BioPharma

What can biotech companies learn from banking scandals?

A board stacked with well-known names but little hands-on knowledge suggests that governance is not a high priority and should ring warning bells for investors.

An employee of Christie's auction house manoeuvres a Lehman Brothers corporate logo and is featured in the sale of art owned by the collapsed investment bank Lehman Brothers on September 24, 2010 in London, England. (Photo by Oli Scarff/Getty Images)

An employee of Christie’s auction house maneuvers a Lehman Brothers corporate logo and is featured in the sale of art owned by the collapsed investment bank Lehman Brothers on September 24, 2010 in London, England. (Photo by Oli Scarff/Getty Images)

Theranos, the former high-flying biotech startup, has recently had to tell regulators that it was voiding two years of tests from its Edison blood testing devices. This scandal could lead to a lack of public trust in new technology from healthcare start-ups. After all, how can a company with a high profile CEO, high valuation and well-known board members get things so wrong ? Similar questions were asked about banks after the financial crash in 2008 and they have still not regained public trust.

There are some lessons that Silicon Valley can take from the turmoil on Wall Street.

Diversity matters

At Theranos, Elizabeth Holmes is CEO and chairwoman, but the rest of board consisted of 11 men, until it was pared down last year. After the collapse of investment bank Lehman Brothers in 2008, academics questioned if things might have been different if the firm had been called Lehman Sisters (there are certainly a few different perspectives on this). A preliminary study by Canadian researchers at the University of British Columbia business school suggested that high testosterone levels amongst men of a certain age led to more aggressive decisions.

The lack of women in biotech could lead to similar problems.  A study found only one woman chief executive officer and and two female board chairs amongst San Diego biotech firms. In addition, less than 10% of board directors were women. Liftstream, which provides executive and board level recruitment for life science companies around the world, analyzed 44 CEOs and 322 board directors at 44 public biotech companies specializing in either therapeutics or diagnostics in San Diego County, using filed proxy statements between 2012 and 2014.

Karl Simpson, an author of the study, said in a statement: “The board of directors of San Diego public biotechs are likely going to need further diversification of age, experience and genders over the next few years. Having a board with diverse perspectives is important to continue to advance thriving companies that are innovating new technologies and products.”

Governance matters

A 2014 profile in Fortune magazine described the Theranos board as like no other “with three former cabinet secretaries, two former senators, and retired military brass.” However this board was also like no other as half have no medical or technology experience and there are also no executives with formal accounting, auditing, or legal expertise. Similarly, Lehman Brothers’ 10-member board included a theater producer, a former Navy admiral and only two two executives with direct financial services experience. A board stacked with well-known names but little hands-on knowledge suggests that governance is not a high priority and should ring warning bells for investors.

Behave Yourself or be Regulated

Before the 2008 crash, the mantra for the financial services industry was self-regulation. However, that year Alan Greenspan, the former chairman of the US Federal Reserve, admitted to a Congressional committee that that he had been “partially wrong” in his approach towards the banking industry. He said: “I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms.” As a result, banks have been fined billions of dollars by regulators around the world and faced a whole new swathe of rules, which are still being implemented in 2016. Start-ups need the flexibility to innovate but each scandal that attracts the attention of  regulators will lead to more rules. Regulators are determined to keep a tight rein on banks as they do not believe that the culture on Wall Street rewards ethical behavior. So biotech startups need to ensure that they act ethically in order to be rewarded with the freedom to create successful new products.

Photo: Getty Images

Topics