Indictment
Introduction
Theranos, a company that performed blood tests, was founded by Elizabeth Holmes. As the company’s CEO, she set the company’s strategic course. She was tasked with creating the technology for the blood-testing equipment that would transform the medical sector (Hartsman & Leskin, 2020).
While attending Stanford University, Elizabeth Holmes was introduced to the concept of blood testing for the first time (Hartsman & Leskin, 2020). She was pursuing a degree in chemical engineering and was interested in designing a tool that would transform the medical field (Hartsman & Leskin, 2020). To launch Theranos, she left college in 2003, and for the following several years, she focused on developing the technology (Hartsman & Leskin, 2020). Therefore, Holmes was inspired by the idea of revolutionizing the field.
Shareholder Incentives and Misleading Corporate Practices
The possibility of receiving enormous returns on their investments was the main incentive for shareholders to invest in Theranos. Using its blood testing device, the business claimed to transform the healthcare sector, and at its peak, it was valued at over $9 billion. The firm attracted a significant number of investors due to its potential to disrupt the market and make enormous profits (Ramsey, 2019). As a result, the corporation deceived users and investors about the device’s capabilities and engaged in dishonest business practices to obtain money. Sunny Balwani and Elizabeth Holmes were charged with many conspiracy and fraud offenses (Huang, 2022).
Conclusion
Elizabeth Holmes was in control of the company’s strategic direction and played a pivotal role in Theranos’ growth and development. Her responsibility was to develop the technology that would power the blood-testing equipment, transforming the healthcare sector. The company’s promises, however, were not fulfilled, and the founders were charged with conspiracy and fraud. The possibility of enormous profits on their investment was the most alluring factor for shareholders to invest in Theranos. However, it was subsequently discovered that the technology failed to operate as promised.
Agency Problem
Introduction
Elizabeth Holmes, the founder and former CEO of Theranos, faced charges of fraud and conspiracy after the company’s revolutionary blood-testing technology was found to be ineffective. Since the product failed to deliver on its promises, the situation raises questions about potential agency problems within Theranos—specifically, whether the company suffered from conflicts between the interests of its management and its shareholders (Ramsey, 2019).
Conflict of Interests
When shareholders’ interests and management’s interests conflict, the agency problem occurs. Although management may have other objectives, such as increasing their own pay or job stability, shareholders want the corporation to maximize profits and increase the value of their investment (Shim, 2023). This mismatch of incentives may cause management to operate in its best interest to the detriment of the shareholders.
On the one hand, the possibility of receiving excessive profits on their investments was the most alluring incentive for stockholders to invest in Theranos. According to Business Insider, the company claimed its blood testing equipment would revolutionize healthcare (Ramsey, 2019). On the other hand, management could have had objectives other than increasing revenues. According to the BBC, Elizabeth Holmes adhered to the philosophy of “fake it until you make it” and prioritized establishing a reputation as a successful businesswoman over increasing shareholder value (Clayton, 2022). She could have been more interested in keeping control of the business than in increasing earnings.
Conclusion
Hence, since stockholders and management experienced conflicting incentives, Theranos may have experienced agency problems. The primary concern of shareholders was making a profit, although management may have had other objectives. It is indeed possible that Elizabeth Holmes, the company’s founder and CEO, was more concerned with enhancing her reputation and keeping control of the business than with increasing shareholder value. These improper incentives may have facilitated the dishonest behavior that led to the firm’s failure.
References
Hartsman, A., & Leskin, P. (2020). The rise and fall of Elizabeth Holmes, the Theranos founder whose federal fraud trial is delayed until 2021. Business Insider. Web.
Huang, K. (2022). Elizabeth Holmes is sentenced to more than 11 years for fraud. The New York Times. Web.
Ramsey, L. (2019). The rise and fall of Theranos, the blood-testing startup that went from Silicon Valley darling to facing fraud charges. Business Insider. Web.
Clayton, J. (2022). Elizabeth Holmes: Has the Theranos scandal changed Silicon Valley? BBC. Web.
Ramsey, L. (2019). The rise and fall of Theranos, the blood-testing startup that went from Silicon Valley darling to facing fraud charges. Business Insider. Web.
Shim, H. S. (2023). Goals and governance of the firm [Lecture]. CUNY College of Staten Island.