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Theranos Makes Us All More Cynical About Business – Inc. – Bendi Service

After a jury found former Theranos Chief Operating Officer Ramesh “Sunny” Balwani guilty of defrauding investors and patients, commentators will raise familiar questions about the blind spots and excesses of Silicon Valley’s startup culture. But the Theranos episode did far more than cloud the tech industry. It has fueled widespread cynicism towards companies that claim to have a higher purpose.

At the beginning of its story, Theranos stated that its mission is “to facilitate the early detection and prevention of disease and to empower people everywhere to live their best lives”. That sounded noble, but while Holmes, along with Sunny, reassured their investors that “you can build a business that does well by doing good,” Theranos employees discovered serious flaws in the company’s blood-testing equipment. Eventually, directors, investors, and board members realized they had fallen victim to a massive deception.

Theranos is hardly the only company to wrap bad behavior in high-minded rhetoric. Another healthcare company, Turing Pharmaceuticals, claimed it was “dedicated to helping patients who often lack effective treatment options by developing and commercializing innovative treatments.” And yet the company’s CEO, Martin Shkreli, increased the price of a life-saving drug from $13.50 to $750 a pill and was later jailed for securities fraud.

And look at Purdue Pharma. It proclaimed that “compassion for patients and excellence in science inspire our pursuit of new medicines.” This from a company that has fueled the deadly opioid crisis through its irresponsible marketing of highly addictive painkillers like OxyContin.

These companies and others across a range of industries are the worst of the worst,
particularly egregious practitioners of so-called virtue signaling – who profess a belief that a company knows resonates with stakeholders but is not genuinely supported by its actions.

Research by James D. Westphal and Sun Hyun Park has shown that corporate virtue signals can be surprisingly effective. That’s because nobody has enough incentive to hold companies accountable for it.

Leaders use a mix of pandering, reciprocity, and retaliation to discourage employees and external stakeholders from questioning actions that seem at odds with their words, the researchers found. With pandering and reciprocity, they practice flattery and grant favors to build goodwill. With negative reciprocity and retaliation, they punish and exclude those who try to expose them.

When placed in the hands of experienced executives, these tactics can lull and deceive both employees and outside stakeholders such as board members, securities analysts, management consultants, and even journalists.

All of these strategies played a part in Theranos, Turing, Purdue, and others to some degree. But the chasm between words and deeds eventually grew so deep that the truth inevitably emerged.

Some companies, in the name of corporate purpose, have managed to get themselves on the ESG (Environmental, Social and Government) lists, which are designed to encourage ethical investing while engaging in highly unethical behavior. Gaming company Activision Blizzard, for example, earned a spot on the coveted list despite allegedly having a rife of sexual harassment in the workplace, which its executives allegedly knew about and were unable to stop.

As an economics professor studying purpose-driven organizations, I’ve seen people roll their eyes at my insistence that a company should articulate a mission that serves both a business and social purpose. They regard such utterances as time wasters, which are only lip service to euphonious concepts. Such skeptics would point to companies like Theranos and others across a range of industries to make their case.

And yet, my research shows that Purpose can and should be so much more than a PR exercise. Done right, it can really energize an organization and make a difference for shareholders, employees, customers, the planet and society at large.

Take another company, Livongo. When it was founded seven years ago, its mission was “to empower people living with chronic conditions to live better, healthier lives”. These weren’t just words. The CEO, Glen Tullman, used this statement to lead his company successfully through expansions, an IPO and eventually a takeover by another company – without losing sight of the original purpose.

For Tullman and many of his associates, purpose was driven in part by personal experience. Tullman’s own son has type 1 diabetes, and most of his employees either have a family member with a chronic condition or have struggled with one themselves. Many of them knew firsthand what it was like to continuously monitor diabetes with a glucose strip. Her empathy for Livongo’s clients led to holistic methods of treating disease, including regular at-home data collection, free medical care, personalized counseling and interventions.

Throughout its rapid growth, Livongo has remained committed to giving its members more control over their own health and fewer reasons to visit expensive clinics and hospitals. In order to achieve these goals, the company has sometimes had to incur more costs than some investors considered reasonable. But by sticking to his purpose, Livongo managed to prove the doubters wrong.

Sunny also explained that Theranos tried to empower people to lead healthier lives. But this statement turned out to be a facade designed to hide deceit and greed. Other CEOs must not follow the same path and abuse the concept of purpose, even if their intent is far less malicious.

When companies profess beliefs that do not stand up to scrutiny, they betray a cynicism that the public can feel and perpetuate a cycle of distrust. But my research has shown that companies that have a stated purpose that is both for-profit and socially conscious have a significant advantage over those that don’t.

Let companies like Theranos, Turing, and Purdue be a lesson to those whose statements of intent are mostly empty PR efforts. The public deserves better. Customers, employees and investors deserve better. It is up to American corporations and their leaders to back up their noble words with enduring and concrete action.

The opinions expressed here by Inc.com columnists are their own and not those of Inc.com.

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