Corporate Governance and the OpenAI Coup
My interest in the OpenAI saga as an AI-ML professional is superseded by my interest in it as an investment researcher. This note is a cautionary tale for our clients, colleagues and my students at Northwestern University (in the finance side of my job and teaching).
As an analyst you only begin with proforma financial statements. Of course you gather the data (or get an intern to do it), make assumptions which are as realistic as possible (or simply less outrageous than the other guy) and make your forecasts. You follow that up by studying industry behavior. Even the best run companies at an awesome price maybe duds in a wave of industry level changes. And then finally you look at macro dimensions - locally and globally.
And in the rush to be thorough and do all of these well, unlike Warren and Charlie, you learn to ignore corporate governance challenges. Especially in the mad rush of tech investing, corporate governance problems are often overshadowed by the fear of missing out. But even then, all these are usually about the founder or CEO often taking irrational decisions or having supernormal voting rights (and thus, power). Think A shares of Meta or Google, think the Musks and the Mellons of the world…it is the founder-ceo who has made/supported the earth shattering inventions and thus investors (sometimes extremely unwillingly even) allow them to remain the master of all they survey. Boards across the world (especially in the US and especially in tech) are becoming more and more toothless (for good or for bad).
Then whither OpenAI? A few board (bored?) members with no skin in the game, fired the CEO and co-founders of a rocket ship 😳…one had to dig in to understand more. And what showed up was ridiculous and another supporting reason why in my class at Northwestern University (MSDS 4747 - Finance for Technology Managers) we begin with governance and structure of corporations. I will probably add a case on it next semester.
OpenAI started off as a not for profit. It also has a for-profit arm now to accept investments but somewhere deep down in the structure is a non-profit. Why does that matter? Simple. There is a significant difference between corporate boards and non-profit boards. The former is responsible to the shareholders and are often custodians against management overreach which might hurt the shareholders. Pet projects, agency problems like moral hazards, arms length transactions, executive compensation etc. all fall within the purview of the corporate board because these are some areas where managers may often slip. However, as mentioned before, the board is unfortunately often toothless. Boards are often indirectly chosen by senior managers and their tenure, compensation and perks often depend upon the manager-board relationship. For a nuanced and problematic ringside view of this relationship, feel free to read the early chapters of Barbarians at the Gate on how Ron Johnson selects his board and gets them over to his side (in short, compensation, celebrity golf and private jets). But that is another story…so what about non-profit boards? By definition, like an individual asset manager’s fiduciary responsibility is not towards his/her firm but towards the end client, the member of a non-profit board is also responsible only to the ‘mission’. Yes, not to the shareholders (because there are none) and definitely not to the managers (because they are expected to execute and may get waylaid). The board is expected to ensure that the non profit remains true to its original mission and if it ever moves away from the straight and narrow to bring it back to walk the line.
Which is why when you read the statement, “You also informed the leadership team that allowing the company to be destroyed "would be consistent with the mission." you might have been shocked! But if you were a finance guy, you would know that the board was claiming to ‘do their job’. Now do I think the board was nuts? Of course I do. Do I think Satya Nadella should be called the Satya Nutella (Satya means True…so the True Nutella, with the tagline, “Wake up to Wow!”, and of course he is now the real sugar daddy of tech)? Absolutely. Did I order some MSFT real quick on this news? Hehehe, maybe I did not but I guess I should have…But do I also think that understanding corporate governance, being careful about corporate structure and cap tables, and understanding individuals in management/boards and their skin in the game is arguably as important as proforma accounts? You bet.