OpenAI’s Unusual Board: Should It Change Its Structure to Govern Effectively? | Mint

OpenAI’s Unusual Board: Should It Change Its Structure to Govern Effectively?

OpenAI’s Unusual Board: Should It Change Its Structure to Govern Effectively?
OpenAI’s Unusual Board: Should It Change Its Structure to Govern Effectively?

Summary

The unique governance arrangement, with a nonprofit overseeing a for-profit arm, raises questions about the job of the board.

OpenAI has a new board, but its directors may still confront the same old problem.

The artificial-intelligence startup’s unusual business structure that gave oversight of its for-profit business to a nonprofit board will be an unresolved issue for the new board to tackle.

A popular suggested fix: Dissolve the nonprofit, say corporate and nonprofit directors, academics and lawyers. These people say that sorting out that potential conflict of interest will address other governance issues, including the board’s reporting hierarchy and the differing objectives between a nonprofit mission and corporate profit motive. Still others wonder if an area as impactful as artificial intelligence belongs in the hands of a small group of individuals.

“A for-profit and nonprofit don’t mix; they have entirely different goals," said Charles Elson, who has served on the boards of nonprofits and public and private companies, including ice-cream maker Blue Bell Creameries and care provider Enhabit.

The board, which formally took over last week, should scrap the current setup and move to for-profit status as soon as reasonably possible, he said. “The confusion the dual status creates is highly problematic."

Board shake-up

Sam Altman returned as chief executive of OpenAI after a five-day standoff with the company’s board, which fired him for not being “consistently candid in his communications with the board."

The board was also reconstituted. The new three-person board includes Bret Taylor, the current board chair and former co-chief executive of cloud-software giant Salesforce; former Treasury Secretary Larry Summers; and Adam D’Angelo, the sole remaining member of OpenAI’s previous board and founder of the question-and-answer platform Quora. Altman won’t have a seat on the board and Microsoft, which invested $13 billion for a 49% stake in the for-profit arm, will be a nonvoting observer on the board. The new board will appoint additional directors and possibly explore substantial changes to OpenAI’s governance structure, according to The Wall Street Journal.

Chairman Taylor has said the first order of business is to stabilize the organization. Asked if the board could revisit OpenAI’s structure, Taylor said: “I think it’s a great question—probably not one for my first day on the job."

OpenAI declined to comment on the company’s structure.

Under OpenAI’s current charter, the board’s sole responsibility is to ensure that the company develops AI systems beneficial to humanity—even if it means wiping out investors’ profit. But that mission and board oversight didn’t change with the creation in 2019 of a “capped profit" arm that went on to raise billions from investors. The money supported OpenAI’s ambitions to scale up its generative AI product and capabilities.

The nonprofit paradox

A nonprofit board’s primary focus is the organization’s mission, and not any financial benefits from the for-profit side, said Ruth Bernstein, an associate professor of nonprofit management at Pepperdine University.

Other technology and socially oriented nonprofits have confronted the dichotomy between business interests and the organization’s mission.

When Mozilla Foundation, the nonprofit behind the Firefox open-source web browser, wanted to expand into revenue-related operations, it launched the Mozilla Corp. in 2005. Since then, there have been two boards overseeing the two entities, said Mark Surman, the foundation’s president who also sits on its board.

The two boards have the same goal of ensuring an open internet, but differ in their approach and the skill-set they bring to the role, he said. The board that oversees the foundation, which this week announced the appointment of four new members, includes people with philanthropy, tech policy and open-source expertise, while the for-profit board is composed of directors who know how to run companies. The boards interact annually, with the foundation’s board overseeing the for-profit business and electing or re-electing its board members. They also meet as needed to discuss one-off significant business changes.

“There’s a collegial relationship where we understand each other’s goals and strategy and refine them. And sometimes there’s tension, but we have enough of a shared interest," Surman said. The foundation, which now includes a handful of for-profit businesses, booked revenue of around $593 million last year, according to an audited financial statement, most of which comes from Mozilla Corp.

Responsibilities for good governance

By some counts, all boards, whether they oversee nonprofits or profitable companies, are similar, with responsibilities such as hiring and firing leadership and setting executive compensation, said Elson, who is also founding director of the Weinberg Center for Corporate Governance at the University of Delaware.

Their objectives are different, however. Profitable companies aim to return capital to investors while a nonprofit is intended to create a societal benefit. This mismatch became a topic of boardroom discussion years ago while Elson was on the board at governance nonprofit Investor Responsibility Research Center. He and fellow board members discussed acquiring a business that generates a profit, which presented a problem similar to that of the OpenAI structure.

The idea was quickly dismissed. “The two don’t combine well," Elson said. “It’s oil and water."

The board mismatch isn’t the only issue at OpenAI, said John Hotta, a nonprofit director at the National Association of Corporate Directors Northern California.

The company’s reporting hierarchy needs to be clear, he said. The chief executive and board chair dictate the company’s direction, and when the two roles are separate and if there is a conflict between the two, who wields ultimate authority is something that the board needs to communicate and follow. At OpenAI, after the board fired the CEO, pushback from investors and employees led to Altman’s return. Three of the four board members who pushed Altman out, including OpenAI co-founder Ilya Sutskever, are now gone.

There are limits on the constraints a nonprofit board can put on the commercial side, said University of Connecticut law professor Minor Myers. “Because that commercial business is really people, and they can leave, and then the nonprofit board has no control over the development of the technology."

“As this all shows, that’s a very delicate balance," he said.

Mozilla’s Surman said OpenAI and the board need to figure out what the company is—whether it’s an ethical startup or a public-service institution. “I don’t know what they’re trying to be," he said.

A broader consideration is whether a business with such influence on the public should be controlled by a government entity rather than a private group of people, said Ofer Lion, a partner at law firm Seyfarth Shaw who advises nonprofits. “Maybe that’s the real question," he said. “Should an entity like this, that has such a heavy hand on what the future will look like…be in the hands of a very small group of individuals?"

Write to Jennifer Williams-Alvarez at jennifer.williams-alvarez@wsj.com

OpenAI’s Unusual Board: Should It Change Its Structure to Govern Effectively?
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OpenAI’s Unusual Board: Should It Change Its Structure to Govern Effectively?
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