11/22/2023 UPDATE

Well, I did say it was likely the situation would continue to change. Here’s the latest:

• Sam Altman returns as CEO

• Three of the 4 remaining board members, Ilya Sutskever, Tasha McCauley and Helen Toner are off the board and Sam Altman and Greg Brockman (who is returning to OpenAI as well) will not have board seats.

• The start of the new board is: Bret Taylor (Chairman), Larry Summers (economist and former US Secretary of the Treasury) and Adam D’Angelo (remains on board). Presumably other directors will be announced shortly. This new board does seem to signal that the overall strategy is shifting to favor the for-profit entity, but that’s only conjecture at this point.

• Altman has agreed to an internal investigation into alleged conduct that prompted the board to oust him.

• Microsoft CEO, Satya Nadella, expressed support for the changes at OpenAI. He tweeted “We are encouraged by the changes to the OpenAI board. We believe this is a first essential step on a path to more stable, well-informed, and effective governance.”

• That’s all that is known at present, but again, I’ll update this if anything additional is announced.

I’ve debated writing something on the OpenAI drama since the first announcement on Friday. Everytime I’d start there would be a new development / announcement / rumor. Just keeping up was nearly a full time job. And the story isn’t over at this point (Tuesday). There is a long list of articles and blogs and linkedIn posts on the subject, so sharing something new and useful is a challenge. There are some lessons in this somewhere though, so I’ll try to pull out some useful observations.

I won’t rehash the complete timeline, you can find that here, but instead I want to examine a few issues that fall out of the events. There has been a lot of speculation around what happened and how the OpenAI board came to its conclusion that Sam Altman should be replaced as CEO, but I fundamentally think the issue is tied directly to the misalignment of the company structure and the board’s duties.

OpenAI was of course founded as a non-profit organization, but has since built a for profit subsidiary. The structure is somewhat more complex / unusual though. It’s important to remember OpenAI’s original goal: “building safe and beneficial artificial general intelligence for the benefit of humanity”. This diagram shows the current structure:

The original non-profit took in donations of just over $130M to start its work, a considerable amount but way less than the original donation commitments of $1B. One simple fact that all companies involved in AI research have learned, it is VERY expensive to operate, particularly because of the massive consumption of compute power required to support the research and operations. Because of that fact, and the difficulty of operating on donations alone, the for-profit subsidiary was launched. The structure left the non-profit board in control of both entities, and the concept was to cap the profits of the for-profit entity, leaving governance in the hands of the non-profit board to ensure that the original goal was front and center. This is unusual, and created some potential conflict between the non-profit mission and the for-profit mission that have now become obvious.

Board duty and conflicting issues

It is worthwhile to remind ourselves of the similarities and differences of the two types of organizations / boards. The responsibilities of a board director in a for-profit private company and a non-profit organization share some similarities but also have key differences.

For-Profit Private Company Board Director Responsibilities

For-profit private company board directors are primarily responsible for the overall governance and strategic direction of the company. Their duties include setting annual budgets, operational goals, ensuring funds are available for operations, and evaluating the performance of the CEO. They are chosen by the board and are accountable to the shareholders of the company. The board is also responsible for protecting the interests of shareholders and stakeholders.

Non-Profit Board Director Responsibilities

Non-profit board directors, on the other hand, have three primary legal duties known as the "duty of care," "duty of loyalty," and "duty of obedience". The duty of care involves ensuring prudent use of all assets, including facility, people, and goodwill. The duty of loyalty requires board members to act in the best interest of the organization, and the duty of obedience requires them to ensure the organization complies with all applicable laws and regulations.

Non-profit board directors are also responsible for hiring and setting the compensation of a CEO or executive director to run the day-to-day management activities of the organization. They play significant roles in providing guidance to the organization by contributing to its culture, strategic focus, effectiveness, and financial sustainability. They also serve as ambassadors and advocates for the organization.

