Patrick McKendry

The curtain is finally drawing to a close on the story of Elizabeth Holmes and Theranos. This week the U.S. district judiciary set a date for Holmes to begin her 11-year prison sentence after the federal judiciary rejected her bid to remain out of prison while attempting to overturn her four counts of felony conviction for fraud from last year. 20 years after dropping out of Stanford to found Theranos, Holmes will be forced to face the music, serving jail time and paying restitution of $452 million to various defrauded investors.¹ The story began with a product that seemed too good to be true - a low-cost, rapid analysis blood test with the ability to deliver results for multiple diagnostic measures - and a smart and ambitious young founder.²

That Silicon Valley trope of the innovative visionary with a brilliant idea has sat at the core of numerous storylines over the years. Many of our co-workers may also be really smart people with great ideas. Yet in many cases, the plot of those stories does not culminate in fraud. The story of Elizabeth Holmes and her rise and fall alongside Theranos highlights key lessons for us on the role of expectations and incentives in driving behavior as well as the importance of keeping our egos in check as leaders.

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The Negatives of Great Expectations

The story of Elizabeth Holmes really begins in 1868. In that year, the company Fleischmann’s Yeast was founded.³ The company played an important role in changing America’s bread industry. Its founder was Holmes’s great-great-great-grandfather and reports suggest that the entire family was very thoughtful of growing and maintaining their status in respect to their family’s influential heritage.⁴

As a result, the expectations placed on Elizabeth Holmes, by herself and others, were incredibly high. They were also incredibly improperly focused, oriented towards the outcome of “success” rather than the proper inputs of how to achieve it. It is a textbook case study in the powerful negative influence that improper expectations can have. We have all lived with expectations our entire lives. From the moment we are born, our parents begin to place expectations on us. They want us to be happy. They want us to live a good life and be a contributing member to society. They want us to be successful. But, where those expectations are placed and how they are communicated is critically important. When misplaced, a parent’s hope for their child to be successful may be perceived as the expectation to do well in school. When miscommunicated, a child may perceive that they will only be loved when they do well in school. This foundation can be incredibly damaging and, sometimes, may follow a person through life, e.g. a preoccupation with school could evolve to a preoccupation with work.

It can be helpful to look at an example of how this can be done right. Kobe Bryant is one of the great basketball players and top scorers of all time. In an interview, Bryant tells a story of when he was 11 years old and, over the course of an entire summer league season, scored 0 points. Zero. Bryant’s family had its own legacy with his father being something of a basketball legend in Philadelphia. After the season, Kobe was devastated by his failure so his father took him aside. The message to the young Bryant was, “Whether you score 0 or you score 60, I’m going to love you no matter what.”⁵ As Bryant tells it, that gave him all the confidence in the world that he needed to play the game in a way that he could enjoy while also being successful.

This is what healthy expectation setting looks like. By placing value on the person rather than on their output, we give people the confidence to be themselves. This may feel like an alien concept in the corporate world where performance improvement plans and incentivized sales compensation targets are common. It shouldn’t be. Authenticity is conducive to job performance. In fact, research suggests that when people feel they can be more authentically themselves, they experience higher levels of autonomous motivation, which drives results.Leaders, in particular, play a key role in enabling authenticity when they are supportive.⁶Said differently, when we help our people be comfortable to be themselves, they push to become their best selves.

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Tell Me How Someone Gets Paid and I'll Tell You How They'll Behave.

Incentives have a tremendous impact on human behavior. Behaviors which are rewarded get repeated, regardless of whether they are the ones we want. The challenge with incentives is that the way they influence action is not always how we intend it. Equity investing is a good example of providing incentives, via monetary investment, to reward behavior, such as industry innovation or efficient capitalistic activity. Theranos offers an extreme example of how this can go off the rails. Holmes and her executive team sought higher and higher evaluations and continued to pitch capabilities that the company did not have. Each new investor, hoping to drive a promising medical innovation, actually only rewarded deceit.

