Unethical Leadership and the Effects of Communication Failures to Issues, Risks, and Crises
INTRODUCTION
Throughout history, there have been countless organizational crises due to unethical leadership, which has affected communication responses to issues, risks, and catastrophes. In the early 2000s, a young Stanford University student, Elizabeth Holmes, dropped out of college to pursue a startup healthcare company, Theranos, that could test for cancer and diabetes through tiny drops of blood. During the height of Theranos, it was worth $9 billion, and Holmes was named the richest woman in America by Forbes. However, it later fell apart due to “elaborate, years-long fraud in which they exaggerated or made false statements about the company’s technology, business, and financial performance” (O'Brien, 2022).
Ethical leadership is imperative to the health and wellness of organizations and their employees. This case study will analyze Elizabeth Holmes and Theranos’ unethical leadership and communication responses.
LITERATURE REVIEW
To build the foundation for this case study, literature reviews of multiple types of sources were conducted in order to develop the comprehensive groundwork needed to determine the best practices that could have been used in Theranos’ case, and what work could have been done to prevent the unethical practices used by Holmes as an executive and Theranos as a company to protect the brand while ensuring truth is told about their shortcomings and legal issues.
In conducting the review, we utilized news sources that reported on Theranos and Elizabeth Holmes’ success in the medical field and many accomplishments they received from government and scientific bodies, news sources review and coverage of the unraveling of the truth and subsequent legal action and imprisonment of Holmes, and academic journal articles to establish prior knowledge on the subject as well as for theoretical communication applications with regard to Theranos’ specific crisis situation.
BackgroundAt the age of 19 years old, Elizabeth Holmes dropped out of Stanford University to pursue a new way of testing blood with a finger prick (Thomas, 2022). This new medical technology pursuit was the start of Theranos, which is two words combined–therapy and diagnosis (O'Brien, 2022).
Ramesh "Sunny" Balwani joined Theranos in 2009 with a $10 million loan to help Holmes. Holmes and Balwani met in 2002 when she was a college student at Stanford, enrolled in a program to learn Mandarin in Beijing. Balwani is twenty years older than Holmes–they kept their relationship private from stakeholders (O'Brien, 2022).
In 2013, Theranos launched publicly by announcing a Walgreens partnership after a decade of building up the company (O'Brien, 2022). This attracted media attention and put Theranos in the spotlight. Walgreens's "Theranos Wellness Centers" was planned to give consumers nationwide access to less invasive blood testing (Theranos & Walgreens, 2013). The first location was in Palo Alto, California (O'Brien, 2022).
Legal Issues
In 2015 whistleblowers Tyler Schultz and Erika Cheung, former employees, came forward with concerns about Theranos. “Cheung had approached the number two person -Balwani- to bring Theranos’ handling of their erroneous test results to his attention. Instead of taking Cheung seriously, he cast doubt on her competence. After she left the organization in dissolution, Theranos threatened her with legal action” (EQS Editorial Team, 2023). Shultz had brought evidence of fraudulent practices to Holmes', yet he was also reprimanded and threatened by Balwani. Despite the tactics used to silence them, Schultz and Cheung began sharing how the company was built on pure lies. They revealed to board members about the failed technology, company culture of intimidation and secrecy, and despite the importance of patient results they were inaccurate.
Soon after the whistleblower information was discovered, The Wall Street Journal led a series of investigations that were published from 2015 to 2016 on how Theranos was covering up technology failures that jeopardized the health of patients. The FDA began their own investigations, which proved the whistleblowers and Wall Street Journal information to be true.
Holmes denied the claims made against Theranos and even threatened to sue John Carreyrou, publisher of the Theranos report on The Wall Street Journal. In 2018 Holmes stepped down as CEO and Bawlwani stepped down as president, as both were charged with criminal fraud for misleading investors and deliberately making false claims on the efficiency of the company’s blood testing technology. Theranos was officially shut down by the FBI following investigations.
