SAM ALTMAN, OPENAI, AND THE IMPORTANCE OF CORPORATE GOVERNANCE.

• Date: 01 January 2025
• Author: Trautman, Lawrence J.,Foster, Larry D., II,Trautman, Lawrence J.^Foster, Larry D., II

 TABLE OF CONTENTS
                INTRODUCTION 137
                 I. IMPORTANCE OF AI SYSTEMS 139
                 A. Evolution of Data Processing 139
                 B. Societal and National Security Implications 140
                 II. OPENAI 142
                 A. History 142
                 1. Sam Altman 143
                 2. Greg Brockman 144
                 3. Elon Musk 144
                 4. Ilya Sutskever 145
                 5. Peter Thiel 146
                 6. Additional Team Members 147
                 B. Unique Corporate Structure of OpenAI 147
                 C. Influence of Effective Altruism Movement 149
                 D. OpenAI Charter 150
                 E. Sam Altman's Vision for AGI and OpenAI 151
                 F. Disclosed OpenAI Customer Use Cases 155
                 G. Other Potential Applications 155
                 H. Relationship With Microsoft. 159
                 I. Importance of Corporate Structure 160
                 J. Capital Requirements in Conflict With Entity Structure? 160
                 K. What About the Board of Directors? 161
                III. IMPORTANCE OF CORPORATE GOVERNANCE 162
                 A. Board Duties and Responsibilities 163
                 B. Board Committee Structure 164
                 C. Audit 164
                 D. Compensation 169
                 E. Nominating and Governance 170
                 F. The Governing Challenge 174
                 G. Board's Responsibility For Managing Executive Talent 176
                 H. The Regulatory Challenge 177
                 I. Corporate Governance and the High Velocity Enterprise 178
                 IV. OPENAI'S SELF-INFLICTED CRISIS 183
                 A. Events Leading to Altman's Ouster 183
                 B. Risk Governance, Including Survival of OpenAI and Humanity 185
                 C. The Weekend of Crisis 187
                 1. Friday, November 17, 2023 187
                 2. Saturday, November 18, 2023 188
                 3. Sunday, November 19, 2023 189
                 4. Monday, November 20, 2023 190
                 5. Tuesday, November 21, 2023 190
                 E. New Board of Directors Elected 192
                 F. WilmerHale Conducts Review 194
                 G. Additional Directors and Post Crisis Developments 194
                 H. Musk Litigation 197
                 I. Long-term Impact of Crisis 198
                CONCLUSION 199
                

INTRODUCTION

At about noon on November 17, 2023, CEO Sam Altman was fired by the three independent directors of OpenAI. (1) The chaos of this event provokes questions regarding the individuals and companies driving the A.I. revolution. Particularly, how the "premier A.I. start-up" can be trusted to advance technology implicating billions of people when it can so easily spiral into crisis because of "backbiting behavior and slippery ideas of wrongdoing." (2)

In a short period of time, artificial intelligence (AI)-enabled ChatGPT has proven to be the quickest expanding consumer application of all time, reaching 100 million new users just two months after its launch. (3) While these developments in AI raise many novel issues of law and policy that need to be addressed by policy makers and courts, it appears the importance to society cannot be overstated. Within the first months of 2023, technology leaders--including the likes of Elon Musk--raised concerns regarding AI Labs. (4) In an open letter, Musk warned that A.I. presents "profound risks to society and humanity." (5) On the other hand, proponents of AI emphasize that AI-driven innovations have the potential to offer solutions to global challenges including food security, climate change, poverty, and cancer. The National Artificial Intelligence Research Resource Task Force underscore this point, stating that "[w]e... cannot afford to miss out on seizing the opportunity for leveraging AI to serve the public good." (6)

With altruistic aspirations, OpenAI states that as a nonprofit its "unique capped-profit model drives [its] commitment to safety," meaning that as "AI becomes more powerful," the organization can "redistribute profits to maximize the social and economic benefits of AI technology." (7) Against this backdrop--what Bill Gates has called "the most revolutionary technology he has seen in decades, on par with computers, cell phones, and the internet," (8)--emerges the story of a corporate governance crisis that nearly destroyed one of the most significant technological engines of our time. Given its profound societal impact, a compelling argument can be made that OpenAI requires the most experienced and talented corporate governance of any U.S. corporation, public or non-profit. This paper highlights how the board of directors at OpenAI terminated the employment contract of its CEO Sam Altman, raising the threat of hundreds of highly-skilled employees walking out the door, thus potentially disrupting billions of dollars in value and critical knowledge of this important technology. Hopefully, corporate directors of both for-profit and non-profit companies, venture capitalists, technologists, and government regulators can learn from this near-disastrous example.

