OpenAI’s dramatic decision to fire its CEO Sam Altman on Friday, and the days-long power struggle that followed, were only possible thanks to the extraordinary power of its directors. The extremely powerful ChatGPT Developer Board of Directors does not answer to shareholders or ownership group, but to all of humanity. The OpenAI Charter states that “our primary fiduciary duty is to humanity.”
Microsoft CEO Satya Nadella, who played a central role in negotiating the future of OpenAI and Sam Altman, now wants to bring about a management shakeup at the leading AI startup. “Surprises are bad,” he told Bloomberg during an interview Monday evening.
The surprise, in this case, was that OpenAI fired Altman on Friday, without informing Nadella until a minute before it went public, according to reports. Axios. OpenAI’s unique corporate structure does not give wealthy backers like Microsoft, which has invested $13 billion in the AI developer, seats on its board.
OpenAI’s board “can essentially make decisions unilaterally” without consulting investors, says Karen Brenner, executive director of law and business initiatives at New York University’s Stern School of Business.
Nadella, who has meanwhile committed to appointing Altman to Microsoft, says he plans to stay with OpenAI, but will now push for changes to its board structure.
In normal for-profit entities, investors usually have some ability to influence strategy, both through governance rights and board seats. Not in OpenAI. “It is unusual that when you form an entity to pursue a strategy, which requires an unusual amount of capital, that the people who are providing the capital will not have some degree of voice, control or oversight over the capital they are providing,” Brenner says.
Why is the OpenAI panel so powerful?
OpenAI’s unique board structure comes from its founding as a non-profit organization. In 2015, Altman, Greg Brockman, and current board member Ilya Sutskever, along with other partners including Tesla CEO Elon Musk, founded OpenAI as an artificial intelligence research lab. By 2019, OpenAI’s leadership realized that it would need to raise money — perhaps huge amounts of it — to fund its research. To make this possible, OpenAI created a subsidiary with a cap on profit.
A for-profit entity is indeed unusual. Companies are rarely in the habit of proactively reducing their profits. But as a division of a non-profit organization, its goal is “to ensure… [artificial intelligence] They are used for the benefit of everyone,” OpenAI decided that it did not want investors to have an unfettered profit motive.
“Part of the goal was to limit the financial upside potential as well as maintain close control of the social impacts of this technology,” Brenner says.
But OpenAI’s massive success may be the undoing of this strange architecture. The technologies developed by the for-profit arm were so advanced that they eventually attracted billions of dollars in investments from Microsoft and Silicon Valley VCs who poured money into OpenAI. As its success increased, investors and executives alike wanted to capitalize on the commercial opportunity of their work, according to Vasant Dhar, a data science professor and artificial intelligence researcher at New York University’s Stern School of Business.
“OpenAI was just a victim of its own success,” says Dhar. “I don’t know if they really expected to get this far so quickly – but they did.”
OpenAI’s board has such power within the company because it answers to no one and has no fiduciary duty to help shareholders get a return on their investment. Even other big-name investors, including major venture capital firms like Sequoia Capital, a16z, and Tiger Global, have no say in the company’s decision-making.
Venture capitalists, such as Microsoft, are not accustomed to being spectators in their investments and may begin to exert more influence through other channels. They can try to exert private or public pressure, as a16z founder Marc Andreessen did through his tweets with encrypted messages. Investors can withdraw future financing commitments, although this will depend on the terms of each of their original deals. Microsoft has an even bigger trump card: blocking access to computing resources that support OpenAI technology.
“People with money usually have a lot to say,” Brenner says. At OpenAI “they don’t have much to say technically in terms of management structure, but they have a lot to say because they provide capital.”
Can OpenAI investors do anything?
OpenAI’s board of directors fired Altman after it claimed he was not “consistently honest” in his communications, without providing details. OpenAI’s chairman and president, Greg Brockman, was unaware that the Altman dismissal meeting was taking place, according to Share on X. Even this is unusual in itself, as board chairs usually dictate when and where board meetings will be held. In fact, Brockman was removed from the board by his fellow directors shortly after Altman’s dismissal. He resigned immediately upon hearing the news.
However, the uproar over the dismissal led to days of tense negotiations, as OpenAI’s board tried to figure out how to bring Altman and Brockman back into the organization. The newly appointed interim CEO, Mira Moratti, pushed to rehire the two in different roles, according to Bloomberg. Instead, the board made another surprise decision by appointing another interim CEO to replace Moratti: Twitch founder Emmett Shear.
The board is now facing a complete mutiny from its own employees. More than 700 of OpenAI’s approximately 750 employees signed a letter stating that they would resign if the board did not resign and reinstate Altman and Brockman.
the The New York Times Reports indicate that Sutskever was concerned that Altman was moving too quickly to bring the technology to market, without considering the risks. He has since changed his mind, throwing his support behind Altman’s return.
Because OpenAI’s investors have no say in its management, they have limited recourse to removing board members, which they would have been able to do in a more traditional structure. Typically, if the board makes decisions that shareholders consider ineffective, they can be voted out of their role. In the case of OpenAI, this is not allowed, which strengthens the board’s grip.
The board could even make an unpopular decision, such as when Altman was fired, which could lead to the wholesale defection of hundreds of employees. Normally, a board with a fiduciary responsibility to shareholders would not make a decision that would risk a brain drain. “If a talent team walks out the door or is fired, it puts the entire organization in question,” Brenner says. “This will leave a lot of questions going forward. Where does the technology lie? And what can executives who end up leaving the company do in another configuration?”
OpenAI investors are unlikely to be happy with such a large exodus of talent. Dhar says the board “handed its intellectual property to Microsoft on a silver platter.”
Nadella told Bloomberg that Microsoft would welcome any former OpenAI employees. “Anyone else who works at OpenAI and wants to go somewhere else, we want them to come to Microsoft,” he said.