Harry Nelson

Start with Integrity: Lessons from Theranos

Leadership requires integrity

“First they think you’re crazy, then they fight you, and then all of the sudden you change the world.”  Today’s Wall Street Journal quotes Elizabeth Holmes, the CEO of Theranos.  Holmes has spent the last ten months putting on a clinic of how to run your company without integrity:

     1. Over-hype your product (mini blood containers and breakthrough diagnostic testing). 

    2. Raise hundreds of millions of dollars and become a paper billionaire. 

    3.  Come crashing down in a criminal fraud investigation.

For months, people have been asking me as a healthcare regulatory lawyer to comment on the Theranos trainwreck.  For me, the key lesson we should all take away is: First, have integrity.   Understand it, demand it, and live it.  While I predict that Theranos will be a case study for decades to come in FDA and Medicare regulatory compliance gone wrong, more fundamentally, it is a case study in leadership gone wrong that everyone can learn from.

Holmes’ quote above about changing the world is a riff on one of the great political and spiritual leaders of social change, Mahatma Gandhi, who said, “First they ignore you, then they laugh at you, then they fight you, and then you win.”  In riffing on Gandhi, Holmes was apparently taking a cue from the hero of one of her personal heroes, Steve Jobs, whose marketing attempted to elevate Apple from cool personal devices to a spiritual force for world change.  The Journal describes Holmes’ obsession with Jobs, down to a penchant for black turtlenecks and extreme project secrecy.

In fairness to Holmes, she was far from alone in the world of early stage tech companies.  We constantly hear the hyperbolic “change the world” shtick and see companies operating in “stealth mode” to keep their game-changing technology or business model secret.  If the Theranos story helps to quell either trend, it wouldn’t be such a bad thing.  Although it’s hard to knock Jobs’ idiosyncratic approach based on the fact that Apple products lived up to his hype, Theranos teaches us that hype and secrecy are dangerous in the hands of a person or organization that lack integrity, accountability, and transparency.

  1. Start with Integrity

Let’s start with integrity. Integrity is one of the least-understood words that gets batted around in both a leadership and healthcare compliance context.   We often describe people as having “integrity” without explaining what we really mean. On a simple level, integrity comes down to leaders and their organizations being honest and truthful.  On a deeper level, integrity involves nuance because leaders are called upon to answer difficult questions – from investors, from employees, from those the organization serves, from government.  After all, how do you raise money or retain employees if you aren’t painting a bright picture of the future?  What we really mean when we talk about integrity is ensuring, as we paint the picture, that we’ve done so in a way that is honest.

The key question to ask is:  is there any “daylight” between what we are saying and what we are doing? There’s nothing wrong with speaking aspirationally or trying to be inspirational.  Good leaders often need to do both.  After all, the wrong tone or message – or even a flat, uninspiring one – can sometimes create more problems, fail to get people motivated to do the things you need them to do, or send a negative message by implication.  Delivering the message the right way, emphasizing the right facts, crafting the takeaway are all hallmarks of good leadership communication.

But good leaders have to be careful about giving nuanced answers that achieve the necessary goal while remaining truthful at all times.  At its core, the message always has to have integrity.  Once you allow for a gap between what you say and what’s actually true, you and your organization are off the path and headed for trouble.

Simply put, there isn’t any room for a person who doesn’t understand and live up to that.  People smell the dishonesty.  It’s clear that Elizabeth Holmes missed this lesson.  She exhibited no integrity in mischaracterizing the cessation of the “nanotainers” as a voluntary step when it was demanded by the FDA.  She failed to level with Theranos employees about the mistakes made.  As an investor and advisor, my general feeling is “run for the hills” when you encounter a person in charge who lacks integrity.  If you catch it after you’ve already invested, find the first opportunity to act. You can teach plenty of other stuff, but not integrity, and if the leadership is missing this trait, then there’s no way the organization can operate with it.

The converse isn’t always true:  sometimes a founder or leader can have integrity but not insist on it from his or her team.  I’ve worked with leaders who are honest people, but let their teams off the hook.  Organizational integrity is hard, because no amount of lip service to behaving in an honest or ethical way will mean anything if you don’t “live” your organizational integrity.  I think of accountability and transparency as the two pathways of doing so.

