Theranos was, until recently, Silicon Valley’s most exciting tech company. Valued at $9bn by investors, it had created a small device that could do hundreds of blood tests on a single drop of blood and automatically email you the results. Its devices had been rolled out to Walgreens drug stores in the US, and representatives of the company claimed its tech was being used in the battlefield by the US Army.

But there was one problem: the device didn’t work. Blood tests were either too unreliable or often performed in secret on rival machines. The US Army was not using it. Many highly educated, socially committed people who worked for Theranos are suspected to have been part of this fraud. How many, and why, will be investigated at the criminal trial of former CEO Elizabeth Holmes in 2020.

A clue may be the early experience of Theranos CFO Henry Mosley. In 2006, having been asked to alter financial projections upwards to impress investors, he was told by another employee that Holmes had pretended that a fake result had been a live blood test to potential investors at the pharma company Novartis. He suggested to her that the company was acting irresponsibly. Her reply: “I think you should leave right now.” Later, this approach to dissent was extended to the entire organisation. Holmes allegedly boasted to staff that the technology was “the most important thing humanity has ever built” and those who disagreed “should leave now”.

Theranos may be an extreme example of the denial of what Harvard Business School professor Amy Edmondson calls “psychological safety”, and the potential damage it can do. In “safe” companies, junior employees feel supported if they ask difficult questions, admit their mistakes or point out flaws. Senior managers like to think that their teams are like this – but Edmondson’s research, published in her book, The Fearless Organization, has found that the default state of the workplace is anything but psychologically safe.

“It’s part of our hardwiring,” she explains. “We are reluctant to do anything that might make us look bad, for obvious evolutionary reasons.”

Edmondson says that the finance function is an area in which ‘safe’ companies have a huge advantage – because often financial data, if interrogated properly, can give early warnings of underperformance, risk or even fraud.

Yet the problems of the audit relationship show that very often questions that should be asked are not addressed until it is too late. Few people will end up in a Theranos (or Enron or WorldCom, or even a Patisserie Valerie) type of crisis, but most have experienced business problems where many people suspect a problem, but no one feels comfortable being the first to raise it.

One of the problems is that questioning the status quo is often seen as undermining the boss. Managers impose a culture that implicitly demands only good news. “What does that really mean? It means we’ve promoted the wrong behaviours,” Edmondson says. “Soft skills are extremely important in today’s world. And, lo and behold, soft skills are actually the hard skills. It’s easier to teach someone about finance than it is to teach them to be self-aware, or to let go of that strong sensation we all have, that we are right.”

Wendy Addison is a consultant who has worked with many companies, including Facebook, to help develop psychologically safe workplaces. Her view is informed by bitter experience as a whistleblower on financial fraud at LeisureNet Ltd, once one of South Africa’s most respected companies. It led to her losing her job and her house, and having to move to another country to avoid death threats.

She warns that the search for excellence is often the problem. “Our company didn’t start off as corrupt,” she recalls, “But there was a zero tolerance to any kind of mistakes or failure, because we had to live up to the haloed impression that we’d created for ourselves. It’s very difficult to put your hand up and say that, actually, we do make mistakes.”

This meant that a creeping pattern of fraudulent self-enrichment among senior executives at LeisureNet went unchallenged until it was too late. One thing that Addison learned from this is that compliance with whistleblower regulation is not the same thing as psychological safety.

“Leaders who have a whistleblower hotline installed tell me they have an open culture. Absolutely they don’t, because if you’re not fostering what I call courageous conversations in which people are speaking up and listening at an early stage, that’s precisely when people are forced to become whistleblowers,” she says.

Recently Addison spoke to an audience of 400 accountants, and asked them to put their hands up if they had never found themselves knowing they should speak up, but closing their mouths out of fear. No one raised a hand. “We need to take the risk that we’re fallible, and we’re vulnerable,” she says. “And volunteer that vulnerability.”

She has some sympathy for leaders who have accidentally stifled their staff’s ability to speak up. “They have been made to believe that they are being paid for fixing problems rather than fostering breakthrough thinking, or soliciting people’s voice or concerns. And so leaders have a deep attachment to the answer, rather than the question.”

Therefore, a counterintuitive result of psychological safety is that, for outsiders, it may seem you are making more mistakes. Edmondson describes the data that many high-performing hospitals in the US record more errors, because staff feel safe admitting to them, and yet have better outcomes. 

How can organisations become safe? Many organisations have pockets of safety, she says, even if that is located in one team. To find them, she recommends that employee surveys are useful for diagnosis – not least because they demonstrate a willingness to listen to negative feedback.

Then there are three steps to creating psychological safety. First, to create a series of formal behaviours that invite everyone to speak up in meetings. “The most important step is an invitation to use our voice, and systematic tools to do it, such as going around the room and asking: What did we miss? What do you think? What might you know?” she says.

But this is useless without step two, which is to learn to hear bad news. “Listening doesn’t mean agreeing with everything. Listening doesn’t mean everything that anyone says must be put into action. It means discernment and processing and just taking time to hear,” she says.

Finally, step three is to embed this in the culture of an organisation, rather than thinking of this as a project. If this means embracing failure and communicating it to business partners, that’s better than the alternative.

The ICAEW Library & Information Service provides full text access to leading business, finance and management journals.

Further reading on whistleblowing is available through the articles below.