Holmes was charged with three counts of wire fraud and one count of conspiracy to commit wire fraud and sentenced in May 2023 to 11 years in federal prison. Holmes and Balwani were ordered to pay approximately $452 million in restitution due to the offenses resulting in a significant financial loss to entities and adverse financial impact to other individuals. Balwani was charged and found guilty on all 12 charges relating to defrauding patients and one charge of conspiracy to defraud patients. Balwani is sentenced to 13 years in prison.
Possible Theoretical Applications
Various theoretical frameworks could have been applied in this situation, both before the crisis and during. Before the crisis, Theranos’ may have used the health belief model (HBM), which is a health communication theory in the modern practice of public relations that measures outcomes based on variables of perceived susceptibility, severity, barriers, and benefits (Green et al., 2020). Additionally, the socio-ecological model of public relations would also likely have been used by Theranos to influence those around them–potential stakeholders, potential customers, and government entities–transcending policy, communities, and institutions to create a bubble of false trust in Theranos as a company and Elizabeth Holmes as an executive. There are many cases of SEM being utilized during public health emergencies, such as during the Ebola virus disease crisis in multiple African countries (Figuroa, 2017), but can also be used for health awareness and promotion of public health and safety, such as suicide or domestic violence prevention (Krug et al., 2002).
During and post-crisis, Theranos used a host of theories to protect its image to the public and its stakeholders to separate itself as an entity from Elizabeth Holmes’, appearing to shift from a technology focus to a people focus, humanizing the brand that was being attacked. Two theories that Theranos used as a part of its strategy to protect its reputation were situational crisis communication theory (SCCT) and image repair/restoration theory (IRT). SCCT is a theory that provides the recommended level of action based on the organization’s involvement with the wrongdoing that is alleged. This theory takes into account multiple variables, like prior crisis history, relationships between bad actors and the organization, and the impact the crisis had on the public and stakeholders (Coombs, 1995). It is likely that this theory in particular led to the separation of Holmes’ from the Theranos brand name to protect its image amid her own legal battles she personally faced from defrauding stakeholders and patients.
IRT works as a function of crisis communication by saying that when a crisis occurs, the image and reputation of the organization is threatened which leads to communication to mitigate the effects of the crisis (Benoit, 1995). Five possible choices for next actions in IRT once a crisis is identified that threatens the organization are denial, evading responsibility, reducing offensiveness, corrective action, and mortification.
Overall, Theranos applied the theories that are applicable to their crisis rather haphazardly, and in some cases incorrectly, in attempting to rectify the situation. Evading responsibility and denial were the two most often used choices when communicating with the public, with Holmes continuing to deny she purposefully defrauded investors during her criminal fraud trial (Godoy, 2021).
METHODOLOGY
We used the descriptive case study method to gain qualitative research and learn about Theranos and its founder, Elizabeth Holmes. A descriptive case study allows researchers to evaluate real-world situations and how the variable, in this case, Theranos and Holmes, addressed it. The research taught us facts about the case and expert commentary and research (ACSP, n.d.).
Google search shows approximately 420,000 search results for Theranos and Elizabeth Holmes. After we evaluated the common themes of the search results, we learned that we could break up the case study into four parts– the startup of Theranos by Elizabeth Holmes, the rise of Theranos, the fall of Theranos, and the post findings of lies and deceit by Holmes. In all four parts, we explored unethical leadership and the effects of communication failures on issues, risks, and crises.
CASE ANALYSIS
Startup of Theranos by Elizabeth Holmes
Elizabeth Holmes originally wanted to create a patch that would test microscopic blood samples but later changed the idea to Theranos to test tiny drops of blood with the Edison machine. The goal was to make blood testing faster and less expensive. Holmes used her own money for the startup and later raised $6 million in capital. Holmes also convinced a Stanford professor, Channing Robertson, to help develop the product in the lab. This helped Theranos gain credibility. Homes later brought on Ramesh “Sunny” Balwani, who had zero knowledge of biomedicine and was extremely strict. Balwani and Holmes kept their relationship private from employees and investors (EQS Editorial Team, 2023).
