Three Debacles and Rookie Mistakes by Boards: Debacle One: HeadSpin

We have this vision in our minds about corporate boards:  experienced, no-nonsense folks with bottom-line good sense all wrapped together in a “does not suffer fools well” package.  Three recent case studies tell us that we are misguided in our assumptions.  Here’s the first example in a series.

HeadSpin — Yet another Silicon Valley fraud start-up. Who were the investors? To name two:  GV — Google’s (Alphabet’s) venture capital subsidiary and  Iconiq Capital (manager for the Zuckerberg fortune but terrible at spelling).

These gazillionaires, with off-the-charts IQs, plunked their money into a company without getting board representation.  They also let HeadSpin sally forth without a single audit.  In fact, HeadSpin had one accountant — a freelance accountant who worked from home and used only QuickBooks.

HeadSpin had no CFO or HR department. When anyone asked for, oh, say, financials, Manish Lachwani, simply ignored them.

HeadSpin claimed Apple and American Express were clients that used its software for app testing.  No one ever checked with those companies to verify that they were indeed customers. They were not and there were many others on the list of customers who were not customers.

Well, it was a fraud.  So much of a fraud that Lachwani has entered a guilty plea to three counts of fraud.  Most of the other fraudsters have at least gone to trial. One of his not-so-clever tricks was to take investors’ money and  invest it in Snap, Roku, and Tesla. He never shared his portfolio approach to running a business with his investors.  He made up financial statements and joined a long line of Silicon Valley fraudsters:  Elizabeth Holmes (Theranos); Samual Bankman-Fried (FTX), Trevor Milton (Nikola), and 9/10ths of the dot.coms.

The lack of oversight is stunning — no financials, no CFO, no bank statements – just a few of the things boards should be looking at. But governance is something to be mocked in the Valley unless it involves whipping nuns into a frenzy about climate change so that they can take center stage at the annual meeting.

The excitement over something new in tech draws investors, but the genius of ideas and takes structure to turn that idea into a business.  Both investors and boards should  know by now that when it comes to Silicon Valley investments: Do not trust and verify everything.

About mmjdiary

Professor Marianne Jennings is an emeritus professor of legal and ethical studies from the W.P. Carey School of Business at Arizona State University, retiring in 2011 after 35 years of teaching undergraduate and graduate courses in ethics and the legal environment of business. During her tenure at ASU, she served as director of the Joan and David Lincoln Center for Applied Ethics from 1995-1999. In 2006, she was appointed faculty director for the W.P. Carey Executive MBA Program. She has done consulting work for businesses and professional groups including AICPA, Boeing, Dial Corporation, Edward Jones, Mattel, Motorola, CFA Institute, Southern California Edison, the Institute of Internal Auditors, AIMR, DuPont, AES, Blue Cross Blue Shield, Motorola, Hy-Vee Foods, IBM, Bell Helicopter, Amgen, Raytheon, and VIAD. The sixth edition of her textbook, Case Studies in Business Ethics, was published in February 2011. The ninth edition of her textbook, Business: lts Legal, Ethical and Global Environment was published in January 2011. The 23rd edition of her book, Business Law: Principles and Cases, will be published in January 2013. The tenth edition of her book, Real Estate Law, will also be published in January 2013. Her book, A Business Tale: A Story of Ethics, Choices, Success, and a Very Large Rabbit, a fable about business ethics, was chosen by Library Journal in 2004 as its business book of the year. A Business Tale was also a finalist for two other literary awards for 2004. In 2000 her book on corporate governance was published by the New York Times MBA Pocket Series. Her book on long-term success, Building a Business Through Good Times and Bad: Lessons from Fifteen Companies, Each With a Century of Dividends, was published in October 2002 and has been used by Booz, Allen, Hamilton for its work on business longevity. Her latest book, The Seven Signs of Ethical Collapse was published by St. Martin’s Press in July 2006 and has been a finalist for two book awards. Her weekly columns are syndicated around the country, and her work has appeared in the Wall Street Journal, the Chicago Tribune, the New York Times, Washington Post, and the Reader's Digest. A collection of her essays, Nobody Fixes Real Carrot Sticks Anymore, first published in 1994 is still being published. She has been a commentator on business issues on All Things Considered for National Public Radio. She has served on four boards of directors, including Arizona Public Service (1987-2000), Zealous Capital Corporation, and the Center for Children with Chronic Illness and Disability at the University of Minnesota. She was appointed to the board of advisors for the Institute of Nuclear Power Operators in 2004 and served on the board of trustees for Think Arizona, a public policy think tank. She has appeared on CNBC, CBS This Morning, the Today Show, and CBS Evening News. In 2010 she was named one of the Top 100 Thought Leaders in Business Ethics by Trust Across America. Her books have been translated into four different languages. She received the British Emerald award for authoring one of their top 50 articles in management publications, chosen from over 15,000 articles. Personal: Married since 1976 to Terry H. Jennings, Maricopa County Attorney’s Office Deputy County Attorney; five children: Sarah, Sam, and John, and the late Claire and Hannah Jennings.
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