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Selling a Scam: A Case Study

I recently became obsessed with an ABC Radio podcast called The Dropout. The six-part podcast was released in January of this year and tells the story of Elizabeth Holmes and her fraudulent company, Theranos that claimed to have revolutionized healthcare by creating technology that could run hundreds of blood tests using just a single drop of blood. At the company’s peak, it was valued at over $9 billion dollars and was backed publicly by leaders such as Betsy DeVos, The Walton Family, and General James Mattis (who went on to become Secretary of Defense). Since 2003, the company operated under the false pretense that their groundbreaking technology was operational, accurate, and life changing. It’s an absolutely bonkers true story that ends with a Wall Street Journal exposé, a federal investigation, and criminal charges for fraud. Just last week, U.S. District Court Judge Edward Davila ruled that the trial against Homes will begin July 28, 2020.

This scandal has been compared in scope to Bernie Madoff’s ponzi scheme, and has received as much excitable public attention as the famed Fyre Festival. As much as I’ve enjoyed following this podcast, it’s also been incredibly disheartening. Why do people do bad things? Why are they allowed to get away with it for so long? What can we do to intervene? Here’s what I concluded at the end of the series:


Why do people do bad things? 
To be clear, I don’t think Elizabeth Holmes is an “evil” person, but I have really struggled to wrap my mind around her wildly unethical behavior. This is such a complex question and I don’t think it has any one answer, but here are some possible explanations: 

Studies on this kind of behavior indicate, “that the more room a situation provides for people to be able to justify their behavior, the more likely they are to behave unethically”. Holmes sang praise to the importance of her work, to investors and the public alike. The future that she describes is moving, and emotional, and intensely desirable, “We see a world in which no one ever has to say, ‘If only I’d known sooner.’ A world in which no one ever has to say goodbye too soon.” This intoxicating vision might have just served as the justification she needed to perpetuate this scandal.  

Holmes was also making an enormous amount of money because of the energy and profound excitement generated for her technology. Not only that, she was being heralded as the next Steve Jobs, and profiled as “the youngest self-made female billionaire in the world”. This is significant because the empirical evidence shows that “people lie when it pays”. 

In general, these phenomena are what psychologists call “psychological traps”, which are the root causes of unethical behavior. According to Dr. Robert Hoyk and Paul Hersey, “these traps distort perceptions of right and wrong so that one actually believes his or her unethical behavior is right”. They create convincing and compelling illusions of how we perceive our behavior and its effects. In this way, people can get sucked into a vicious psychological battle with themselves on how to actually be and do good. 


Why are they allowed to get away with it for so long? 
When we look back at scandals like these in hindsight, we typically find two things to be true: “The institution allowed it, and top leaders enabled it”. When this is the case, it creates an incredibly toxic environment that makes for unethical behavior to be allowable, and sometimes even encouraged, in people who may otherwise be inherently good. 

In the Harvard Business Review article “Why Ethical People Make Unethical Choices”, author Ron Carucci presents five reasons this may happen:

  1. It is psychologically unsafe to speak up
  2. There is excessive pressure to reach unrealistic performance targets
  3. Conflicting goals provoke a sense of unfairness
  4. Ethics are not focused on as a norm of the organization
  5. A positive example isn’t being set

In the story of Theranos, it seems that all of these factors played an important role in the ethical climate of the organization. These factors affected employees at all levels of the organization and their willingness or ability to provide feedback, communicate concerns, or report errors or dangers. When there isn’t agreement or alignment on how ethical questions should be handled in an organization, it breeds uncertainty and fear, and ultimately lets bad things go unchecked. 

UCSD Clinical and Translational Research Institute

What can we do to intervene?
The responsibility of us as leaders and followers is to not only help to create an ethical culture in our organizations but also to intervene in instances of unethical practice when needed. We can accomplish these things with conscious strategies like these:

  • Know your own values and don’t fall pressure to groupthink
  • Be aware of and challenge problematic norms 
  • Ask critical questions 
  • Encourage disagreement 
  • Promote a culture of feedback that values honesty and transparency
  • Speak out against wrong – and support those who take this chance

I think the only other question I was left with was, why does any of this matter? Why should we care so much about scandals like these? The organizations that show us “what not to do” provide a foreboding warning of what can happen if we behave unethically or allow unethical behavior to continue. That being said, there are also so many examples of incredibly good companies whose values-based leadership drives their reputation and influence. The Ethisphere® Institute works to “define and advance standards of ethical business practice”, and each year they release a list of “The World’s Most Ethical Companies”. This list is compiled by evaluating companies on five categories: ethics and compliance program, corporate citizenship and responsibility, culture of ethics, governance, and leadership, innovation and reputation. In 2018, that list included 135 companies like 3M, Microsoft, T-Mobile, and U.S. Bank. The ethics of organizations like these have such a massive footprint and are made possible by the individuals and teams who are a part of them. The fate and future of the Theranos executives is still to be decided, but we have the opportunity to learn from their choices and be better leaders and followers because of them. 

Give The Dropout a listen or watch the HBO documentary The Inventor: Out for Blood in Silicon Valley for the full story! 

*Leadership Lesson* 

Many people have never been asked to articulate their ethics or sense of morality. Lead a simple exercise to start a conversation about individual and group ethical responsibility. Propose an ethical dilemma – it can be something simple and unrelated to your organization and the work you do – like do you run a red light when you are running late? Then, have everyone consider and respond to the following questions:

  • What are the possible choices? 
  • What complicates each choice? 
  • What are the consequences of each choice? 
  • What personal values affect my choice?
  • What are my obligations or duties surrounding this choice?
  • How does my choice affect my relationships with others? 
  • Which factors are most important to me when making my decision?

Have a group discussion to determine the best course of action. 

*Meet the Author*

Caelan Cooney is the Program Coordinator for Leadership Inspirations and spends most of her time helping to create meaningful programming and content. She got her start in leadership as a high school DECA student, and went on to graduate from Chapman University with degrees in Business Management and Integrated Education. As a regular contributor to From the Balcony, her favorite topics to explore are personality theory, group development, and conflict management. In her free time, she enjoys hiking, rock climbing, and listening to podcasts.