During the startup of Theranos, there are multiple examples of unethical leadership. First, the Edison machine never worked, and there were clear deficiencies in its technology. Robertson received a large salary for helping during the startup, and it’s still unknown if he knew about the technological issues and problems with the machine. It’s clear there were problems with the machine at the beginning, and Holmes never came forward and communicated the problems. Holmes kept it internal and hid it from stakeholders (EQS Editorial Team, 2023).
In addition, Holmes hid her relationship with Balwani from stakeholders. This was inappropriate because Holmes was the Founder, and Balwani oversaw day-to-day business operations. They were not transparent about the relationship, which led to additional unethical leadership problems (EQS Editorial Team, 2023).
The Rise of Theranos
In 2011 Holmes was introduced to former US Secretary of State George Shultz, he became another board member that provided Theranos with the connections to fill the board with influential people in politics and business.
What helped Theranos soar was the money received from famous names, which not only provided the financial support needed but the credibility and awareness. “Walmart’s founding Walton family invested $150 million, media mogul Rupert Murdoch put in more than $120 million while former Secretary of Education Betsy DeVos contributed $100 million” (EQS Editorial Team, 2023). Walgreens and Theranos entered a partnership, in which the company’s tests would be offered in over 40 stores. This partnership led to Holmes' promise that Theranos blood tests would be soon available within five miles of every American household.
As Theranos rose in value to $9 billion, so did Holmes' image. She was seen as a media star, appearing on the cover of Fortune and Forbes as one of the youngest self-made billionaires in the US and on Times Magazine for the list of 100 most influential people. President Biden also visited the Theranos lab publicly praising Holmes as an inspiration.
Figure 1: Elizabeth Holmes on the Front Page of Forbes
Source: (Kulwin, 2015)
Figure 2: The Edison Machine
Source: (Eitel, 2019)
The Fall of Theranos
After the Walgreens partnership launch, Theranos spiraled out of control. Although Balwani was president and COO of Theranos, he did not understand the process and technologies of the lab nor did he try to, and it became known with the employees. Theranos claimed to have the ability to perform various tests for indications of diseases such as diabetes or cancer with a few drops of blood. However, this claim was false, as the Edison device delivered unreliable or simply false results. Inspectors were also denied access to the labs where machines were installed. Employees in the labs brought attention to the problems with Edison, consistently documenting errors in reports. Both Balwani and Holmes ignored all documented errors and reprimanded all employees pursuing the errors. The Theranos company culture was hostile; it consisted of distrust, psychological pressure and constant lies leading to the resignation or termination of employees.
Tyler Shultz worked on the diagnostic team and quickly discovered technology errors and altered data. When Shultz drew attention to the internal issues Holmes refused to acknowledge the wrongdoings and had Balwani threaten Tyler Shultz. Theranos quickly tried to pressure Shultz into signing a confidentiality agreement by threatening legal action against him. Rather than go to the authorities, Shultz turned to The Wall Street Journal reporter John Carreyrou. Together Shultz and Carreyou were able to publish the articles revealing that Theranos was using third-party machines for blood tests and the Edison provided unreliable results. This led to Theranos denying the allegations with Holmes publicly stating the reporting as “factually and scientifically erroneous” (O'Brien, 2022) and threatening both with lawsuits.
