The Corporate Governance Failure at the Heart of Sam Altman’s Ouster from OpenAI

In this piece I examine both the flawed corporate structure of OpenAI, and the neglect of governance evolution during a year of immense change. Those things led to the chaos that is still unfolding around the firing of Sam Altman. I conclude that alternative governance structures aren’t the issue, as some may readily surmise. Nonetheless, how OpenAI’s particular structure was set up and managed left it vulnerable to calamity. Other alternative structures, such as those instituted by Anthropic, were more thoughtfully put together, better harmonize the interests of multiple stakeholders, and should be more resilient to slow divergences of goals or sudden organizational shocks.

On Friday, November 17, 2023, CEO and co-founder Sam Altman was unceremoniously fired from OpenAI by four members of the company’s non-profit board. As of Monday, November 20, 2023, three days after he was fired, it seems Sam Altman will be joining Microsoft as CEO of a new AI division that he will help create. Mr. Altman will be joined at Microsoft by former OpenAI board chair and COO Greg Brockman, who quit last Friday within hours of Mr. Altman’s ouster and his own demotion from the board. Other senior employees have since resigned, are intent on joining the new Microsoft division, and many more likely will do so. Reportedly, at least 650 of OpenAI’s 770 employees had signed a petition demanding that the company take Mr. Altman back and get rid of its Board. In addition to employee shock and outrage, OpenAI’s investors were very upset about Mr. Altman’s sudden firing, without advance notice to any of them and seemingly without substantive provocation. The company was on the verge of another financing round that would have entailed a secondary sale of employee shares, valuing OpenAI at $87 Billion dollars, triple its current valuation. That financing appears in jeopardy (certainly the valuation can’t stand with the amount of destabilization introduced to the company), which harms the interests of both employees and previous investors.

Despite scrambling over the weekend to repair the damage done by his firing and bring Mr. Altman back, the board instead preserved their own roles (for the time being) and quickly demoted interim CEO Mira Murati (OpenAI’s CTO) — designated as interim just Friday — in favor of Emmett Shear, former CEO of Twitch. In the wee hours of Monday morning, Ilya Sutskever, co-founder and Chief Scientist of OpenAI and one of the board members who orchestrated Mr. Altman’s ouster, expressed remorse over what has transpired: “I deeply regret my participation in the board’s actions. I never intended to harm OpenAI.” The fate of OpenAI hangs in the balance. The company has been harmed, deeply, and it remains to be seen how it will recover. Regardless of what prompted the board to see fit to remove Mr. Altman in the first instance, certainly in no one’s perfect world would the chaos and uncertainty brought about by both the ouster and the manner in which it was undertaken have been a goal. This is all a grand fiasco. Of the many things to be said (and still to be discovered) about the Shakesperian drama unfolding before our eyes, it is safe to say now that it is an unmitigated failure of corporate stewardship.

What transpired with OpenAI represents a huge and unmistakable failure of corporate governance. This is the case whether Altman returned after his firing or not (who knows, he still might). How he was terminated in the first instance, and the chaos that followed, provide all the evidence of failure that we need. Through the lens of governance, we can get an interesting and perhaps the most probative view on what went wrong at OpenAI. The data points from the last few days are susceptible to multiple readings. Even those who agree there was a failure of governance may ascribe different reasons for it. Some commentators will be happy that the will of the board prevailed; they will see that as a win for board governance (see, e.g., here, arguing that Altman’s quick return to OpenAI based on employee and investor pressure after his firing would have been a failure). Others may blame the alternative governance structure of the company and contend that anything too creative or exotic that leaves key shareholders out of oversight and decision making is flawed.

Basic Corporate Governance
For profit companies typically have boards of directors. Venture-backed start-up boards typically include one or two company executives, as well as representatives from the VC firms who contributed the most capital. It is healthy to have other outside, or independent, directors, who can bring fresh perspectives on governance and management matters without being overly swayed by self-interest. Corporate board members have fiduciary obligations to the company, typically to promote positive business performance, ensure legal and regulatory compliance and maximize shareholder returns.