Last month, OpenAI shook the tech world. It wasn’t its generative artificial intelligence (AI) or product ChatGTP that made the news this time, but its corporate governance and a series of misalignments between the board and CEO Sam Altman. First, the board fired Altman, and then appointed two interim CEOs consecutively, first Mira Murati, and then Emmett Shear. That was followed by an uprising of the employees, a return of Sam Altman as CEO, and a replacement of the board members. All of that happened in less than a week. The details of what led the board to make this sequence of drastic decisions and ultimately get overhauled were not publicly communicated, so there is little value in speculating about what went down behind boardroom doors. However, there are a few lessons that corporate boards can pull from the OpenAI debacle.
An unusual governance structure
As a fast-growing and disruptive company, OpenAI is, in many ways, a poster child for Silicon Valley. However, its governance structure is rather unusual for a successful and well-funded tech company. OpenAI Inc. was founded in 2015 as a non-profit. In order to raise capital to fund its growth and technological advancement and at the same time protect the entity from too much capital market pressure, OpenAI LP was started in 2019, which is a capped-profit entity that the non-profit OpenAI Inc runs. The board of directors oversees the mission of OpenAI Inc. Its goals and composition reflect the board of a non-profit, not those of a billion-dollar-funded startup. For example, the OpenAI board didn’t have any representation from its major investors, like Microsoft, which invested USD 10 billion in the firm in 2023. It is easy to imagine how this governance structure can result in misaligned incentives for the board of directors, the executive leadership, and the shareholders. Nonetheless, the commotion at OpenAI has some key learnings for corporate boards in general.
The court of public opinion
Replacing the CEO is a big decision and often a last resort, even more so if the CEO is also a founder of the company. Putting someone else behind the wheel affects every aspect of the organization. The board is responsible for a stable transition. Whether or not the decision is well grounded and for the right reasons, pushback and upheaval from outside the boardroom destabilizing the situation can be expected. For starters, employees at tech companies tend to have a strong loyalty to the founders. In the case of OpenAI, a majority of (highly skilled) employees almost immediately sided with the ousted founder CEO Altman against the board’s decision(s) putting additional pressure on the board. For high-profile companies like OpenAI, even the general public will jump in to judge the board in the court of public opinion without necessarily having all the facts. Leaders, including company boards, are not judged by their intent but by the outcome.
Governance of a non-profit vs. for-profit organization
OpenAI has a particularly complicated governance structure because of its for-profit activities under a non-profit board. The priority of non-profit boards is to serve the public good, while for-profit corporations are usually focused on maximizing profit. As a consequence, the role of the board and how it operates is different. Many board members build experience on non-profit boards before entering their first corporate boardroom. Using that prior (and relevant) experience serving on a non-profit board, while at the same time understanding the dissimilarities is of the essence to become an effective board member.
Cornerstone for success
Boards should never underestimate the impact of their decisions on all stakeholders, including shareholders, investors, customers, and employees. Foreseeing possible consequences of their governance is essential for company stability and you need the right people around the top table to do that. Every organization has its own specific needs from the board; there is no one-size-fits-all. Determining the right size and composition of the board are crucial aspects of effective governance when combined with a good CEO-board relationship. An experienced, adaptable, and diligent board isn’t just a nice-to-have, it is a cornerstone for success.
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