Another one of the whistleblowers, Erika Cheung, worked as a lab associate in the Theranos labs. She noticed that the Edison machine frequently failed. The machines were as "accurate as a coin toss." Cheung went as far as notifying George Schultz, former U.S. Secretary of State, Theranos board member, and grandfather to Tyler Shultz. Cheung stated, "It was concerning to see this degree of failure, this was not typical for a normal lab." Cheung was so upset after she left Theranos that she became an advocate for ethics in the industry. Cheung took matters into her own hands by writing a letter to the Centers for Medicare & Medicaid Services (CMS) exposing Theranos' lies and internal issues (Khorram, 2021). This shows the unethical leadership and communication by Holmes and Theranos.
Shortly after publication of these reports Walgreens ended its partnership with Theranos and the state regulator CMS yielded a warning that Theranos tests were endangering patient health. Walgreens and other major partners sued Theranos. In early 2018 the Financial Industry regulator (SEC) charged Holmes and Balwani, resulting in Holmes resigning and being banned from running a publicly traded company for ten years. A few months later Theranos was officially shut down.
Walgreens is currently paying $44 million to settle a lawsuit by customers who received defective blood test results from the Edison machine. Walgreens has explained that “they are a victim of Theranos’s fraud and did not know that Theranos’s tests were not market-ready” (Dumas, 2023).
All of Holmes’ lies and deceit caught up with her. Even the basics of communication theory (SCCT) and image repair/restoration theory (IRT) could not revive her personal reputation and her overall company image.
Figure 3: Elizabeth Holmes Net Worth
Source: (Forbes, 2024)
Post-Findings of Lies and Deceit by Elizabeth Holmes and Theranos
After Theranos collapsed, Elizabeth Holmes was put on trial three years later. She was found guilty on four of the eleven charges of lying, misleading, and defrauding stakeholders and patients. Balwani was also charged with multiple counts of fraud and sentenced to twelve years and eleven months in prison (EQS Editorial Team, 2023). Throughout the trials, which lasted almost two years, Holmes vehemently denied that she and Theranos purposefully defrauded investors, and that she was under the guise that the technology worked (Godoy, 2021). In addition to jail time, the pair owe over $800 million in restitution to investors they defrauded, and Holmes stated she cannot pay $250 per month as ordered by the court to investors (O’Brien & Iyengar, 2022; O’Brien, 2022; Ivanova, 2023).
During the trial, multiple testimonies were given. Adam Rosendorff, the laboratory director, told Holmes multiple times how the Edison machine did not work. Instead of using integrity and basic ethics, she decided to ignore scientific evidence and recommendations. She even went as far as hiring a new laboratory director, Balwani’s dermatologist, who had no experience in the field (EQS Editorial Team, 2023).
Another testimony included US Secretary of Defense General James Mattis, a Theranos board member. During the testimony, Mattis explained that he received all his information, including technology updates, from Holmes directly. The board was told that the Edison device received approval from the US Food and Drug Administration (FDA) and the World Health Organisation (WHO). The technology was never validated. Mattis shared a presentation that Holmes created for Theranos, which showed this blatant lie (EQS Editorial Team, 2023).
Holmes received a total of eleven years in prison. She is no longer with Balwani and is now married to heir William “Billy” Evans and has two children. Holmes gave birth to her second child after her conviction (EQS Editorial Team, 2023).
Figure 4: "From $4.5 billion to $0.
Source: (O'Brien, 2016)
CONCLUSION
Elizabeth Holmes started her company and ran it into the ground with unethical standards, leadership, and communication. She was never honest, and one lie turned into hundreds of lies. Adding Balwani and their secret relationship in the business only compounded the issues.
Multiple theoretical applications can be applied to this case, such as the health belief model (HBM) and the socio-ecological model of publication relations. These helped influence stakeholders into believing that Theranos and the Edison machine were legitimate.
Lastly, crisis communication theory (SCCT) and image repair/restoration theory (IRT) were used during the rise and fall of Elizabeth Holmes and Theranos. The strategy to repair crises and an organization’s public image is difficult to achieve when everything is based on compounded lies. Overall, Elizabeth Holmes is now paying the consequences for unethical behavior, leadership, and false communications along with Balwani.
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