I recently read Bad Blood:Secrets and Lies in an Internet Startup by John Carryrou that tells the tale of Theranos, a company many thought was poised to revolutionize health care by delivering near immediate blood test results from the site where the blood draw is taken; whether a clinic or ultimately even a patient's home.
There is much to the story that is consistent with my exposure to not just the health care industry but the world of business in general. I may touch on some additional themes in the future, but the one area I want to draw attention to is the role of Theranos's law firm.
And, with respect to the role of the law firm, I am limiting the focus in this article to the decision that is made to place the attorney on Theranos's Board of Directors. This decision is but one of many issues that deserve exploration, consideration and understanding for anyone viewing the role of legal resources and strategy as an asset of a company that arguably has nothing to do with the merits of a firm's value porposition and everything to do with its ability to prevail in a street fight.
At a point in Theranos's development a decision was made to approach and ultimately engage a firm with an International reputation for winning major legal battles and having done so at least in part in the technology field. To compensate the firm for its services, Theranos and the firm agreed the firm would be paid, at least in part, through the granting of stock or stock derived levels of compensation.
In short, the law firm would be paid more if the value of the company increased. They were on commission.
As the law firm was retained its lead attorney began to attend each of Theranos's Board meetings - not as a Director but apparently as an advisor. There comes a time, however, where the challenges to Thernos's legitimacy begin to create risk for the members of its Board of Directors and Theranos decides to transition those Directors onto a new Advisory Board which no longer holds the authority, or the individual legal liability risk, of a Board of Directors. New members are named to a new Board of Directors. The lead attorney from the law firm is named as a Director.
This attorney is now serving in multiple capacities, with multiple interests. He is an outside attorney engaged by the Theranos to advise it. He is a member of the Board of Directors for that company and is therefore receiving advise from himself. As an individual, he is a member of the Board and indivually has a fiduciary duty to the company and its shareholders to act for the benefit of the company and if he does not uphold that duty bears the risk of being held personally liable for damages to the company and its shareholders for not upholding that duty. He and his firm stand to make more money as the value of the company's stock increases. And, he likely has a fiduciary duty to the other partners of his firm to act in their interests.
Operating a firm with a commitment to good corporate governance that is of value to all stakeholders is hard enough. Attempting to do so with legal counsel that should need to wear a different hat to identify in which capacity he is now speaking is absurd.
And perhaps the most unacceptable part of this entanglement is that the client is deprived of receiving objective, balanced and thoughtful legal insight that I've always found critical when making decisions that involve any level of legal risk.
I want my lawyer wearing one hat.
Some years ago I served as CEO of a for profit hospital network owned by five non profit hospitals. Each of the owners appointed three members of our Board of Directors, which in each case represented the CEO of each hospital as well as the Chair and Vice Chair of their Boards of Directors.
Two of those individuals were lawyers. One was a community member who did no legal work for the hospital. The other served as a Board member of the hospital and also, through his law firm, as its General Counsel.
Years later this hospital decided to terminate its ownership in the network. The General Counsel, who served as a Board member of the hospital and served as a Board member of the network summoned me to his office to negotiate exit terms. I pointed out to him that I was unclear if I was meeting with a member of the network Board of Directors, a member of the shareholder hospital's Board of Directors, or an attorney representing the shareholder hospital. He was none too happy with me. I offered terms of the exit that conditioned the release of information back to the shareholder hospital upon agreement to provide a settlement payment to the network. His face flushed a bit and he told me the meeting was over and I'd be hearing from him. I said I'd wait to hear from him and in the meantime I would not release any information to the shareholder hospital until a resolution was agreed upon.
I'm pretty sure he didn't shake my hand on the way out.
He called about an hour later. He'd spoken to folks at the hospital and was told the information I wouldn't release was mission critical. He was angry and offended that I had taken such an aggressive posture. He said the hospital would make the payment and asked in an exquisitely sarcastic tone, whether I needed the agreement in writing.
I said I'd take his word.
A week later, I received a call from my Board Chair. It seems he received a three page letter from the Attorney/Hospital Board Member/Network Board member complaining about my aggressive tactic.
I can't help but wonder if he billed the hospital for writing the letter.
Fast forward several years and I was asked by a client to provide my opinion about nominations for his firm's Board of Directors. He was considering adding the firm's attorney from his outside law firm to his Board. I advised that he not do so, because I felt there should be clarity about the role of the attorney. The individual is either engaged to provide legal advice or to serve as a member of the Board. In effect, in my view serving in both roles means the attorney is at times both the client and its legal counsel.
The client chose not to heed my advice and appointed the attorney to the Board.
A couple of years passed and my firm and the client reached an impasse over our contractual relationship and entered into a conflcit resolution process.
You can guess who their lawyer was.
I, naively, held out hope that the conflcit resolution process would allow cooler heads to prevail. I felt the client's view was clouded by emotion and I placed some hope on the idea that a reasonable perspective from the law firm would attempt to find a resolution that would keep the risk of nuclear options at bay. I was wrong. And the Board Member/Lawyer appeared more emotionally connected to the client than to seeking a reasonable outcome. Sure, it could have just been theatrics, but I don't think so. And, the role as a Board Member created a variable that was not helpful for establishing a forum for resolution.
Again, wear one hat.
GS
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