Differences in Responsibilities

The main difference in responsibilities between for-profit and non-profit board directors lies in their accountability. For-profit board directors are accountable to the shareholders and are responsible for the overall direction of the company. Non-profit board directors, however, serve the members of their organization, their cause, and their communities. They have a duty to further the charity's tax-exempt purpose and are legally responsible for protecting assets from fraud and misuse.

Another difference is the level of participation in strategic planning. While both for-profit and non-profit board members have a responsibility to approve, remain current with, and oversee the execution of the organization’s strategic plan, members of non-profit boards generally have a higher level of participation in developing the plan from its initial stages.

The type of metrics used to determine the success of the organizations also differs. For-profit boards use financial metrics of performance such as profit and loss, stock price, and cash flow. Non-profit boards focus on meeting their budget and cash flow projections but also meeting certain client, staff, and community needs.

Currently

The current status of this mess is still somewhat in flux. Currently:

• Emmett Shear, the co-founder of video streaming site Twitch, is interim CEO of OpenAI

• Sam Altman is the CEO of a new Microsoft Advanced AI research organization.

• Greg Brockman (OpenAI co-founder and former Chairman and President) has joined the new Microsoft organization along with at least 3 seniorOpenAI researchers

• OpenAI employees (~95% of them anyway) have signed a letter to the board insisting they resign, bring Altman back and threatening to leave if they don’t get what they want.

• Ilya Sutskever, CTO and board member that apparently either orchestrated the firing of Altman or at least supported the other directors in that decision has since signed the employee letter and Tweeted that he made a mistake in firing Altman.

• The problem that seems to be behind all of this is the disagreement over how fast to move on the continued development of AI. Altman, and the concerns of the for-profit company (investors, share holders, etc.) want to continue to move fast (or faster) to continue its competitive advantage and to push the technology forward. The board (4 of them, excluding former board members Brockman and Altman) wanted to slow the development to make sure they met the original goal of the non-profit.

• Microsoft, which had significant risk from its widespread use of OpenAI tech, has hedged its bets sufficiently that they should be in a good competitive position coming out of this no matter what the outcome of the mess at OpenAI. In effect the worst thing that happens is that Microsoft gets most of the OpenAI resources without having to purchase the company since they have offered to hire any OpenAI employees at their current compensation. It has $Bs at risk, but luckily most of the Microsoft investment is in compute credits not actual cash.

• Salesforce has also offered to hire any OpenAI researchers and match their compensation AND make up for any lost / unvested stock options.

• OpenAI competitors like Anthropic, Google, etc. are in a very strong position coming out of this.

• The timing of all this is exceptionally unfortunate for the employees, who were just gearing up for a tender offer that would have let them extract some of the value from their very hard work. That is most likely not going to happen at this point.

• I guess the board just underestimated the consequences of their actions (or didn’t care), but the fact that they didn’t think it through or know how controversial this would be shows how out of touch and/or inexperienced they are.

• OpenAI’s future is very uncertain. The board tried to orchestrate a merger with Anthropic and install CEO Dario Amodei as the leader of the new company. This did not work out. The board is at risk, the company is at risk and its “mission” is at risk.

What’s the Point?

I’m not sure we know, but here are a few observations:

• Board and executive alignment to overall goals and strategy are essential no matter whether it's a non-profit or a for-profit company.

• The mission gap between a for-profit and a non-profit organization makes the type of structure that OpenAI has very difficult to be successful long term. AI companies need massive amounts of resources to be successful, which are expensive and make operating a non-profit, based on donations not practical and scalable.

• We need balanced AI regulation by the US government, which, even with the executive order, is still touch and go.

• Lesson for investors, having a board who does not have fiduciary duties to the shareholders / investors should be a huge red flag.

• Considering the three “duties” of a non-profit board, I’d say they completely forgot this one: “duty of loyalty requires board members to act in the best interest of the organization”.

Where this goes from here is anyone’s guess. There are still rumors that the board and Altman are still in talks about his return, but the outcome of that is anyone’s guess. I’d think there is a fundamental gap in that the board might want Altman back to stop the blood flow, but could Altman actually accept that if the current board and structure remains in place…I don’t think so. I’ll try to update this post if more news comes out, which it undoubtedly will in the near term.