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Sam Altman’s Firing from OpenAI Is a Clear Example of Governance Risk

3 min

28 Nov, 2023

By Fennel

Sam Altman’s childhood hero was Steve Jobs, who after co-founding Apple in 1976, got fired from his own company nine years later. Just like his hero, Altman was just fired from the company he co-founded, except this time it only took eight years.

For those who aren’t dialed into the latest drama unfolding in Silicon Valley (or too preoccupied with their Thanksgiving holiday), the board of directors of OpenAI (the company behind ChatGPT) fired its CEO Sam Altman (a well-known tech entrepreneur and investor).

Why would OpenAI want to fire its CEO? Although the dust is still settling and all the details aren’t clear yet, the board of directors gave the following explanation:

“Mr. Altman’s departure follows a deliberative review process by the board, which concluded that he 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.”

Now, CEOs get fired, resign, or get politely asked to resign every so often, so that part isn’t too extraordinary. But what makes OpenAI’s case unique comes down to governance.

OpenAI was started in 2015 by Altman, Elon Musk, and a handful of other tech leaders as a nonprofit. Why make the company a nonprofit? Even back in 2015, the people involved with the company saw artificial intelligence as a game-changer, but they were worried that it could spiral into something harmful — especially Musk, who fears that AI could turn into something like Skynet from the Terminator franchise.

For this reason, OpenAI’s mission from the start was to create an artificial intelligence that could benefit humanity as a whole. And to do this, it built out its company with certain guardrails in place, including appointing an independent, nonprofit board of directors who controlled the company. These directors also held no equity in the company, in order to prevent conflicts of interest.

Then in 2019, Altman became the CEO of OpenAI and created a for-profit arm of the company. The rationale behind this was that the operational costs to create groundbreaking tech was expensive, so it would seek outside investors to fund this innovation.

That plan worked, and soon investors were pouring money into OpenAI. Perhaps the most high-profile of these investors was Microsoft, which invested around $13 billion into OpenAI over the course of a handful of funding rounds (one in 2019, another in 2021, and the most recent in 2023). This cash infusion was likely a big help in creating ChatGPT, which was launched in 2022 and is, as you may know by now, a huge commercial success.

This is where the governance thing gets a little messy.

Essentially, there are two sides of OpenAI, there’s the for-profit arm that brings in lots of cash from its products and institutional investors, and there’s the nonprofit company that owns that for-profit arm and is controlled by an independent board of directors.

The tension between these two sides may have escalated into the firing of Altman (there’s also the chance that something else led to his firing). But his expulsion is not without collateral damage. There were talks about taking Altman back as CEO just days after he was fired, the CEO that was picked to replace him was then immediately replaced in turn, OpenAI investor Microsoft poached Altman and a handful of other execs during the chaos, and almost every OpenAI employee signed a letter saying they would leave unless the board resigns.

Again, governance risks can send a company spiraling.

But after a few days of chaos, it seems like the drama ended thanks to a bizarre turn of events. On Wednesday, OpenAI revealed that Sam Altman was back as CEO, and that all of the board directors (except for one) would step down. OpenAI said that it was electing new board members that had a vision more aligned with Altman.

Here we see the culmination of the schism at OpenAI. Leadership differences between Sam Altman and the company’s board of directors seemingly festered over the years, which led to Altman’s removal, a strange reversal, and then a reshuffling of the company’s board. Although the series of events were unusual, it should act as a warning to company leaders and executives as to what can happen when a disagreement between competing company leaders goes unaddressed. In the case of OpenAI, one of these parties had to go.

Does this mean that the governance drama at OpenAI is over? We’ll have to wait and see how the recent events pan out for the future of the company, but either way, this serves as an important reminder that governance risks shouldn’t be underestimated.

Questions for Retail Investors to Consider:

∙ What’s the job of the board of directors?

∙ At the end of the day, who controls a company? Executives, investors, or directors?

∙ How can an investor tell when there are rifts within a company?

∙ ∙ ∙

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Sam Altman’s Firing from OpenAI Is a Clear Example of Governance Risk

Questions for Retail Investors to Consider:

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