Chris Clearfield is the founder of System Logic. Prof. Andras Tilcsik holds the Canada Research Chair in strategy, organizations, and society at the University of Toronto's Rotman School of Management. They are the authors of Meltdown: Why Our Systems Fail and What We Can Do About It.
Elizabeth Holmes, the once-lionized CEO of the U.S. blood-testing company Theranos, was charged with fraud last week. The Securities and Exchange Commission accused her of misleading investors about the effectiveness of her company's technology and overstating its revenues.
It seems to be a classic case of a bad apple – an ambitious executive who, in the pursuit of success, stretched the truth to promote her company.
But we can find a broader lesson if we look at the company's board of directors: Board diversity can be an effective safeguard against bad apples.
Before the scandal broke, the Theranos board was made up of "formers": former chief executives, U.S. senators and cabinet officials, including former secretary of state Henry Kissinger and then-retired General James Mattis. It was a high-profile group, but it had a weakness: it lacked diversity, in both surface-level characteristics – race, gender and age – and expertise.
Other than the two Theranos executives, every single board member – 10 out of 10 – was a white man. And every one of those directors was born before 1953. Their average age: 76 years old.
Diversity helps boards prevent problems. Companies with more gender diversity on their boards, for example, are less likely to reissue financial statements because of error or fraud. Diverse groups also tend to consider more factors when making a decision. Racially mixed juries deliberate longer, share more information, discuss a wider range of relevant factors and even make fewer mistakes when recalling facts about a case. Ironically, lab experiments show that while homogeneous groups do less well on complex tasks, they report feeling more confident about their decisions.
Study after study – from stock market simulations to research on how groups solve murder mysteries – show that we put too much trust in the judgment of people who look similar to us. Homogeneous groups feel comfortable and don't generate enough skepticism. In diverse groups, in contrast, we're more likely to ask tough questions and uncover important facts.
Not only did Theranos's board lack surface-level diversity, but it also lacked medical and biotechnology expertise. The only still-licensed medical expert in the group was former senator Bill Frist, who'd begun his career as a surgeon. William Foege had once been a leading epidemiologist, but had retired from medicine many years earlier. As a group, Theranos's directors would have been more at home at a public policy think tank than at a cutting-edge medical technology firm.
Again, the issue is the lack of diversity. Boards composed solely of domain experts aren't perfect, either.
A recent study that tracked community banks over two decades found that those with boards dominated by bankers were more likely to fail than those whose directors had come from a wider range of backgrounds, including lawyers, doctors, retired civil servants, military officers and non-profit professionals. On a diverse board, as one bank CEO reported, "When we see something we don't like, no one is afraid to bring it up."
Homogeneous boards, in contrast, became deeply entrenched in particular ways of doing things and were less likely to respond to new information. They tended to be overconfident and deferential. As one executive put it, "Everybody respects each other's ego at that table, and at the end of the day, they won't really call each other out."
It's not just Theranos. Foundations that had substantial losses from Bernie Madoff's Ponzi scheme were more likely to have homogeneous boards of trustees. Or take Volkswagen, where an insular board enabled emissions cheating. There were few female directors, and many board seats went to homegrown leaders who'd come from within the auto maker's peculiar corporate culture. According to one former board member, the structure "killed the board as a place of proper discussion."
Diversity is helpful not because people from different backgrounds bring distinct perspectives to the table, but because diversity makes everyone more skeptical. It ensures that a team doesn't work together too smoothly and agree too easily. Diversity is like a speed bump. It snaps us out of our comfort zone and makes it hard to barrel ahead without thinking.
The argument for diverse boards isn't just equality. As our technologies and organizations become more complex, the healthy skepticism of diverse groups becomes especially valuable. In the study on bank failures, for example, diversity had little effect on banks in stable, predictable markets; the greatest benefit was for banks in complex, uncertain environments.
In the wake of the Theranos scandal, much of the focus has been on Ms. Holmes rather than the board. Time and time again, boards are let off the hook for wrongdoing that executives commit, even when board members fail to ask the right questions or dig into signals that something untoward is going on.
To be sure, there are bad apples. When a scandal happens, we discard them and move on. But we don't try to fix the bad barrels – we don't build better boards.
Research suggests that adding diversity to boards is one way to do just that; it could help prevent the next Theranos.