The Theranos ‘advisory’ board should have been on trial too

Facing legal consequences will ensure advisory boards do not just sell their name, but take an active role in the businesses they advise

Elizabeth Holmes defrauded investors out of nearly a billion dollars. She didn’t act alone, although she appeared in the dock without her enablers. That should change, before the next Theranos.

Theranos was only able to succeed by being able to hide behind its big-name board of advisers. Advisory boards occupy a grey area where “advisory” board members lend credibility to a company (like an official board member), without the legal liabilities that come with an official board position.

That distinction is lost on investors, parts of the media, and the public. And that distinction is why so-called “advisory” boards – that sometimes (though almost always inadvertently) enable fraud, without ending up in the dock when the fraudster is brought to trial – should end.

You shouldn’t be allowed to be an “advisory” board member, a designation that carries no legal or regulatory significance, and has been created almost exclusively as a piece of investor PR. If you want to help a start-up get investment, you should be ready to be handcuffed along with the founder if that investment turns out to be fraudulent.

As long as advisory boards exist, bad-faith actors in Silicon Valley will be able to leverage the hard-earned reputations of others to get easy money from trusting investors. That hurts our start-up ecosystem, our economy and, most of all, the innocent victims.

Having a group of experts to advise you when running a business is by no means a bad thing. However, paying (either in cash or equity) to have a group of high-profile names attached to your company – without that attachment leading to any real work or oversight – is a practice that needs to end, in order to protect the investing public.

If the advisory board for Theranos was a “real” board, the increased due diligence would have led to Holmes’s fraud being all but impossible.

Entrepreneurs will always say they have a revolutionary product or idea. Many of them are right. But it is never a good idea to just take their word for it. It appears this is exactly what Theranos’s advisory board did. The rules allowed it to do this. The rules should change, now.

Of course, it is not the requirement of a board of advisors to be personal guarantors of investors’ returns. But at the very least the true meaning of a board – a body providing oversight and accountability – should be respected. That means it has to bring more than just “advice” to the table.

An “advisory” board member is as much of a non sequitur as an “advisory” CEO or an “advisory” auditor. This might just seem like a petty issue of semantics but when it leads to an $804m fraud, semantics matter.

I regularly receive offers of equity in return for joining so-called advisory boards. And I am a member of various (non-advisory) boards. In every company on whose board I sit, I have invested my own money. On every company on whose board I sit, I understand their product intimately. On every company on whose board I sit, I would gladly stand by the founder – because I have looked under the hood and know exactly what they are doing.

None of this is an argument against risk-taking. Even with the best oversight and management, a company can still fail. When that happens, it should be in spite of those factors – not due to their absence. Even when I backed the wrong horse, I always made sure it had legs.

I don’t doubt that Theranos’s “advisory” board had the best intentions, and is (almost) as much a victim as the investors. But the alarm was sounded, and it should have listened. Even back in 2009, Constance Cullen, the former director of Schering-Plough, reported being ”dissatisfied” with Holmes’s response to technical questions. Shane Weber, a director at Pfizer, concluded that replies from Theranos to medical questions were “oblique, deflective or evasive” in 2008.

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In the run-up to the 2008 financial crash, rating agencies marketed subprime mortgages as if they were AAA-rated, leading to the collapse of the housing market. Consequently, the rating agency Moody’s was forced to pay an $864m fine for its false ratings.

Board members act as a rating agency for start-ups, and these ratings need to be officially validated. Facing legal consequences will ensure advisory boards do not just sell their name but take an active role in the businesses they advise. That will protect us all, and drive entrepreneurs to do what they do best: build real, sustainably profitable businesses, supported by a board that holds founders to the same accountability standards to which the board itself is subject.