Episode #31: Don’t Shoot the Messenger

Building a culture of healthy challenge

The topical case study of Elizabeth Holmes and Theranos provides an excellent backdrop for asking some pointed questions about leadership and culture. One of the great failings of Theranos was its culture of secrecy, and suppression of bad news from people who could clearly see the problems with the business.

As leaders, we need to create a culture of robust (but respectful) challenge to bring out the best in our people, but this is impossible if we ‘shoot the messenger’, or unwittingly stymie the very behaviour we are trying to promote.

Nothing kills a high performance culture faster than a leader who can’t handle dissent, disagreement, or bad news. In the case of Theranos, it led to the destruction of billions of dollars’ worth of value, and visited untold emotional and psychological damage on Theranos’ patients, customers, and employees.

If you can manage to establish a climate where your people trust you enough to contribute fearlessly, without fear of repercussions, it is like rocket fuel for your team!

If you want to dig deeper into the Theranos story, I highly recommend listening to The Dropout, created by ABC News chief business, technology and economics correspondent Rebecca Jarvis, along with producers Taylor Dunn and Victoria Thompson.

DON’T SHOOT THE MESSENGER: HOW TO BUILD A CULTURE OF HEALTHY CHALLENGE

Episode #31 Transcript

I presume that most of you have heard of Theranos and Elizabeth Holmes, but just in case you've been hiding under a rock, I'll give you a brief rundown of this story. There's now a book, two movies, and a podcast, which is called The Dropout. And the podcast is something I've listened to. It's fantastic, I can recommend it to all of you.

Elizabeth Holmes was a 19-year-old Stanford dropout when she founded Theranos in 2004. She claimed to have a miraculous new technology that would revolutionise blood testing. And with her offsider, the Chief Operating Officer, Sunny Balwani, they sold this to the market to customers, to seed investors, and to the unsuspecting public.

Holmes claimed that with the simple, finger prick procedure drawing just a single drop of blood, the Theranos machine, which they called the Edison, would be able to perform over 240 blood tests. What's more, the results would be delivered to your cell phone within hours.

Now, if this was true, it would genuinely revolutionise healthcare, given the cost of blood testing, both personal and financial. The only problem was, the technology didn't work. It never worked and it probably never would have worked the way they claimed. At its peak, Theranos was valued at over nine billion U.S dollars.

Holmes had managed to attract 700 million dollars in investment and she was lauded as the youngest self-made female billionaire in history. It was all about magazine covers and interviews, we are talking rock star status.

She managed to attract some really big names into Theranos. So the board members included former U.S Secretaries of State, Henry Kissinger and George Shultz, retired General Jim Mattis and Riley Bechtel. And the kicker, Stanford professor Channing Robertson to give the technology some credibility. Now, as it turns out, she wasn't really that smart. She was just a pathological liar with a compelling vision.

So, for example, she told investors the 2014 sales were $108m, although in reality, they were barely over 100,000. She claimed that the devices were being used by the U.S military in their field operations, which was completely untrue. She also claimed that the tests were accurate and that the machine was able to perform right now, to the standard that she had described. Eventually, it all fell to shit when a whistleblower, a young guy by the name of Tyler Shultz, lifted the lid. And a writer of the Wall Street Journal, John Carreyrou, published an exposé in October 2015.

Holmes was later charged by the Securities and Exchange Commission, the SEC, and settled out of court. As a result, she agreed to stand down from Theranos and pay a $500,000 fine. She was also disqualified from being a director of a public company for 10 years, although there was never any admission or denial of wrongdoing. Theranos was finally dissolved in September 2018 and now Holmes is under indictment for 11 counts of criminal fraud, facing up to 20 years in prison.

how was this fraud so effectively perpetuated?

It went on for years. Theranos managed to execute a major deal with Walgreens, the largest pharmaceutical chain in the U.S, to have their testing facilities in Walgreens' retail locations. The claims of the technology were never substantiated by anyone. And it seems no one picked up on the really obvious red flags.

So for example, when people underwent many of the tests in the Walgreens stores, the blood wasn't actually taken by a finger prick at all. It was drawn in the traditional manner with a needle. The samples were then sent off to a lab, which used third-party machines.

This is not the first time that a company has perpetuated such a fraud on a massive scale. If we look back to 2001 with the Enron collapse, there are some similarities. If you haven't done so already, it's really worth getting your hands on the book about the Enron collapse called The Smartest Guys in the Room. It's by Bethany McLean and it's an absolute cracker, so I can really recommend that to you. But Enron at one point was the seventh-largest corporation in the USA. It had a market capitalisation of about $70b and the share price was north of $90. But it wasn't until after it all unravelled that we realised how complicit so many different people were in that fraud. The media, the auditors, and of course, this signalled the demise of the large firm Arthur Andersen. The ratings agencies, who had pressure to maintain Enron's credit rating despite the fact that their financials were almost unintelligible.