This off-kilter reward system can be problematic even when it does not become criminal. In public companies, external investment can often lead to short-term thinking in order to generate profitable returns for investors. But unexpected outcomes can even happen at the team level. For example, if we celebrate success in achieving a sales number, the team may react by driving a greater quantity of new customers who may be quick to churn. Or, if we highlight high margin yield, the team may respond by not pushing for revenue growth in order to protect that margin.

Instead, as leaders, we want to celebrate the work. This means we should note the good business outcomes, but really celebrate the work that the team did to deliver those outcomes and the way by which they did it. This requires us to have a clear idea of what success looks like - not just the vision for the team, but also how our team wants to go about getting there. I refer to this latter piece as operating principles. Every team has a vision for what success looks like. Operating principles describe how we will work while pursuing that goal. Operating principles are an important first step because they help ensure that the team is able to act autonomously while also staying aligned with the organization’s culture and ethics. For example, one of my team’s operating principles is to be “expert lead”. This principle helps ensure that, for any solution we provide, we seek feedback from those who are closest to the problem and involve them in decision-making.

Similarly, when looking at business performance, this can also mean focusing on metrics that are not just the bottom line. At any time, there are a number of situations that are uncontrollable by our team. That does not mean that the work being delivered is not good. A business that is shrinking because of macro headwinds may be more operationally competent than a business that is growing with macro tailwinds. As leaders, we can help drive motivation in tough environments and ensure proper discipline in good environments by focusing on input metrics, like return user rates or customer satisfaction scores. When leaders ask about these inputs, teams respond by focusing their efforts on these performance drivers because they are getting attention.

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Daedalus and Icarus

A classic of Greek mythology, the story of Daedalus and his son, Icarus, tells us of the dangers of ego. In the story, the two are imprisoned. Daedalus is a skillful craftsman and creates wings of wax and feathers for the two of them to fly to their freedom over the prison walls. As a final heeding, Daedalus warns his son to not fly too close to the sun. While in flight, Icarus becomes intoxicated by their success and flies higher and higher, causing the wax of his wings to melt and sending him careening to his death. The moral is that when we let our egos grow unchecked, we can seek untenable heights that lead to our failure.

We can see this in the story of Theranos. Though Holmes founded the company in 2003, much of the story took place between 2013 and 2015. As it seems from afar, after nearly 10 years of steady success and growing Theranos to a $1 billion valuation in 2010, Holmes wanted much more. She accelerated Theranos, pushing distribution with Safeway and Walgreens in 2012 and 2013.² As distribution scaled, the seams came apart as academics expressed concerns that none of the company’s research or procedures had been published and undergone the peer-review process and whistleblowers went to the press and Department of Health to raise awareness of the non-viability of the Theranos product set.²

Humility is a key differentiator of the strongest leaders. The actor-observer and self-serving biases tend to lead us to over-attribute our role in creating our own success, while understating the role of situational factors and luck.⁷ This misattribution can lead to false confidence and cause leaders to take on riskier propositions because they believe that they can deliver what is needed to make the risk pay off. When this happens, leaders often put their teams or companies out over their skis and lose control of the organization due to the heightened exposure. The COVID-pandemic hiring spree and subsequent lay-off spree by technology companies is a recent example of what this can look like. Without proper humility, we fail to recognize the role of luck in supporting our success. And we then fail to account for the fact that this luck will eventually come to an end.

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Conclusion

It is beyond doubt that Elizabeth Holmes and the Theranos executive team are criminal for their unabashed fraud of investors, business partners, and the public. Board members and investors also should feel embarrassment for the role they played in enabling the rise of the non-existent product. Still, it is important for us to recognize that we are also prone to the biases and situational factors that accelerated the misbehavior of these individuals. Incentives inherent to our jobs and whether leaders highlight inputs or outputs of teams can have undesirable influence on the way that team approaches its work. These problems can be accentuated when we value people for the work they deliver rather than for who they are. As leaders, we must approach our work with humility. By recognizing that our work has multiple external drivers and that failure is more common than success, we can properly lead our work, our teams, and ourselves.

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References

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Theranos & The Curse of High Expectations