In January 2023, Elizabeth Holmes was convicted by a jury on four counts of fraud, however, just a few years ago she was referred to as “the world’s youngest self-made woman billionaire worth $4.5 billion”1.
Holmes founded a company that was meant to be key in diagnosing disease (Theranos), however the technology she developed did not work at all, and “by 2018 the company had collapsed”2.
Due to the revolutionary idea of the company, a number of high worth individuals invested into the company without seeing audited financial accounts. Not only was the company able to raise “$1.3 billion in funding”3 but the board of directors was made up of former CEO’s active in the world of business, as well as government members.
How can businesses learn from this from this collapse?
Companies can ensure that there are policies and frameworks in place which promote good governance and make certain that the board are thinking about how best to perform their role in the best interests of the company4. This will keep them accountable and continually improve their skills. Although Theranos had individuals which were clearly skilled in their previous roles, the company still had grave issues (this is not to say that any company cannot collapse with skilled individuals, as 65% of companies fail within their first 10 years5).
However, if there are processes in place which promote accountability and transparency, the chances of fraud prosecutions, and prosecution in general is greatly reduced.
Although this was a case in the US and charges were brought by the SEC, the ramifications of internal judgements usually have a knock on effect and companies incorporated in the UK should be mindful of their governance practices moving forward.
In the UK, the Financial Reporting Council (FRC) has recently proposed to revise the UK Corporate Governance Code for the first time in five years. This has been done in a bid to restore trust in our audit and corporate governance processes. There have been a number of improvements proposed which include strengthening the function of ‘comply or explain’ where this may be currently weaker in practice.
Most relevant to this article is the proposal to strengthen malus and clawback arrangements, therefore putting financial consequences in place for a lack of compliance and lack of transparency.
In conclusion, companies should be mindful of their governance processes as the regulations are becoming increasingly stringent, and the repercussions greater than ever. Having an effective Company Secretary mitigates the risk of all of the above and should not be underestimated.
If you are considering outsourcing the role of your Company Secretary, at Kin, we have a dedicated team of competent, modern governance professionals who can act as a trusted extension of your in-house team. Please reach out to us on companysecretary@kincosec.com if you would like to find out more.
Sources
- https://www.forbes.com/profile/elizabeth-holmes/?sh=6a78a79b47a7
- https://www.bbc.co.uk/news/business-58336998
- https://news.crunchbase.com/health-wellness-biotech/theranos-elizabeth-holmes-trial-investors-board/
- Companies Act 2006
- https://www.investopedia.com/articles/personal-finance/040915/how-many-startups-fail-and-why.asp
