In their elegant paper, Hermalin and Weisbac (1998) ask a very basic question: “How can boards be chosen through a process partially controlled by the CEO, yet, in many instances, still be effective monitors of him?”. The solution they propose, the process should be “… a function of negotiations (implicit or explicit) between existing directors and the CEO over who will fill vacancies on the board”. Their prophetic paper goes one step further and notes that “… the CEO’s bargaining power over the board selection process comes from his perceived ability relative to potential successors”. The recent tantrum at Open AI tells us that CEOs who derive their power through excellent management and connectivity with staff are best poised for these negotiations.
Open AI solution to Board and CEO conflict
The solution to the open AI problem has been to re-appoint Altman and bring people like Larry Summers and Brett Taylor to the board to restore the board’s credibility. However, the usefulness of a new board perpetually intimidated by a CEO needs to be better for the firm. These people have diverse expertise; however, little or no track record in understanding the uniqueness of Open AI, may do more harm than any benefit. A few of the challenges faced by Open AI are as follows:
Absence of Technical Skills: A board that is “Master of all and Jack of none” is not good for shareholders, investors, customers, or stakeholders. The board may spend time reconciling the differing interests and scrutinising, guiding, and paving the path for the future.
Agency Conflict: Conventionally, the board’s role is to act as a fall-back mechanism when management, especially the CEO, makes big mistakes. Furthermore, the committee also exists as a counter to control the irrational exuberance of the CEO and maintain checks and balances.
Speed of Change: People such as Larry Summers and Bret Taylor come with experiences of handling mega crises and dealing with structural changes. However, an innovative, agile, complex organisation such as Open AI requires deeper skills than these conventional giants.
Candid Communication: The previous episode between Altman and Board manifests that boots on the ground feel generals in the camp are irrelevant to talk to. It could be due to a knowledge gap between management teams and boards. Similarly, Larry Summers is an economist, and requiring him to work with people would take a lot of work.