This paper proceeds in five parts. First, a discussion about the importance of artificial intelligence. Second, a look at OpenAI's history, mission, relationship with Microsoft, and unique corporate structure. Third, the importance of professional, experienced corporate governance is discussed. Fourth, an examination of the OpenAI governance crisis culminating with the ouster of CEO Sam Altman on November 17, 2023. And last, we conclude.

For this article we are relying primarily on the reporting of several journalists who have covered these events. While one of your authors' life's journey has provided no existing relationship with any of the major actors in this drama, we feel compelled to disclose several personal prejudices that no doubt influence our assessment of this crisis. First is an awareness, gratitude, and admiration for the aspirational goals toward benefiting humanity initially established by the non-profit board and founders of OpenAI. These efforts appear profoundly admirable. Next, one of your authors, having devoted several decades toward the pursuit of excellence in corporate governance, finds it impossible to justify the lack of timely recruiting and onboarding of experienced board talent during the months immediately leading up to this crisis. And now, a look at what is now known about this governance crisis and what lessons can be learned.

I. IMPORTANCE OF AI SYSTEMS

A. Evolution of Data Processing

The evolution in computer technology that began during the 1950s has evolved over the years with chip processing speed multiplying manyfold and, when combined with growth in storage capacity, enabling the effective processing of large data sets. (9) Technological gains made in the development of chips for video games during the early 2000s contributed to the foundation necessary to run today's AI applications. (10) The American culture and economy have benefited from the use of machine learning and AI for several decades. Early examples include major platforms like Facebook, Google, and Instagram, where algorithms "learn" from users' search inquiries and return increasingly relevant information to the user in the future, typically to market and sell these items. (11) The positive impact of AI is also evident in innovations like the self-driving function pioneered by Tesla, which utilizes large datasets for machine learning to improve its technology. (12)

Although some elementary forms of AI have been in use for several decades, only recently have industries and governments oriented themselves around AI to harness its potential promise while attempting to mitigate its numerous risks. (13) These rapid advancements in the use of AI raise many new legal and policy challenges. (14) Now, almost daily, the significance of AI systems is reinforced by news reports and descriptions of additional use cases.

B. Societal and National Security Implications

Critical to understanding the importance of the OpenAI story is acknowledging the impact AI has had on the societal and national security landscapes. Significantly, the U.S. Federal Bureau of Investigation recognized AI as a technology worthy of protection, while China has prioritized advancing its AI capabilities, aiming for significant progress by 2025. (15) As "China's AI capabilities are already believed to be formidable," U.S. intelligence agencies have recently issued new warnings about AI beyond just the threat of intellectual property theft. (16) The significance of the November 2023 OpenAI corporate governance crisis must be must be understood within this context of heightened global competition and national security concerns; where:

Instead of just stealing trade secrets, the FBI and other agencies
                believe China could use AI to gather and stockpile data on U.S
                citizens at a scale never before possible. China has been linked to a
                number of significant thefts of personal data over the years, and AI
                could be an "amplifier" to support further hacking operations, FBI
                Director Christopher Wray said, at a news conference in Silicon Valley
                earlier this year. 'Now they are working to use AI to improve their
                already-massive hacking operations using our own technology against
                us,' Wray said
                Fears of how China could use AI have grown so acute over the past year
                that the FBI director and leaders of other Western intelligence
                agencies met in October with technology leaders in the field to discuss
                the issue
                [The] [m]akers of AI technology are concerned about their secrets
                making their way to China, too, according to executives at these
                companies. Recently, OpenAI reached out to the FBI after a forensic
                investigation of a former employee's laptop raised suspicions that the
                employee had taken company secrets to China, according to people
                familiar with the company. The employee was later exonerated, according
                to a person familiar with the matter
                U.S. intelligence analysts have worried for years about the long-tail
                espionage dividends that China is believed to be reaping from amassing
                enormous troves of hacked personal information belonging to American
                officials and business executives.
                Over the past decade, Beijing has been linked to the hacks of hundreds
                of millions of customer records... China was so good at stealing
                private information--billions of pieces of data in all, according to
                U.S. officials, criminal indictments and cyber-threat researchers--that
                its hackers had likely collected too much of a good thing: an
                informational treasure trove so vast that humans would be

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