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- Warren Buffett called out Theranos for appointing political and military leaders to its board.
- The investor looks for business-savvy directors who care about shareholders and his company.
- Theranos founder Elizabeth Holmes prioritized public image over effective technology, critics say.
- See more stories on Insider's business page.
Warren Buffett diagnosed an issue at Theranos that was symptomatic of a major problem at the company.
The famed investor and Berkshire Hathaway CEO called out Elizabeth Holmes' blood-testing startup during his conglomerate's annual shareholder meeting in 2016. He noted that Theranos had assembled a star-studded board of directors – which included former presidential-cabinet members such as Henry Kissinger and George Shultz, two ex-senators, and Jim Mattis, the retired four-star general who later served as President's Trump's defense secretary.
"They got some very big names on their board," Buffett said. In contrast, Berkshire isn't interested in directors who expect a ton of money for 10% of their time, or who want the role because it's prestigious and they want to check a box on their résumé, he continued.
Instead, Buffett's company looks for board members who are business savvy, shareholder-oriented, and have a strong personal interest in Berkshire, he said.
"We want our directors to walk in the shoes of our shareholders," Buffett said. "We want them to care a lot about the business, and we want them to be smart enough so they know what they should get involved in, and what they shouldn't get involved in," he added.
Charlie Munger, Buffett's longtime business partner and Berkshire's vice-chairman, echoed the view that boards should hire the best people for the job. He told an anecdote about the Roman Catholic Archbishop of Los Angeles once hiring Munger's law firm instead of a Catholic lawyer. The archbishop explained the decision by noting that when he had to choose a doctor to perform a major surgery on him the previous year, he didn't go out looking for a Catholic surgeon.
"That's the way I feel about board members," Munger said.
Theranos was privately valued at $9 billion at its peak, but collapsed after The Wall Street Journal reported its blood-testing machines weren't reliable and the company had given inaccurate blood-test results to patients, spurring multiple investigations into the business.
Holmes settled fraud charges brought against her by the Securities and Exchange Commission in 2018, and is now on trial in federal court for allegedly defrauding patients and investors.
Buffett's comments suggest he believes Holmes' focus was on linking the Theranos brand to high-profile individuals who could lend credibility to her company - not securing the counsel of medical or business experts. That fits with the prosecution's claims that she cared more about her company's public image and winning over investors than she did about whether its technology worked.
Theranos didn't immediately respond to a request for comment from Insider.