Rarely has the world of Silicon Valley, usually accustomed to ego fights and brutal decisions, been so heavily shaken as it was last week with the OpenAI drama. Let us have a quick recap of the events. Last Friday, the Board of OpenAI, the mother company responsible for the development of the AI tool ChatGPT, decided to fire its CEO Sam Altman. The following day (Saturday), investors and outsiders were calling for his reinstatement. 400+ OpenAI employees joined the battle and threatened to quit in retaliation. The Board stood its ground. On Sunday, Microsoft, OpenAI’s main investor, announced it had hired the unemployed Altman to lead a new in-house research lab focused on AI and its applications. Finally, on Tuesday, the story came to an end: Altman was restored as OpenAI CEO, and the company agreed to revamp the Board of Directors that had dismissed him in the first instance.
Although the situation is now, to a large extent, back to where it was this time last week, the sequence of events we have witnessed over the last five days is a good and practical reminder of what well-managed companies should pay attention to.
First, this event serves as a poignant reminder that in relatively immature, asset-light industries driven by innovation and intellectual prowess, the primary value of companies is deeply rooted in their people. OpenAI fits perfectly into that category. OpenAI employees who threatened to quit have been aggressively headhunted by competitors, and conversely, OpenAI customers have started looking for alternative services to ChatGPT (OpenAI’s star mass-market product), fearing that the group will soon lose its capacity to innovate. OpenAI’s history is too limited, and the pace of innovation in AI is still too high for the OpenAI ‘brand’ to be more valued than its people – a transition that, in another industry, consulting firms have unconsciously made: the brand is now stronger than the consultants.
Most importantly, this episode highlights the pivotal role played by the Board of Directors and serves as a reminder of several fundamental principles:
- Any top-level decision must come with a communication plan, before, during, and after the event. Microsoft, which owns 49% of OpenAI, was informed of Altman’s dismissal only minutes before the release of the news statement. The lack of prior consultation with shareholders or a clear explanation after the decision harmed the credibility of OpenAI’s Board of Directors.
- Boards of Directors must follow a disciplined decision-making process to avoid hasty or feeling-driven decisions, and to help them justify those decisions afterwards. Not only was the communication absent in its form, but it also lacked content. Because they have no vested interest, independent Board members play a particularly important role in ensuring that these processes are defined and adhered to. They must prevent the boardroom from becoming a battleground for politics and ego. The fact that the ephemeral interim CEO Emmett Shear felt obliged to promise an independent investigation into the real causes of Altman’s dismissal shows the opacity of the process.
- As soon as there is an element of profit, Boards of Directors must represent the interests of their shareholders. To ensure full alignment, informal and regular communication can only be encouraged to avoid bad surprises, as seen in the Microsoft case. The shareholder community also included employees, who were in the process of selling some of their stock options to external investors when the decision was made, most likely adding to their anger.
- As shareholder representatives, Boards of Directors should always try to protect the sources of competitive advantage and value creation within the firm. The fact that OpenAI CEO Sam Altman had no scientific experience in the field of AI and that, as a consequence, he was not directly responsible for the development and success of OpenAI’s products and the value they have generated for their customers, could have been interpreted as him being of ‘limited value’ to the firm. This could not have been further from the truth, although the Board may have limited itself to this ‘first-order thinking’, believing that his dismissal would not harm the company’s performance that much. However, it missed the ‘second-order effect’, whereby Altman was able, in spite of himself, to convince 400+ of the most capable AI engineers to jump ship and join him in this barely-born venture with Microsoft. The intangible value embedded in such a move is much more consequential.
- As CEO appointers, Board Directors should ensure that the CEO’s profile aligns with the company’s mission. OpenAI was created in 2015 as a nonprofit dedicated to the creation of artificial intelligence. The appointment of Altman as CEO in 2019 marked an inflection point – although this may have been inevitable, as we will see later. Altman used his strengths as a business developer and fundraiser to secure a $1bn investment from Microsoft within months, forcing OpenAI to shift away from its pure nonprofit stance in the process. Internally, the decision created a schism between the defenders of the original ‘humanist’ line, starting with Chief Scientist Ilya Sutskever, and backers of the new commercial stance.
More generally, this episode shows the limits of ‘stakeholder capitalism’, defined by the World Economic Forum (WEF) as “capitalism in which companies seek long-term value creation accounting for the needs of all stakeholders”. This was OpenAI’s original goal. But, in the absence of meaningful income and given the vast computing, and thus financial, resources required to train and run its models, OpenAI was forced to open its capital to external private investors, a role that was filled by the State a few decades ago, when similar innovation breakthroughs such as ARPANET (Internet’s ancestor) came to the table. This public-to-private funding shift is a trend that we observe more generally (e.g., Musk launching SpaceX), with the risk of providing some individuals with oversized power. Entrepreneurs are simply occupying a gap that retreating public entities could not fill anymore.
In summary, the recent upheaval at OpenAI serves as a critical case study in the complexities of corporate governance and leadership in the rapidly evolving tech sector. It highlights the paramount importance of human capital in knowledge-driven businesses and underscores the necessity of strategic communication and decision-making processes within corporate boards. The incident also sheds light on the challenges of balancing stakeholder interests, particularly in a field as dynamic and pivotal as artificial intelligence. As we move forward, the OpenAI saga reminds us that the true value of visionary leadership often transcends conventional metrics, and that the decisions made at the top can have far-reaching implications not just for a single company, but for the entire industry and its stakeholders. This event prompts a broader reflection on the evolving nature of stakeholder capitalism and the role of private enterprise in spearheading technological advancements in the absence of public funding, a trend that will undoubtedly shape the future of innovation and corporate strategy.