Theranos: How Not To Design a Board of Directors

The Theranos object lesson is the gift that keeps on giving.  We now have the news that they have restructured their board.  The elderly former government officials (e.g. Kissinger – age 91, Schulz – age 95, Perry – age 87, Nunn – age 76) are exiting the board and becoming “counselors.” The board size is going from 12 to 5, and high-profile attorney David Boies is joining.  They also have announced the creation of a board of medical advisors, which includes some impressive people, although none who are directly in the diagnostic testing space.

Oh, and by the way, they made all these decisions back in July and just happen to be announcing the changes after the wave of bad news initiated by the Wall Street Journal’s recent articles.  It’s amazing that any company that has raised more than $400 million (and maybe as much as $752 million) was allowed by its investors to have such a sprawling board that was redundant in some respects (so many politicians!) while lacking in others.   

So, let’s rewind and consider the role of a BOD, and how to construct one.  Steve Blank did a great blog post on this topic several years ago.  A few points to emphasize:

Don’t set up Board of Directors if all you need is advice and introductions.  A board of directors plays a fiduciary oversight role, and may be necessary because of the legal form of the business (C-Corp) or it is expected by investors. Being a fiduciary is a big deal because board members are legally obligated to operate in the best interest of shareholders.  

Remember that the Board of Directors is the boss.  They decide who leads the company and how they will be paid, and they decide overall strategy.  Board members may also be extremely helpful as advisors and connectors, but that’s ancillary to their fiduciary duties.  Here’s a short guide to setting up a BOD.

Set up a Board of Advisors if you want advice and connections.  There are no legal obligations here, and no standard format.  You identify the people whose expertise or contacts or insights would be helpful to you.  You seek out their input in whatever forum makes sense – maybe informal one-on-one phone calls, maybe more formal quarterly meetings or video conferences.  Here’s a short guide to setting up a BOA.

It’s a good idea to have both a board of directors and a board of advisors.  You can even have multiple advisory boards with different roles, as Theranos is now doing.  The BOD should be the small group playing the governance and strategic role.  BOAs can be larger groups with deep knowledge and wide connections that you can turn to for advice and introductions.  Each type of board has its own role and its own value to a young venture.

Startup Sales into Corporations: Cultivate Gatekeepers

 Major Sales:  Who Really Does the Buying, Thomas Bonoma, Harvard Business Review, July-August 2006

The Theranos story continues to unfold.  Walgreens, their marquee customer, has announced that it will delay expanding beyond their current in-store blood testing center pilot.  Here at the University of Minnesota, the participants in a recent Med Tech Value Proposition Design workshop debated whether all this negative publicity is fair. But the fact is that Theranos has not conducted peer-reviewed studies comparing the results of their technology vs traditional blood testing equipment.  Their stated desire to protect trade secrets by avoiding peer-reviewed publication has undermined their legitimacy in the eyes of key stakeholders.  In other words, Theranos does not seem to have addressed the full “buying center” associated with blood testing. 

Major Sales:  Who Really Does the Buying is a classic Harvard Business Review article about the roles in a complex sale.  Startups often focus sales efforts on end users and high-level decision makers, without addressing the other roles that corporations have in place to ensure quality (does the product/service actually work), efficiency (interoperability with existing tech, effect on standard processes) and cost-effectiveness. But gatekeepers and influencers have important roles to play, and startups evade them at their peril.  

We think of top executives as the ultimate target of a purchase decision:  they have the decider role and if you get their approval, then you’re golden.  But keep in mind that there can be turnover at the top, which has certainly happened at Walgreens since its acquisition of Boots at the beginning of 2015.  As a result, top Walgreens executives who committed to Theranos (an equity investment as well as the blood testing pilot) are no longer with the company.  

Turnover is one reason why corporations depend on structures and systems to maintain standards and retain institutional memory.   One point buried in the October 23 WSJ article is that “The drugstore chain’s clinical-services group typically vets the science and practices of prospective outside medical partners early in the process, but was brought in later with Theranos, according to current and former Walgreens officials.”  

In other words, the gatekeepers were kept out of the loop.  You can be sure that Walgreens (and their counterparts) won’t do that again any time soon.

Too often, startups think of gatekeepers as pure obstacles to avoid.  Gatekeepers are often middle managers whose careers have plateaued in unglamorous jobs, so they may be less fun to deal with than excited end users or a corner-office CEO. But gatekeepers may be quite powerful, and it is possible to leverage their self-image as organizational protectors.  Gatekeepers can serve as facilitators of a corporate sale if they can be convinced of a value proposition that fits with their particular set of concerns.