Board Lessons from the OpenAI Saga

By ADRIAN CHAN

The Business Times, 5 January 2024

 

OpenAI, developer of the artificial intelligence (AI) system, ChatGPT, has drawn global attention for its governance issues.

In November 2023, the board dismissed its CEO, Sam Altman, and removed its chair. Subsequently, the chief technology officer was named CEO-designate, only for her to call for Altman’s return – adding her voice to the employees’ demands for the reinstatement of Altman and the board’s resignation. Within days, Altman was reappointed CEO, and most of the board departed.

These turbulent events, almost Shakespearean in their dramatic twists in boardroom in-fighting, offer valuable governance lessons for boards.

Board-CEO dynamics and culture

One of the most underrated and difficult jobs of the board is the selection, nurturing and management of the CEO.

In Singapore, where most firms are family-owned, CEO management becomes a special challenge for boards. If the CEO’s family is the controlling shareholder that appoints the majority of directors, CEO removal is only a remote possibility. The stakes are higher for boards to ensure CEOs do not act in their own self-interest. This requires building trust over time, management skills and a degree of finesse in the boardroom.

This trust was absent in OpenAI’s case, with the board saying Altman was sacked for not being candid in his communications with it. The board clearly found managing the CEO difficult, given his position as co-founder and celebrity AI poster child.

Trust is eroded when conflict within the board is not well-managed. It falls to the chair to actively manage conflict, ensure dissent is constructive, and develop outcomes that serve the enterprise’s long-term success.

It appeared that OpenAI’s directors clashed over the direction and speed of its AI development. It would seem a positive board culture, with transparency and open communication among directors, was lacking. Without this, boards can degenerate into dysfunction.

Stakeholder engagement

All boards need to engage meaningfully with their key stakeholders. Stakeholders, including investors and employees, have to be convinced of the direction the board is taking the company.

When Altman was abruptly terminated – via  a video call with the board – Microsoft, OpenAI’s biggest investor, was surprisingly blindsided. Even if OpenAI was not legally obliged to consult Microsoft beforehand, effective stakeholder engagement and investor relations would suggest that significant stakeholders should be brought on board before major corporate exercises are implemented.

The threat from its employees to resign en masse – and calls for the board to resign – also underscores how out of touch the board was with its workforce. The board failed to appreciate the level of support Altman had and how critical his role was in holding the organisation together.

Succession planning

Board engagement with senior management cannot be superficial. Boards need to have a clear succession plan for CEOs and key management personnel, along with a crisis management playbook. Directors cannot afford to be hands-off in any leadership change, as mishandling this can lead to irreparable damage to the board’s reputation and credibility.

The backlash to the board’s attempt to exit Altman from the company demonstrated a mismanaged transition process.

More broadly, companies should protect their talent and human capital, as these can be the real assets of value in a business – less so algorithms or codes which can be re-engineered.

Board composition

Board renewal is key. As businesses mature, the company should recruit directors with suitably diverse skill sets, expertise and experience relevant to the company’s development journey.

OpenAI’s six-person board might have been appropriate for a fast-growing startup, but it is doubtful if the board remained fit for purpose when ChatGPT’s valuation reached US$86 billion (S$114 billion). Nearly all the original directors were in their 30s, with an average age of 36. Did the board have sufficient gravitas, seniority, diversity and depth of commercial expertise to oversee such a huge enterprise effectively?

Purpose

It is important for boards to instil values that are aligned with the corporation’s mission and purpose, and cascade these values throughout the organisation. Boards can do this by adopting an ethical framework or code of conduct.

Some attribute the travails at OpenAI to its structure as a nonprofit with the mission of ensuring that AI “benefits all of humanity”. While uncommon, this structure is not that unusual.

In Singapore, many nonprofits are set up as companies limited by guarantee (CLGs). Some of these nonprofit CLGs are established to manage public assets, such as Gardens by the Bay and Esplanade – Theatres on the Bay. It is possible for CLGs to form for-profit subsidiaries to raise funds and earn income to support the nonprofit’s objectives. For example, SPH Media Trust  is a CLG that owns its media brands as for-profit subsidiaries.

OpenAI formed a for-profit subsidiary to bring in the necessary funds for the development of ChatGPT. Issues arose, however, when the startup’s valuation reached astronomical levels, outgrowing and confusing the mission of the nonprofit parent, resulting in divisions at the board level.

Ultimately, chairs and their boards should be united behind a common corporate purpose, and work harmoniously to align the organisation’s values in its service. One can only hope that the newly-constituted board of OpenAI has that clarity of purpose.

The writer is a Vice-Chairman of the Singapore Institute of Directors.