But the culture both internally and externally was “If you don't do what we tell you to do, if you write unfavourable reports, you get no more work with us, and we are the biggest game in town”. No one wanted to kill the goose that laid the golden egg.

Now in the case of both Theranos and Enron, there was a culture of bullying and intimidation to prevent anyone from lifting the lid on the fraud.

my OBSERVATIONS on this case

Before we go on, I just want to make a few observations about the Theranos case from a leadership and culture perspective.

1. The power of a compelling vision.

Now, don't get me wrong. I have no respect or admiration at all for the people who perpetrated this fraud and it really grinds my gears when I see unethical people further deepening the distrust that the community currently has for business. But how do you con extremely wealthy, savvy investors? Everyone wanted to believe in the purpose that Theranos had - to revolutionise healthcare.

What a great purpose, and what a great story. Here's the next Steve Jobs, but it's a young, female Steve Jobs. Holmes already had some big names and smart money in her corner. So for example, Tim Draper, who backed Hotmail, Tesla, and Skype was an early investor in Theranos. And Holmes, as I said before, managed to raise $700m from savvy names like Larry Ellison, the founder of Oracle. Media mogul Rupert Murdoch. The Walton family of Walmart fame. And even New England Patriots owner Robert Kraft. And get this, no one ever saw an audited financial statement. We love purpose, but it has to be used for good and not for evil.

Now can you imagine if you had a compelling purpose and vision that was genuine, that you rallied your people around and took forward? Absolute dynamite.

2. The damage that's done by greed, self-interest and ignorance.

Now, we've got to remember here what this device was. It was a medical device and it provided inaccurate test results. You're not selling a faulty vacuum cleaner that breaks down here. You're providing people with information about their personal health that they trust to be accurate. People were receiving false positives for diseases like cancer. And they were also receiving false negatives for communicable infections, which were then spread unwittingly to others.

And when you know that these tests don't work, yet suppress this with bullying and intimidation, that's got to be one of the worst crimes and transcends all of the lame excuses they're coming out with now, like we had some problems executing our business plan, which I'll come back to. But even being outed as a charlatan in the Wall Street Journal article, Holmes was completely unrepentant. She said in an interview not long after that article was published, and I quote, "This is what happens when you work to change things. First, they think you're crazy. Then they fight you. And then all of a sudden, you change the world."

3. The relationship between truth and loyalty.

One of the key cultural elements that perpetuated the fraud was the Theranos culture of suppression of bad news. They painted any dissent, bad news, or open acknowledgement of the issues as disloyalty. But truth and loyalty are not antonyms.

In September of 2016, The Economist released an issue entitled Post-Truth Politics. People in all walks of life, but particularly business people and politicians, tell an incredible number of lies, knowing that they can get away with it. Cleverly, they make assertions that feel right, but have absolutely no basis in fact. But we are all too ready to accept what we read, particularly when it conforms to our existing world view.

In the Theranos case, it was a cultural cancer. When people tried to raise the fact that the tests were inaccurate or didn't work, the COO, Sunny Balwani, would shut the conversation down. I don't want to hear about this sort of thing ever again. I don't want you to report the test inaccuracies. I just want to see the accurate results. We want 100% loyalty. And if you can't give us loyalty, we will sack you. And they demonstrated amply that they were capable of doing that.

So since when did truth and loyalty end up on the opposite side of the ledger from each other? I'm a simple man, so for me, on the other side of the ledger from truth are lies, falsehood, and prevarication. On the other side of the ledger from loyalty is disloyalty. It should never be a choice between loyalty and telling the truth. In fact, quite the opposite. In my world, if you're loyal to the people you work for, you will tell them the unvarnished truth, respectfully, even if it's difficult. Even if it conflicts with their existing views and yes, even if it's damaging to you personally. Any other definition of loyalty is severely misguided.

4. Accountability.

In the wake of the mess, and facing criminal charges, Balwani's defence lawyer, Jeff Coopersmith, was being interviewed. With a straight face and firm conviction he said, "I think this is a big business failure. They made mistakes along the way in executing the business plan, but that's not fraud." He also said in Balwani's defence that he was not a scientific specialist even though he was in charge of the labs. Apparently, he hired experts to look after this. How could he have possibly known, said Coopersmith. It couldn't be Mr. Balwani's fault that his experts failed him.

This gets right to the core of accountability. Number one, Balwani's got accountability whether he likes it or not because he was the guy in charge of the labs ultimately. But also, you can't suppress information and then blame the people who tried to bring it to you. It's obvious. You have to be able to make judgement calls on issues that you have no technical competency in because that's what leaders get paid to do. And when you don't want to know the answer from experts who work for you, there's absolutely no chance you can make a reasonable decision.

