INTERVIEW: Altman or New Man?

By Reuvain Borchardt

Charles Elson, an expert on corporate governance, spoke with Hamodia after a dramatic five days in which prominent artificial intelligence (AI) technology business leader Sam Altman was ousted from OpenAI, the company he co-founded, then was reinstated as ceo after investor and employee pushback.

Elson is the founding director of the Weinberg Center for Corporate Governance at the University of Delaware, where he is also the retired Edgar S. Woolard Jr. Chair in corporate governance.

He has taught at Stetson, Illinois, Cornell and Maryland law schools; and at Cambridge University. He is a graduate of Harvard College and the University of Virginia Law School, and has served as a law clerk to federal appellate judges Harvie Wilkinson and Elbert Tuttle.

Elson has advised and consulted businesses in retail, manufacturing, human resources, and energy, as well as nonprofits. He is currently on the boards of Encompass Health and Blue Bell Creameries and serves as the executive editor at large for Directors & Boards magazine. He is a consultant to the law firm of Holland & Knight.

Now that the dust is settling a bit, do we have a better idea of what happened with Sam Altman?

None. We still don’t have an idea. I think a lot of Wall Street Journal reporters are chasing that down! Nobody knows what happened. That’s the problem with this.

Some outlets have reported that the board didn’t like that Altman had too much power. Reuters reported that shortly before Altman was fired, “several staff researchers wrote a letter to the board of directors warning of a powerful artificial intelligence discovery that they said could threaten humanity.” There were reports of tension over Altman trying to focus more on the for-profit subsidiary than the nonprofit company. I’m sure you’re familiar with all these theories. Are they true?

The problem is: unless you know, you don’t know.

We do know that, after he left, he was going to go to Microsoft and take everybody with him. That wouldn’t have been a good thing. That was weird, because that would have meant that Microsoft, which is an investor in OpenAI, would have effectively purchased OpenAI for the cost of their investment, which is a lot less than what the company is worth; there are other investors in OpenAI who probably would have sued if that happened.

It would have been a mess. So I guess OpenAI taking Altman back was the best solution.

So you’re saying it was in no one’s interest — including Microsoft’s — for Microsoft to hire all these OpenAI employees.

Correct. It would have been a legal mess that would have gone on for G-d knows how long.

Is it common for companies to have a structure like OpenAI’s, where the company is created as a nonprofit and has a for-profit subsidiary?

No, it’s very uncommon. Very odd. The problem is the two really don’t mix very well. I know of only one other situation where that happened: The Delaware State Fair owns a casino and racetrack, and there are public investors in the casino along with them.

Apparently, the only way they were able to get a permit to have a casino is by having it owned by the Fair, that had apparently also had the right to the racetrack there before the casino was brought in.

Why is it so rare for a nonprofit entity to have a for-profit subsidiary?

Because it’s a stupid idea, since you have conflicting goals. The for-profit is there to make a profit, and nonprofit is there to benefit humanity. If the for-profit and the nonprofit have different investors, their goals will differ dramatically.

Some reports said the reason for the conflict was that Altman was seeking to maximize the profit at the expense of the nonprofit. Do you believe that?

Perhaps.

Why did the for-profit investors allow the structure wherein its activities are governed by the board of the nonprofit? 

I have no idea. I’m surprised that they did, because any time you have a for-profit owned by a nonprofit, there’s a conflict of interest. The intent of the investor is to generate a good return on their investment, whereas the point of the nonprofit is to better society — and society’s betterment may come at the expense of investors. That’s the problem, and that’s why I’m rather surprised that people would invest in that sort of for-profit.

Years ago, NYU (New York University) somehow ended up owning the Mueller spaghetti company. Eventually, NYU got rid of it.

Non-profits shouldn’t operate for-profits. They have conflicting goals or objectives. In the Delaware State Fair case you have an interesting conflict: people who invest in a casino/ racetrack want dividends, while the Fair wants a happy family experience. The two don’t mesh well.

Why, then, would a nonprofit set up a for-profit subsidiary?

You set up a for-profit to get investors. In a nonprofit, you’re not getting investors, only charitable donations.

He needed capital to fund this business. And the only way to get capital was to create an investment vehicle for people to invest in the technology they were going to develop, and profit from that technology through their investments. That’s why people invest.

The problem is, once you set up the for-profit and get the investors in place, now you have the conflict.

I have heard of nonprofits setting up for-profit subsidiaries, but typically they don’t keep them.

So if he wanted to start cashing in on this great new invention, why didn’t he create a new company, rather than doing it as a subsidiary which causes these problems?

Because the nonprofit can argue that the technology is theirs.

What the nonprofit could typically do in a lot of cases is like what NYU did, selling off the Mueller spaghetti company. A nonprofit can sell a for-profit entity, take the cash, and start a foundation or whatever.

There are a lot of ways to deal with this. I’m sure a corporate lawyer could certainly figure something out.

But the issue here really is you have two conflicting goals, and you can’t manage it like a for-profit should be managed or like a nonprofit should be managed.

It’s like oil and water; they don’t mix.

How does the appointment of a board of directors in a nonprofit differ from the appointment of a board of directors in a for-profit?

In a nonprofit, the boards are usually self-perpetuating. In other words, there’s no real election of directors in a typical sense. They appoint their own successors.

The board disintegrated after Altman was fired. Altman was on the board before he was fired, in addition to being CEO. But when he came back, it was only as CEO, not as a board member. Why did he agree to that?

I think you’re going to have to find out why they terminated him to begin with. Until you get the answer to that one, it’s really impossible to understand how this came together.

One of the board members who supported firing Altman got to keep his job on the new board; the other anti-Altman board members are out. Any idea why that one was allowed to stay?

No idea. That’s internal board politics.

Do you look at what happened here as an AI story and the nature of this emergent technology being the underlying cause of it? Or is this just about the conflict of for-profit vs. nonprofit, a plain old business story, a business dispute?

It’s a business story, a business dispute, that happens to involve an exciting new technology, that’s all. You could have applied this, frankly, to any sort of new technology or new invention.

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rborchardt@hamodia.com

This interview originally appeared in Hamodia Prime magazine.