Illumina: Where Was the Board?

Sunday brought news that Francis deSouza had resigned as CEO of Illumina.  It at first might have seemed he had survived the boardroom challenge from activist investor Carl Icahn, losing only one ally - Board Chairman John Thompson.  But that apparently effectively made him a lame duck, and he is now leaving immediately -- leaving no one at the helm of Illumina momentarily but also eliminating any interference from deSouza with the installation of his successor.  If you have access to STAT+, Matt Herper's commentary is very informative (I'd expect nothing less).

deSouza tried to remake Illumina in his own image via huge acquisitions, but both times he hit regulatory walls.  His great sin -- perhaps one of the greatest unforced errors in business history -- was to plunge ahead with integrating Grail into Illumina ahead of getting regulatory approval.  That would be a bold move for a non-controversial addition - for every acquisition I've been involved with there has been a very careful dance to not integrate substantially until regulatory approval is granted -- but Grail was sure to raise regulatory interest.  Here was a monopolist in one field buying a leading contender in a related field.  The potential mischief that Illumina could play on competitors was obvious - simply reserving future product deliveries gives a huge window into a companies expected cadence of launch and operation.  So it was immense hubris for Illumina to act like the regulatory signoff was fait accompli.

But that brings my title question: why did the Board of Directors go along with it?  After all, they are supposed to be representing the shareholders and guarding their interests.  Now I'm certainly no expert on corporate governance -- I'll enumerate below almost everything I base my opinions on -- but does this mean Illumina's board subscribed to an Imperial vision of CEO-ship in which the Board's job is to do what the CEO asks but never ask hard questions?  John Thompson lost his Board position in the wake of the Grail debacle - should more members follow?

When I was young, my mother gifted me a small number of shares in AT&T, where she had worked both while single and for the first few years of married life.  The annual report would come in and I would attempt to read it, which didn't teach me much.  But I did vote for directors, and so looked at the short resumes given and came to the conclusion that Directors were CEOs of other companies.  So captains of business.

When I was at Warp Drive, we employees had limited interactions with the board but I did once present to them.  But there was a tale oft told by Founder Greg Verdine -- he would regale one Board member with elaborate tales of our scientific progress -- and we did a lot of amazing science -- and this member would say "That's great Greg, but where are the drugs?".  Which to me is what a Board member should do - be always keeping the CEO and upper management on their toes and level headed and focused.  Our Board was dominated by the venture capitalists who had funded us and also had representation of our partner (Sanofi) -- people who knew the pharmaceutical business intimately.

While at Warp Drive, I kept hearing buzz about another startup in a range of media.  It was clearly a darling of the press, so I was curious and started looking at the website - and immediately went to examine their Board.  What sort of people would a high-flying diagnostics company have to advise it   It is my eternal shame that I did not capture in this space then my immediate reaction, which sent my eyebrows over my head and down to the base of my spine.  What the bleep were all these politicians and generals doing on a board????  What could they offer, unless it was purely to grease the skids for fat defense contracts?  Of course, that company was Theranos, and I was way ahead of the curve - but foolishly silent about it.

Finally, earlier this year I read (well, mostly listened to) the book Power Failure, about the collapse of General Electric (not to be confused with a book by the same title about the collapse of Enron). Since GE was my father's sole employer in his adult life, the company has a permanent place in my psyche.  I keep meaning to write a review on it.  Anyways, one topic the book touches on is the role of the GE Board in the rise and fall of the company.  Under Jack Welch, GE's board very much ascribed to the Imperial model and that continued with Jeffrey Immelt.  Through luck and Welch's skill, it worked -- under Immelt and a frightful disaster, it didn't.  The Board finally did act when Immelt essentially melted down in public, but probably long after he should have been put to pasture.  Successor John Flannery discovered how powerful a board can be, as Board member Lawrence Culp organized a coup to oust him

Illumina's board probably should have been particularly cautious given deSouza's background - he came from unregulated tech not a highly regulated space such as diagnostics or pharmaceuticals.  In the tech industry daring regulators to act seems to be common sport; in pharmaceuticals and diagnostics it is courting disaster.  This was just the antitrust authorities; what level of playing chicken would deSouza have encouraged with the FDA or EMEA?

I doubt deSouza will be long out of a day job.  He is a director at Disney, whose fit with being CEO at Illumina can probably be best described as never raising a conflict-of-interest.  He's an experience manager and perhaps a tech-focused company, perhaps in the biotech arena, will feel his bold approach is appropriate rather than foolhardy.

For Illumina, where next?  It seems nearly assured that the painful process of expelling Grail will proceed.  After that, Illumina must decide what it wants to be.  With heightened competition and still growing markets, even a smooth Grail acquisition threatened to distract the C-suite from keeping atop the sequencing field.  Grail is also free to pick the best technology for their assays, whether it is Illumina or someone else.  And hopefully for all of us Carl Icahn soon loses interest in the company and divests his holdings.  He seems to almost revel in not understanding the business and I am unaware (please educate me if I'm wrong) of any company that has benefited from his long-term involvement.  But in any case, my hope is that Illumina gets back to focusing on providing innovative tools for mining genomic information and quits trying to become an actual provider of clinical genomic tests..  The Grail acquisition was not good IMHO for Illumina's core sequencing business -- both with the interference it played with customers choosing Illumina and the executive distraction.