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Voice of the CEO: Lessons in Governance From OpenAI

Blogs Anthony Pugliese, CIA, CPA, CGMA, CITP Nov 21, 2023

Within the span of four days, OpenAI — the organization behind ChatGPT — fired its CEO, hired and fired its first interim CEO, hired its second interim CEO, and saw over 700 of its 770 employees threaten to quit.

It’s been a busy week, to say the least.

The dust has yet to settle on what the future of OpenAI will look like, and it’s too early to say what (if any) role internal audit had in OpenAI’s governance process — or even if it has an internal audit function in place. What we do know, however, is that there were several significant challenges in the organization’s governance structure and processes that set the stage for the past week’s dramatic turn of events.

OpenAI has become the preeminent example of the need for good corporate governance in emerging industries. And internal auditors can learn from that organization’s missteps to better position their own for success.

Lesson 1: An organization’s governance structure must support its mission.

OpenAI was formed as a 501(c)(3), a nonprofit organization that has been recognized by the U.S. Internal Revenue Service as being tax-exempt by virtue of its charitable programs. It is tasked with developing artificial intelligence (AI) that would be safe and beneficial for humanity. It was also designed to be a balance to for-profit entities like Google that, in the view of OpenAI’s founders, could drive AI growth beyond a safe level. The board’s job was to support this mission.

However, this same board also oversaw the mission for OpenAI LP, a for-profit entity launched eight years ago that has received billions of dollars in investment. This means that the investors in the for-profit entity had no seat at the board level.

To be even more clear: Even Microsoft, which owns 49% of the for-profit organization and invested $10 billion this year alone, did not have direct representation on the for-profit board. This is a significant departure from most for-profit organizations.

It’s worth noting that the governance structure was deliberately designed this way to prevent potentially unhealthy input from financial investors who might be more concerned with profits than humanity. This type of structure isn’t completely unheard of. In the United States, many not-for-profit organizations have for-profit subsidiaries. However, it is also common for these for-profit ventures to have separate boards of directors.

For Open AI, one of the most significant risks of a single board overseeing both the not-for-profit and for-profit entities is rumored to have materialized: What happens when the two organizations’ missions are in conflict?

Lesson 2: The composition of the board of directors should advance the organization’s goals.

Another risk with OpenAI’s governance structure is its composition. With only four members, the board is relatively small compared to other Silicon Valley firms, which often have between eight and 20 members.

Further, the directors appear to have had little background in corporate governance, instead leaning heavily into OpenAI’s tech lineage. Board membership, as of last Friday, included OpenAI Chief Scientist Ilya Sutskever, Quora CEO Adam D’Angelo, technology entrepreneur Tasha McCauley, and the Georgetown Center for Security and Emerging Technology’s Director of Strategy and Foundational Research Grants, Helen Toner. This group no doubt covers the technical and industry knowledge necessary for a board to be effective, and likely even possesses the leadership skills.

However, a more diverse board could have brought representatives with knowledge, skills, and experience in audit and finance, risk management, and regulatory compliance — just to name a few examples.

Ultimately, the specific composition of any board of directors should be designed to meet the needs of that organization. However, benchmarking against organizations of similar sizes and industries can help identify potential risks. While the leadership may ultimately decide to deliberately move away from an industry standard, considering the pros and cons of that benchmark could help an organization avoid a board crisis like the one OpenAI has faced this past week.

Lesson 3: Communication is a key component of good corporate governance.

The IIA’s Governance Toolkit identifies “Clear communication across the organization” as the goal of the first principle of effective corporate governance. This might be demonstrated via:

  • Clear, actionable, and collaborative communication among each of the members of senior leadership and between senior leadership and the board.
  • Management structures that are effective at getting the right information to the right stakeholders in a timely manner.

Unfortunately, neither of these items were publicly demonstrated in the handling of Altman’s firing.

The board’s blog last Friday announcing the news stated that the CEO “was not consistently candid in his communications with the board, hindering its ability to exercise its responsibilities. The board no longer has confidence in his ability to continue leading OpenAI.” According to reports, this announcement came as a shock to most stakeholders, including both investors and employees. Within two days, the company released another statement to employees, clarifying that the firing was not due to “malfeasance or anything related to our financial, business, safety, or security/privacy practices,” but was instead due to a "breakdown in communications between Sam Altman and the board.”

The damage had already been done. Microsoft had reportedly offered Altman a job, and more than 95% of OpenAI’s employees signed an open letter threatening to quit if the board did not do so first.

Clearly, there were breakdowns in communication across many levels. Perhaps if the approach to communication between senior leadership and directors had been better structured or monitored, the firing could have been avoided altogether. If it could not have been avoided, the communication plan for sharing the news of the CEO’s departure with employees and multi-billion-dollar investors could certainly have been improved.

In the next few hours and days, OpenAI’s board of directors could step down. A new board could be named, and Altman could be reinstated. Alternatively, almost all their employees could resign, turning an industry-leading company into shambles virtually overnight.

Regardless of the outcome, companies in emerging fields should heed the lesson about the importance of good corporate governance. Of course, like all organizations, they should also work with internal auditors early on to get insights into building, maintaining, and assessing governance structures and policies.

Anthony Pugliese, CIA, CPA, CGMA, CITP

Anthony Pugliese is president and CEO of The IIA.