technology to consumers despite laboratory reports of inaccuracies. Eventually, the third stage of ‘denial of risk and peril’ occurred when she amplified the value of the company to attract large investments in 2013 to 2015 and fired people who opposed her questionable tactics. By 2015, the fourth stage of ‘grasping for salvation’ occurred when she reorganized the board to bring in reputable members to boost the credibility of the company and offset reports of irregularities. In 2018, the fifth stage of ‘capitulation to irrelevance or death’ occurred with the dissolution of the company.

Ethics and the Community

Elizabeth Holmes crossed a number of ethical boundaries. Her unethical behaviors had widespread effect on the community.

First, she succumbed to confirmation bias by preventing the scrutiny of her proprietary blood testing technology via the scientific method (Neff, 2011). Holmes has always been protective of her blood testing technology. While her blood testing technology appeared to be sensible, skepticism grew due to the lack of internal evidence and external scientific reviews of the technology. Confirmation bias caused Holmes to disregard information indicating the inaccuracies of the blood testing technology. She fired people who opposed her decisions. This caused low morale, dissatisfaction, and distrust within the company.

Second, she put the lives of customers at risk by disregarding and concealing reports on accuracy issues with the blood testing technology. Laboratory employees reported that the accuracy of the blood testing technology was low (Neff, 2011). A significant number of blood test results were false. However, Holmes ignored these reports and fired people who disapproved of her decision. Holmes also highlighted data that supported her technology and suppressed data that negated the claimed capability of the technology. Holmes continued to market her proprietary blood testing technology even with the reported accuracy issues. An effect of the disregard of evidence is that she placed the health of customers at risk. Issues with accuracy meant that many customers would likely incur emotional distress, inconvenience, and unnecessary cost when they obtain blood test results that erroneously suggest a condition. Customers may purchase medicine for a condition that they do not have and end up damaging their health. Even if the use of the proprietary blood testing technology costs 90% less than the market price, the risk to the wellbeing, health, and life of customers outweighed the initial cost savings (Weinstein, Sipala, Turkington, & Stromberg, 2016).

Third, Holmes defrauded investors. She amplified data favorable to her proprietary blood testing technology and inflated the valuation of the company to make it seem like it was generating significant revenue (Neff, 2011). This had ripple effects on other health start-up companies. Investors became more cautious about investing in health start-ups. This increased the difficulties for health start-ups in obtaining investments. The regulatory environment became stricter. Nevertheless, the post-Theranos environment meant that health start-ups that hurdled the skepticism of investors and stricter regulations were likely to succeed.

Organizational Culture and Leadership

Organizational culture explains anomalies and successes through the beliefs, attitudes, and behavioral norms adopted and shared by members of the organization (Schein, 2010). Holmes established a hierarchical top-down corporate culture that gave her exclusive control over decision-making (Jaeger, 2016). Exclusive control over decision-making enabled Holmes to engage in unethical actions. The concentration of power at the top manifested through the characteristics of the board of directors and hierarchical relations in the company.

As the controlling shareholder of the company, Elizabeth Holmes established a board that allowed her to dominate decision-making. The board of directors did not serve as a monitoring and oversight body. Instead, it functioned as a means for Holmes to reinforce her credibility and the image of the company (Jaeger, 2016). The first 12-member board comprised of diplomats, military leaders, and politicians. In addition to Holmes, the other members of the board were two former secretaries of state, two former senators, a retired Marine Corps general, and a retired Navy admiral. When the company was under scrutiny for alleged irregularities in its laboratory practices in 2015, Holmes reorganized the board to include members who can boost the credibility of its proprietary blood testing technology. Holmes downscaled the board to only five members, which included a retired executive vice president of the pharmaceutical company Amgen, a former director of the Centers for Disease Control and Prevention, and the previous chief executive officer of the financial services company Wells Fargo. In addition, Holmes created a board of counselors and a scientific and medical advisory board. Another indication of the weakness of the board as a monitoring body is 80 as the average age of the members of the board. Based on the revised Global Governance Principles, director independence can falter after 12 years of service in a board position (Jaeger, 2016). Since the purpose of the board is to boost the image of the company, the board was highly ineffective in its role in facilitating constructive dialogue and challenging management when necessary (Jaeger, 2016).

As the top executive of the company, Holmes created an authoritarian hierarchical system that prevented check-and-balance and stifled participative decision-making (Jaeger, 2016). She fired managers who objected to her decisions and strategies, dismissed unfavorable test reports, and expected employees to follow instructions and not ask questions. By stifling dialogue and different opinions, Holmes was able to commit unethical actions. However, it was through the expose of disgruntled managers and employees that led to the Wall Street Journal article about the anomalies in the blood testing technology and company practices and the subsequent investigation by regulatory authorities.

External Factors Affecting Decision Making

A number of factors influenced Holmes’ decision to engage in unethical practices. First, health services are expensive in the United States and there is a legitimate demand for cheaper alternatives (Waltz, 2017). In the case of blood testing, most doctors and clinics do not have in-house laboratories. Blood samples go to centralized laboratories located miles away. It takes several visits with long intervals before a patient receives a diagnosis and treatment. Blood testing is also expensive. A portable and cheap blood testing technology is a practical solution.

