Governance (or the lack of it): a common thread

High profile arrests

Look no further than Theranos with chief executive and founder, Elizabeth Holmes, FTX founder and chief executive, Sam Bankman-Fried and more recently Charlie Javice, co-founder and chief executive of TAPD Inc, trading as Frank, a US college financial planning startup:

• Holmes will start an 11-year prison sentence next week after being convicted of fraud related to a Silicon Valley blood-testing company.
• Bankman-Fried was arrested late last year and subsequently extradited to the United States to face fraud-related charges attracting a 115 year maximum prison term.
• Javice is accused of defrauding JP Morgan Chase which paid US$175 million for Frank which it is alleged had falsified the majority of its user data.

Common threads

Unsurprisingly, the common thread in these cases is a lack of governance.

John Carreyou in “Bad Blood” notes that the Theranos board and regulators provided insufficient oversight. This was despite the board being a range of “big names” who boosted the founder and chief executive’s credibility and as Carreyou described it “taking her at her word” and was a “make believe board”.

In the FTX case, the Harvard Business Review (Noam Wasserman 1 December 2022) comments: 

“…the founder was almost completely unchecked. In fact, the lack of oversight was seemingly so extreme that it makes Zuckerberg’s iron grip on Facebook look like a democracy. At least Facebook (now Meta) has a board of directors and audited financials. FTX resisted creating an official board of directors until January, the VCs who invested in FTX did not get board seats — and its financials were an epic mess.”

And finally, Frank - the trade name for TAPD Incorporated – which was allegedly anything but.  With all the publicity around this case, there is no mention of governance oversight, directors or a board beyond the co-founders.

Some lessons for directors and boards (and for founders too)

In each of these cases, the fraud and ethics issues are obvious and clearly run against any notion of good practice governance.

Less obvious, but equally relevant for directors and boards, is the lack of governance oversight. Even where there was a board in these cases, there was a lack of inquiry and holding to account.

These are also lessons for company founders who are growing their businesses.  Boards and governance can help keep them and their businesses safe, and provide the foundation for ongoing growth. They bring their skills and experience to ask the hard questions and bring their broader skills and experience.

The alternatives aren’t pretty and neither is the inside of a prison cell!