The Grand Sham (and how it was enabled)

In the old days, writes ethics expert Jane Arnott, a ‘C’ on a school report was often accompanied by the comment ‘more effort needed’.

When the NZX issued their initial discussion document outlining their intended review of the NZX Corporate Governance Code – first issued in 2017 – it was, in the nicest possible way, a C-grade when it came to their decision to overlook the inclusion of Principle 1.

The review is an opportunity. According to the NZX, it encourages stakeholder feedback ‘in relation to key aspects of the Code, and to consider international developments in the context of New Zealand market conditions, to ensure that the settings in the Code are correctly calibrated to promote good corporate governance for our listed issuers’.

On this basis, speaking up is encouraged. So far so good – except that in missing the entirety of Principle 1, the possibly vexatious area of Codes of Ethics, regular training and internal speak up, the NZX has signaled that, in its view, the status quo is ‘job well done’.

There will be reason for this.

But, at this point, former Theranos CEO Elizabeth Holmes would probably be one of their staunchest supporters. Probably not the best company to keep.

Over the course of several years private investors ploughed $724m into Theranos, a company peppered with false claims and inflated egos.

All the time Theranos employees, especially those with technical insight, tried but failed to raise concerns – wait for it – internally. Because an internal option was all they had.

Like many NZX Codes of Ethics or Speak Up policies, attention and control is directed at dealing with issues in-house. This however relies on everyone in-house being equipped to listen (spoiler alert, training is beneficial), willing to uphold ethics, and ethical behaviour – regardless of whether it means losing contracts, missing a bonus or being overlooked for promotion. Because who wouldn’t expect some penalty if a product had reached the market that was nothing other than a grand sham?

The internal speak up process at Theranos involved being personally smeared with everything from disdain to contempt – followed by increasingly intense threats of legal action and a multitude of private investigators.

Tyler Schulz, the former Theranos intern who went on to work as a research engineer at the company (and who happened to have his grandfather in the position of company Chair), referred, in one of his interviews, to a former colleague who, saddled with student debt, was so badly threatened with legal action and investigation that she not only quit the company, but went to work in Hong Kong.

It seems that in the world of internal speak up, status, power and wealth helps. Find yourself in a company where you have neither – and the culture doesn’t reflect its ethical code – and you will immediately be placed at a disadvantage.

Similarly, young Tyler experienced bullying and legal threats that were so disturbing he too quit the company. In one email (that came from the company President and boyfriend of Chief Executive Elizabeth Holmes) Tyler was told he was “arrogant, reckless, ignorant, patronising with no understanding of basic statistics, maths or science and that if he had any other last name he would be held accountable to the strongest extent.”

In other, more polite words, do not discredit our company or the science on which it is founded.

The point is, internal reporting can become a critical enabler of fraud, misconduct, and serious breaches across numerous regulatory areas. So too can a hoodwinked media and Board. As the media love affair with Theranos grew, it became increasingly hard for sincere concerned voices to gain traction. Traction that was transformed to a slippery slope, given the Board featured people with military or diplomatic backgrounds – irrelevant in all but status and, significantly, lacking the scientific credentials to separate fact from fiction.

A company’s integrity and ethics performance is arguably one of those areas where dissing the messenger and rejecting the message can become a team sport. Holding position requires substantial armoury, along with resilience and tenacity. I should know, I have had plenty of experience.

But for external speak up providers, where the message is the mission, the ability to guide and overcome the tentacles of toxicity is assured. Attempts to constructively dismiss and ‘manage out’ those who spotted ethical irregularities that pave the way for fraud cannot be so easily dismissed.

As Craig McFarlane, founder/director of independent ethical reporting company Report it Now confirms, “if we are made aware of an allegation that the company itself will not take seriously, depending on what it is, we will consider and if necessary put into action procedures for escalation.”

“Further, as an independent company with a dedicated focus on speaking up and whistleblowing, we offer the advantage of not having to consider other collegial client relationships across a spectrum of service offerings that could compromise either our reputation or bottom line.”

Internal whistleblowing procedures are a risk. The need to explain and substantiate the risk is just one of the areas that business ethics concerns itself with. And concern itself it will.