Second, regulatory loopholes provided opportunities for Holmes to evade regulation for years. Holmes succeeded in seeking approval for the categorization of her blood testing technology as a laboratory developed test (LDT) (Waltz, 2017). An LDT is exempt from FDA regulation as long as the laboratory complies with standards under the ‘Clinical Laboratory Improvement Amendments of 1988’, develops and employs the test internally, and does not sell the test to external parties. The purpose of the exemption is to enable laboratories to develop and test specialty or cutting-edge tests, such as for rare illnesses. As the developer of the technology and owner of the laboratory, Holmes used the regulatory exemption to evade the disclosure of her proprietary secrets (Jotwan, Boumil, Salem, Wetterhahn, & Beninger, 2017). While the blood testing technology qualified as an LDT, the company abused the exemption by performing high-volume tests for paying consumers (Waltz, 2017).

Third, limited third-party scientific reviews of the company’s proprietary blood testing technology allowed Holmes to attract large investments and continue selling the technology to the public. There was hardly any analytical chemistry and other scientific studies on the portable blood testing technology before 2016. Several reasons can explain this situation (Wilson, 2019). One reason is that Holmes was very protective of her proprietary blood testing technology. Information on the technology was not accessible to third parties seeking to review or test the technology. A second reason is the insufficient review forums in the area of analytical chemistry. A third reason could be that many hesitated or did not think to review the technology because of the charismatic persona of Holmes and the success of the company. Holmes presented her blood testing technology as a sensible and practical alternative to expensive blood testing that requires large samples drawn from a vein (Neff, 2011). Holmes received CMS certification for her laboratory and secured a partnership with Walgreens (Jotwans et al., 2017). A negative review of the technology has to be rigorous to receive acceptance not only from the scientific community but also from the public.

Given the revenue potential of meeting the demand for a cheap and portable blood testing technology, a regulatory loophole, and limited scientific reviews, the expected gains outweighed the deterrents. Limited deterrents explain Holmes’ engagement in the unethical behaviors of covering up accuracy issues with the blood testing technology, using other technologies for testing blood collected from consumers and inflating the value of the company to obtain capital investments.

Results and Lessons Learned

Holmes was an ineffective leader in committing unethical actions that led to the demise of the company. Effective leaders exercise sound management techniques as well as arduous strategic reasoning (Collins, 2009). Developing people is a sound management technique (Collins, 2009). Holmes was an ineffective leader because she ignored the development of people in the company. She believed that all those who work at the company are replaceable. Instead of nurturing human resources, she focused on maintaining a corporate façade to attract talents. However, retention of talents became problematic. Some of the employees of Holmes served as whistleblowers. Rigorous strategic reasoning involves recognizing and accepting that a strategy does not work together with reinventing a new strategy that supports the achievement of the core mission of the organization (Collins, 2009). After the test reports, it should have become apparent that the accuracy issues of the current level of development of the portable blood testing technology required attention. Using only a pinprick amount of blood is not sufficient to generate the broad range of tests promised by the company. Instead of rectifying the flaws of the technology or limiting the tests covered by the technology, Holmes focuses on covering up the flaws of the technology and maintaining the façade of a successful company.

Holmes’ strongest trait is her narcissism. The desire for personal gain and glory pushed her to pursue relentlessly her self-proclaimed innovative blood testing technology by networking with influential people in government and the private sector to build a positive company image, establishing a positive personal brand image, charismatically promoting the technology, and using her reputation, network, and charisma to attract capital investments. However, narcissism also led to her downfall. She pursued gain and glory by all means, including the commission of unethical behaviors.

As a trait, narcissism can push and drive a leader to pursue innovative initiatives. However, an effective leader should guard against the negative influences of narcissism, which Holmes failed to do. Narcissism can make a leader ineffective. It inhibits good communication within the organization. Effective leadership is about communicating effectively to facilitate information exchanges across the organization, motivate employees to contribute towards the company mission, and develop a good relationship with stakeholders (Schein, 2010). Narcissism can make a leader despotic through top-down communication, firing employees who ask questions, and concealing information from stakeholders. To become an effective leader, it is important to become aware of the negative consequences of narcissism. By being careful about the ill effects of narcissism, a leader balances the drive towards new initiatives with ensuring the smooth flow of information within the organization, motivation of employees to support the organizational mission, and address the interests of stakeholders to gain investments ethically.

Conclusion

The leadership of Elizabeth Holmes showed how the strengths and weaknesses of a leader affect the organization and other stakeholders and a range of organizational and external factors facilitate the decisions and behaviors of a leader. Holmes’ strengths explain her success as a leader and the success of her start-up company. However, her weakness led to unethical behaviors that caused the downfall of the company. Holmes committed unethical behaviors due to limited deterrents within the organization and the external environment. An effective leader optimizes strengths while addressing or mitigating the negative effects of weaknesses. An effective leader also refrains from unethical activities to prevent organizational demise.

References

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