  1. Focus on Accountability and Transparency

It’s not about mistakes.  Every person and every company makes mistakes.  The questions are: (1) can you detect your mistakes early enough to correct before the damage is done, and (2) do you own the mistake?   While I tend to think of personal integrity as foundational, accountability and transparency can sometimes involve a personal learning process.

Accountability is about taking responsibility.  In the organizations I’ve led, I usually look for two kinds of self-responsibility that I think distinguish accountable people.  One aspect is people who “own” their mistakes and shortcomings, as opposed to either hiding them or, worse, blaming others.  The other aspect is people who possess such an internal sense of responsibility that you can count on them to live up to and follow through on their commitments.   One challenge that I personally have struggled with is over-promising and under-delivering, which is an accountability problem.

Transparency is the related need to communicate and disclose the things people need to know about, so that everyone has the information they need to have.  In any organization, there is sensitive information, and not everyone needs to know everything.  Transparency involves figuring out what information needs to be shared, and being able to trust people and not withhold important information for fear of scaring or offending them.  I was struck in reading the Wall Street Journal article about how just last month, Holmes gave a talk to Theranos employees in which she was upbeat about promising new tests that used only miniscule amounts of blood — failing to share that she was referencing very early stage research that was a long way from being relevant to what Theranos is able to offer in the market.  Ironically, it sounds like Holmes was repeating her broader pattern:  offering far-off hype in order to hide from the immediate reality.

One key leadership lesson is that leaders need to level with their teams about the risks ahead.  You can be upbeat, but only after you’ve acknowledged the downside risks.  My experience is that nothing builds credibility as effectively beginning with humility and acknowledging the risk that you may not succeed or even sharing bad news.  Conversely, nothing erodes trust like ignoring or, worse, hiding bad news news.  The truth has a way of surfacing, which makes people who omit the bad news seem like liars.  The reality is that every person and every organization hits points where it’s necessary to talk about challenges, and the inability to do so is a fatal flaw.  I can think of several instances when I heard a great presentation and only later realized the presenter was not being upfront and not giving an accurate presentation.  It left me wondering if the person was not being honest with me or simply not being honest with himself.  Either way, it’s the kind of deception that undermines relationships.

  1. Two strikes and you’re out (not three)

Although the baseball adage is “three strikes and you’re out,” my experience in regulatory compliance is that you get two strikes, not three.  Whether it’s with employees, investors, or government regulators, the first strike is the underlying mistake.  The person or the organization screwed up.  As a regulatory lawyer, there is no margin in this moment to mess up the response in this organizational moment.  If the underlying event is a moment of truth, then the person or the organization recognizes it and acts.  The response will vary based on how serious the mistake was.  Sometimes, apologizing and taking responsibility is enough.  Sometimes, corrective action is called for to demonstrate that the apology is not just lip service. Sometimes, a mistake is so serious that roles and responsibilities need to be reassigned.  No matter what happened, I have seen over and over that things can be made “right” if responded to the right way.

Unfortunately, just as often, I’ve seen this chance organizations blow this chance to make things right by not getting how serious the issue is and what needs to be done about it.  The point is that, just as they say, “you only get one chance to make a first impression,” in the aftermath of a mistake, you often only get one chance to make it right.

Once you blow that, it looks less like a mistake and more like a pattern.  At that point, all bets are off.  Having dealt with the FDA, CMS, and other healthcare regulators more than a few times, I can tell you that there is no compassion after a “second strike”.  Healthcare organizations are often caught by surprise by the draconian consequences of not remediating problems promptly.  They miss the extent to which regulators feel that lives are at stake when people get unreliable diagnostic information (in the case of the FDA) and that federal resources are being abused (in the case of Medicare).

On a personal level, we can certainly be more forgiving of people than government agencies are of regulated companies.  Our marriages and partnerships couldn’t survive if we took such a hard line.  But I have come to the view that healthy organizations need to be paying attention to accountability and transparency issues in the workforce, and making sure that these values are being lived by leadership and learned at all levels.

When the book is finally written on Holmes and Theranos, it may be that there was no way to make things right because the lack of integrity was so profound.  After all, if the integrity problem is bad enough, accountability and transparency become impossible.  But even if the vast majority of organizations don’t have problems that are anything on the order of magnitude of Theranos, there are valuable lessons to be learned from the company and from Ms. Holmes.  Start with integrity in the way you communicate.  Insist on accountability from your leadership and whole teams.  And work on transparency.  We can all benefit from the deficits that this case highlights.

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