5. Don't believe your own bullsh!t.

This is a classic case of confidence bias. Now, who knows what was in Elizabeth Holmes' head throughout those dozen or so years leading Theranos? One might imagine that when you attract big names and big dollars, having everyone jump on the bandwagon, the hubris might take over. Perhaps she genuinely thought that she would someday realise the dream of the technology that she was claiming already worked. Maybe in her head she's thinking if I just get through this hurdle, we'll crack it and everything will be okay. That can't possibly justify the lies and obfuscation that she and Balwani visited upon investors, doctors, patients, and customers.

creating a culture of respect and robust challenge

So here's the main point on leadership and culture that I want to draw from this case study and that's about creating a culture of respectful and robust challenge. I've chosen to highlight this particular cultural element as I've seen it drive unhealthy culture in a number of organisations. And it's more widespread than you might think.

Can you imagine how different this story would have been if Theranos had a culture of robust, respectful challenge? They'd hired some incredibly talented people and as they were finding the issues, those issues perhaps might have been uncovered, investigated, and who knows? Maybe even addressed.

In this case, it appears to be a willful disregard for knowing the truth from people who pretty much knew themselves the problems that they had and tried to suppress it. This is incredibly unhealthy, and it must have been a horrible place to work in a culture like that.

Now, I can hear you all saying “Sure, Marty, but I would never do that,” Well, don't be so certain. I've seen many leaders who were decent people and who would never behave unethically or fraudulently, yet still create a culture of compliance, silence, and conformity all the same.

A prerequisite for healthy culture is the leader's ability to invite respectful, but robust challenge, and to bring out the differing viewpoints, perspectives, and data. All the talk we occupy ourselves with on diversity and inclusion is fun and interesting but let's face it, it doesn't matter who's on the team roster if you can't get them to play. So unless you can work out how to bring out the value of diversity through a culture that embraces respectful challenge, it's all just conversation.

DON’T SHOOT THE MESSENGER

We often unwittingly shut down respectful challenge because we ‘shoot the messenger’, metaphorically speaking. Now, we normally use this expression to describe someone who blames the bearer of bad tidings, but it can happen in a few different ways. So there's the obvious yelling and screaming or otherwise getting angry when someone gives you bad news. But there's also more subtle things like being dismissive of someone's opinion, not listening actively and carefully. Not demonstrating an ability or willingness to change your viewpoint in light of better information. Rewarding and expressing admiration for people who suck up to you and simply restate your opinion after you've voiced it.

We can also stifle challenge and debate by going into a meeting or conversation with preconceived ideas. Not insisting that people speak up and have an opinion is also really destructive. Now for many years, I've said to the people who work for me, particularly executive-level people,

“If you don't bring something unique and different to the table, then you're no good to me. You've got bring something different. And if you think the same as me, then at least one of us is redundant. And guess what? It's probably not me.”

If you manage to get all your people to feel as though their unique contribution is not just welcomed, but it's expected and it's required, then you change your ability to lead. You can make better decisions. You can help expand not just yours, but everyone's perspectives and viewpoints, and break down existing prejudices. If you manage to do this, you'll give yourself half a chance of being able to anticipate and manage the complexities and ambiguities that face all senior leaders in all industries. But before this happens, people need to trust that you aren't going to shoot the messenger.

You can do this by:

• giving them confidence by rewarding them when they put a viewpoint on the table that you haven't previously considered,

• calling out their name to ask their opinion in meetings and consider it thoughtfully, even if it's a ridiculous suggestion,

• asking their counsel in one on one situations when they're below you in the hierarchy.

One of the questions I love from Jeffrey J. Fox's great book, How to Become a Great Boss, is that when one of your people asks you for advice on something just simply say, "I don't know. What do you think?" It takes a lot of self-confidence to do this.

I was fortunate to have a career that spanned many different industries and it was obvious when I went into a new industry that I didn't understand what was going on when I turned up. I found it would take me six months to acquire a sufficient working knowledge of any new industry, but about two years to gain a profound understanding. In the meantime, I had to rely on two things.

1. My core skillset that brought value to the business. So my commercial skills, leadership, communication, strategic thinking, and so forth.

2. My ability to bring out the best in the industry experts around me.

I learned how to do that by getting the most out of each person and being able to draw out of them the best that they had to give.

If you do nothing else after listening to this podcast, spend a little time looking at your navel and have a really good think about whether you're a leader who inadvertently shoots the messenger.

It's quite hard to change the unhealthy lack of challenge culture if it's endemic.

But it's something that you need to start thinking about how to change today.

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