Amid the flurry of the recent (and still brewing) OpenAI CEO ousting, I’ve seen countless questions and speculation about corporate governance and the role of a board of directors. Can a board fire a sitting CEO and what’s the precedent for that? Who sits on the board and what experience do they have? What roles do investors, employees, and other stakeholders have in corporate governance?
Recently, I joined my first public company board and have enjoyed learning more about the corporate governance process through the National Association of Corporate Directors (NACD) and The Sorrel Group. While I’ve previously served on various advisory boards, the mandate and formality of a corporate board of directors is distinct. I’m sharing here a brief primer for those who might find this helpful context to understand the current turmoil.
What’s happening with OpenAI?
First, a brief recap of the OpenAI situation, which continues to evolve: OpenAI is the AI company behind ChatGPT and DALL-E. Since its launch in November 2022, ChatGPT has captured the imagination of technologists and laypeople alike; today it has over 100 million weekly active users leveraging the powerful conversational chatbot for everything from writing term papers to explaining complex topics to getting relationship advice. At the same time, OpenAI has been at the center of various AI controversies regarding data privacy and copyright infringement.
Founded in 2015 as a non-profit research organization, OpenAI has the stated intention to develop “safe and beneficial” artificial general intelligence (AGI). In 2019, OpenAI transitioned to a capped for-profit model, allowing it to solicit investments and pay employees equity; Microsoft is one of the largest OpenAI investors. Based in San Francisco with about 700 employees today, OpenAI has developed several large language models under the leadership of Sam Altman, who has served as CEO since 2019. Until the changes of the past few days, the OpenAI board of directors consisted of three OpenAI executives (Altman, Chairman Greg Brockman, and Chief Scientist Ilya Sutskever) plus three independent directors (Adam D’Angelo, Tasha McCauley, and Helen Toner).
On the afternoon of Friday, November 17, 2023, the OpenAI board announced Altman out as CEO, citing that he “was not consistently candid in his communications,” and OpenAI CTO Mira Murati as interim CEO. In the wake of this surprise announcement, several OpenAI leaders resigned, including Brockman. Over the course of the weekend, reports have been swirling that the Board is in talks with Altman about being reinstated as CEO (with the possibility of the board resigning); some suggested that investors are pushing for Altman’s return. OpenAI chief strategy officer Jason Kwon reportedly informed staff that he was “optimistic” about bringing back Altman and other senior leaders; employees are declaring public support for Altman and some are indicating they would follow him to a new company. Clearly, the situation is still evolving and – like many – I’m following along with unabashed fascination.
What is corporate governance?
So, let’s back up a moment. What is meant by corporate governance? It’s the processes and procedures used to operate and control corporations. The guiding principles were laid out by the Organisation for Economic Cooperation and Development (OECD) and are intended to promote fairness, transparency, and the efficient allocation of resources. Specifically, they clarify the role of management, the responsibilities of a board of directors, and the rights of shareholders.
Policies and regulations vary by country. The systems in the United States and the United Kingdom emphasize the importance of shareholders. U.S. corporations are governed by state laws and trading is overseen by the federal Security and Exchange Commission (SEC). The 2002 Sarbanes-Oxley Act (SOX) – which was passed in the wake of the Enron accounting scandal – mandates detailed corporate financial record-keeping and reporting. For instance, all public companies must file an annual Form 10-K document with the SEC detailing revenue, assets, liabilities, and risks to keep shareholders or prospective investors informed about financial performance.
What is a board of directors?
Every corporation in the U.S. is required by law to have a board of directors; most states dictate a minimum of three board members, and boards usually have between seven and 12 members. A U.S. corporate board is typically made up of a few executives from the company plus non-executive directors, who are elected by shareholders. For companies listed on the New York Stock Exchange (NYSE) or the Nasdaq, the majority of board members must be independent directors (meaning they do not have a material relationship with the company).
A board of directors provides oversight for the company, protecting the interest of shareholders and managing risks. The board makes key decisions on issues such as mergers, acquisitions, leadership, and compensation. And – yes – the board has the power to overrule CEO decisions and even remove a CEO from their position if they are not meeting expectations or are causing harm.
Most boards delegate key tasks to committees, each with a specific responsibility. For instance, an audit committee focuses on financial reporting, internal controls, and risk management; a compensation committee reviews compensation philosophy, executive salary and incentives, and talent development; and a nomination and governance committee oversees corporate governance and board composition.
Directors bring senior-executive experience and expertise in an area of interest to the corporation. Historically, boards were made up primarily of former CEOs (today still about 30% of new directors are active or retired CEOs). Today, Fortune 500 board members are primarily male (70%) and white (78%) and have an average age of 63. “Right now, boards are homogeneous. Such a uniform composition does not reflect the diversity of the organization’s workers nor the customers they serve,” wrote Debra McCormack from Accenture.
In recent years, there has been increased focus on board diversity. For example, some boards are recruiting members with technology skills or international experience. Data has shown improved business performance with diverse boards (for example, one study demonstrated that companies with at least one woman on the board raised an average of 16% more funding than those without). Today, all Nasdaq-listed companies must have (or explain why they don’t have) at least two diverse directors, and they are required to publicly disclose their board diversity statistics. “Even though all groups have seen growth in board representation over the last decade, no Fortune 500 company board fully represents the demographic population in the United States,” according to the 2023 Deloitte “Missing Pieces” report.
Apple’s board has nine members: its CEO plus eight independent directors, including two women. Microsoft’s board has 12 members: its CEO plus 11 independent directors, including five women. IBM’s board has 13 members: its CEO plus 12 independent directors, including nine former CEOs and two women. Walmart’s board has 11 members: its CEO plus 10 independent directors, including three women. Pfizer’s board has 12 members: its CEO plus 11 independent directors, including four women. I recently joined Regeneron’s board, which has 13 members: its CEO and President plus 11 independent directors, including four women and two Nobel Prize winners.
Have boards ousted CEOs before?
The recent OpenAI situation is, of course, not the first instance of a public ousting of a sitting CEO by a board of directors. This has evoked memories of the famous firing of Steve Jobs by the Apple board in 1985 (though he wasn’t CEO at the time); Jobs went on to found NeXT and eventually made his way back to lead Apple 12 years later to revive the company.
In 2005, Carly Fiorina was forced out of her CEO position by the Hewlett Packard board after the company’s financial decline. In 2008, Jack Dorsey was fired by the Twitter board (though he came back for a second stint as CEO in 2015). In 2012, Bob Diamond was let go by the Barclays board following a scandal; three years later, Antony Jenkins was ousted as the Barclays CEO. In 2020, following the 737 Max crashes, Boeing CEO Dennis Mullenburg was let go and replaced by board chair Dave Calhoun. In 2022, Volkswagen CEO Herbert Diess was removed by its board after a series of missteps. In September 2023, Planet Fitness CEO Chris Rondeau was asked to resign.
So, the OpenAI story is not unique. But what led to the abrupt firing and what will happen next? Speculation abounds. Was critical information withheld from the board that prevented it from carrying out its fiduciary responsibilities? Is the board makeup appropriate? Is there evidence of malfeasance? Was there a communication breakdown with investors? Time will tell. Right now, I’m going to watch how this saga plays out with fascination as it could have tremendous ramifications for the future of corporate governance and the development of AI technology.
Photo by Benjamin Child on Unsplash
